Opinion ID: 567021
Heading Depth: 2
Heading Rank: 2

Heading: Wrong Products to NCR--BB 30, RB 72-73, GB 26, DCT 20

Text: 30 The appellants assert that shipments of $506,600 worth of products to NCR with Convergent colors, keyboards, and serial numbers, rather than NCR colors, keyboards, and serial numbers was more than a mistake. They argue that it was part of Meise Magic, the improper scheme to inflate second quarter sales and earnings. However, they offer no evidence to show that this was more than a mistake, such as that it was highly unusual or that significantly more mistakes of this kind occurred in the second quarter than in other quarters. 31 J. Overstated Burroughs Premium--BB 31, RB 67-70, GB 25-26, DCT 20-21 32 Convergent had a contract with Burroughs under which it earned a premium of differing amounts based on whether it delivered target numbers of products according to the contract. In the third quarter, Convergent was constrained to reduce the premium it had claimed as revenue in the second quarter by $488,936 because Burroughs disagreed that all the necessary shipments had been made. The appellants seize on this as evidence of improper revenue recognition. However, the Director of Burroughs Business Information and Systems Group stated that Convergent was not unreasonable in believing that it deserved the full premium, that the dispute was legitimate, and was not resolved until the third quarter. Supp.E.R. 207 at p 9. The appellants offer no evidence, but their own allegation that Convergent was unreasonable. 33 K. Shipment of Defective Products--BB 31-32, RB 73-74, GB 26, DCT 21 34 The appellants allege that Convergent deliberately shipped defective products to ADP, Alanthus, and CPT in order to recognize $915,000 in revenue in the second quarter. They thoroughly describe the problems Convergent's customers were having with certain products, Supp.E.R. 191, Appendix A, and provide the generalized testimony of a Convergent quality engineer that unqualified people inspected products, that improper and incomplete tests were performed, and that a substantial quantity of poor quality products were shipped, E.R. at 3072-73 (Durden declaration). The appellