Opinion ID: 567021
Heading Depth: 3
Heading Rank: 1

Heading: Declarations Supporting the Appellants--BB 54-58, RB 42-51, DCT 16-181

Text: 6 The appellants rely heavily on the declarations of five Convergent employees to support their arguments (Carlson, Durden, Edelheit, Gervin, and Petit). Many of the evidentiary citations in their briefs, especially those supporting key allegations, are to these declarations. The district court granted the appellees' motion to strike the declarations for having no clear foundation in personal knowledge, 2 introducing hearsay, or having no demonstrated relation to the specific transactions at issue. Evidentiary rulings are reviewed for abuse of discretion. Roberts v. College of the Desert, 870 F.2d 1411, 1418 (9th Cir.1988). 7 From a thorough review of each declaration and the use made of each by the appellants, we find that the district court was correct, for the most part, in its assessment. The parts of the declarations that were unobjectionable did not establish a genuine issue for trial. The inferences the appellants attempted to draw from the declarations were negated by adequate explanations which the appellants did not rebut. We mention the declarations when appropriate throughout the following discussion of the transactions challenged as fraudulent by the appellants. 8 B. Shipments More than Two Weeks Before Requested Delivery Date--BB 21, RB 64-65, GB 19, DCT 19 9 The parties agree that shipments well in advance of a requested delivery date without customer approval would be a questionable business practice. The appellants allege that Convergent engaged in that questionable practice in order to inflate second quarter earnings. In support of their allegation, they offer invoices totalling $3,821,148 which show request dates more than two weeks after the ship date, and the declaration of Jeffrey Edelheit which states: 10 I was told by senior management that for the good of the company, orders had to be pulled in for two or more weeks before the dates stipulated by customers for shipment of product. In other words, if a customer did not want merchandise shipped until mid-July or later, it was shipped without the customer's agreement, in late June so that the revenue could be recorded in the second quarter of 1984. 11 E.R. at 3075, p 5. As the Corporate Credit and Collections Manager, Edelheit would not have responsibility for invoicing or shipping merchandise. Therefore, this statement has not been shown to be based on personal knowledge. As hearsay, the district court did not abuse its discretion in striking it. 12 The invoices themselves establish an inference of impropriety. However, in declarations based on personal knowledge, Convergent offered the unrebutted explanation that Convergent never shipped early without the customer's request or approval, Supp.E.R. 275:4-5 at p 7 (VP of Finance, Newman); Supp.E.R. 267:2 at p 4 (employee responsible for approving shipping and revenue recording), and that the new request date did not appear on the invoice in those circumstances, Supp.E.R. 270:3-4 at p 6 (general manager of accounting). The appellants offered no evidence from customers that any had received product before they desired it or were willing to receive it. No genuine issue of fact with regard to these invoices has been shown. 13 C. Shipments Up to Two Weeks Before Requested Delivery Date--BB 25-26, RB 64, GB 18-19, DCT 19 14 The appellants also argue that shipments totalling $953,035 that were made less than two weeks before the requested delivery date were improper. The appellants' accounting expert, Bernd Bildstein, states that recognition and realization of revenue from shipments of products prior to the previously scheduled delivery date without the customer's prior approval violates GAAP [Generally Accepted Accounting Principles].... E.R. at 3109-10, p 9. Convergent explains that it ships up to two weeks before the request date when possible so that the product will reach the customer by the request date. Supp.E.R. 263:5 at p 12 (principal accounting officer). Even if Bildstein's statement is true and Convergent's practice is improper, the practice is an ongoing and openly stated policy. As a practice that is not peculiar to the second quarter, it is not probative of a scheme to inflate second quarter earnings above what they would otherwise be. D. False Software Sales 15 The appellants argue that Convergent improperly recognized $1,340,250 in revenue for sales of software that was later returned, knowing that the customers had not ordered the software. 16 1. BB 22--After the second quarter, $67,500 was credited for software that Technicon claims it never ordered or received. E.R. at 860. The appellants offer no evidence that this was more than an innocent mistake. 17 2. BB 27-28, RB 66, GB 23-24, DCT 20--The parties dispute whether $253,000 in software sales to Gould occurred in the second or third quarter. Whichever quarter it occurred in, the appellants again offer no evidence that the sale was more than an innocent mistake. 18 3. BB 28-29, RB 71, GB 22-23, DCT 21--Convergent billed AT & T for $480,000 for a mix of upper and lower grade software licenses that it thought was appropriate for AT & T's purposes. AT & T paid the bill, but later opted for the lowest grade of license across the board, requiring a credit of $120,000 of the amount paid in the second quarter. Supp.E.R. 212/70. The appellants offer no evidence to rebut the conclusion of Convergent's outside auditor that the billing in the second quarter was calculated to meet deadlines under Convergent's contract with AT & T and that AT & T's later change of heart did not make the earlier revenue recognition improper. Id. 19 4. BB 29, RB 70, GB 25, DCT 21--The appellants suggest that $339,750 in invoices to Sigma Data, labelled invoice only, represent improperly recognized revenue because no goods were ever shipped and the transaction was later reversed. However, they do not rebut Convergent's evidence that invoice only transactions involve the sale of licenses which are intangible products that cannot be shipped. Supp.E.R. 263:4 at p 10 (Controller, Fischer). Also, Convergent testified that the transaction appeared to be reversed, but was not in reality reversed, because the debt was deducted from the price of Sigma Data stock later purchased by Convergent. Supp.E.R. 210:8-9 at p 19 (VP of Finance, Newman). 20 5. BB 10, RB 78 & n. 63--There is an issue of fact regarding $200,000 in software sales to Unisystems. The President of Unisystems, John Thomas, testified that on June 27, four days before the close of the second quarter, Richard Meise, Convergent's Vice President of Sales, asked Thomas to purchase $200,000 of software to help Meise meet his goal of a million dollars of software sales by the end of the quarter. 3 E.R. at 137. Thomas declined because he did not think Unisystems could use the software, but Meise persisted and told Thomas he could return it. Id. at 138. Subsequently, Thomas agreed. Meise flatly contradicts Thomas' testimony, saying that the $200,000 was for the sale of a source code to Unisystems that could only be returned in accordance with Convergent's warranty provisions, Supp.E.R. 208:8 at p 16, and that Convergent allowed the return because Unisystems said the software was incompatible with its needs, Supp.E.R. 272:4 at p 9; Supp.E.R. 258/150; Supp.E.R. 241:19-20. The district court did not discuss this dispute. Assuming Thomas' testimony is correct and the sale was improper from the beginning, the transaction inflated earnings per share by 3.8%. See Appellants' Brief Ex. A n. 4. E. False Hardware Sales--BB 22, RB 75 n. 59 21 Convergent's records of its own mistakes lists $193,000 in sales to Zygal and $150,000 in sales to Star that had not been ordered, E.R. at 919-22, and $75,639 for shipments to Burroughs of products still bearing Convergent colors and serial numbers, E.R. at 924. The appellants offer no evidence that the $418,739 in mistaken hardware sales was anything, but a mistake. 22 F. July Invoices Recognized in Second Quarter--BB 23-24, RB 61-63, GB 16-18, DCT 18-19 23 The appellants argue that $811,006 of revenue from invoices dated July 1, one day after the end of the second quarter, was improperly recognized in the second quarter. Convergent points to shipping documents bearing June dates to argue that the shipments actually were made at the end of June. See Supp.E.R. 212/73-77, 79-96; Supp.E.R. 258/153. Convergent's Manager of General Accounting testified that in the Distributed Systems Division, invoices reflect a shipping date that corresponds to the date the invoice was printed, even if that happens to be a day or two after actual shipment. Supp.E.R. 270:3 at p 5. The appellants argue that these invoices are from the Data Systems Division, not the Distributed Systems Division. Also, an employee of the shipping department stated that she was directed to back date[ ] shipping documents so they would be dated the last day of the quarter, even though the products were actually shipped after the end of the quarter. E.R. at 3081, p 3 (Petit declaration). There is an issue of fact whether the shipment date on the invoices or the shipment date on the shipping documents reflects the true shipment date, and if shipment occurred after the second quarter, whether revenue recognition in the second quarter was proper. The revenue boosted second quarter earnings per share by 3.5%. See Appellants' Brief Ex. B. G. Understated Reserves 24 1. BB 24-25, RB (52-)57, GB 21-22, DCT 14--Convergent's outside accountants found that in a worst case scenario under disfavored accounting methods the bad debt reserves were understated $606,000 during the second quarter. Supp.E.R. 212/57:028307-08. The two other scenarios discussed by the accountants estimated an understatement of $103,000 and $129,000. The appellants seize on this to argue that Convergent executives deliberately understated the reserves by $606,000 as part of their plan to inflate earnings. However, the auditors concluded that any understatement of reserves did not have a sufficient impact on earnings to require the restatement of the second quarter financials. Id. Convergent testified that any understatement in the reserves was the result of billing or shipping errors. Supp.E.R. 212/56:28302. Given the inexact nature of estimating debt reserves, the appellants have not provided evidence that Convergent had the information in the second quarter necessary to render even a $606,000 understatement recklessly misleading. 25 2. BB 32, RB (52), 57-58, GB 22, DCT 14--Convergent's outside accountants found that $300,000 in additional product warranty reserves was necessary because of post-second quarter events. Supp.E.R. 268 at p 5. To rebut this evidence, appellants point out Convergent knew in the second quarter that there was a risk that rework costs on some data systems would exceed the warranty reserve. See Supp.E.R. 212/18 at 20350096 (4/24/84 executive staff meeting minutes). The appellants offer no evidence of the magnitude or nature of the risk, or the other economic factors that would have influenced the response to the risk, to show that the reasonable business decision was to increase the warranty reserves at that time. A genuine issue about the warranty reserves has not been raised. 26 3. BB 33 n. 22, RB 56 n. 38, DCT 15--The appellants assume from a list prepared by Convergent's Controller that $937,000 in additional inventory and administrative and manufacturing reserves taken in the fourth quarter should have been taken in the second quarter. However, nothing in the list ties the additional reserves to the second quarter and the Controller explained that events in the fourth quarter increased the reserve requirement, even if the transactions that would eventually affect the reserves occurred in prior quarters. Supp.E.R. 263:2-3 at pp 5, 6. 27 H. Shipments-In-Place to Prime--BB 26, RB 59-61, GB 20 28 Convergent had a contract with Prime that allowed it to transfer title to products to Prime while keeping the products on Convergent's premises for some time. Supp.E.R. 212/9:20 (Convergent's consolidated financial statements mentioning such agreements); Supp.E.R. 205:6 at p 13 (Director of Finance and Administration for the Data Systems Division). The appellants' expert, Bildstein, testified that he believed that title did not pass under the arrangement, E.R. at 3110-11, but the Commercial Code governing the parties says that title to goods passes from the seller to the buyer in any manner and on any conditions explicitly agreed on by the parties. Cal.Commercial Code § 2401(1). The appellants have not supported their allegation that title did not pass in the second quarter, making revenue recognition of $766,800 improper. 29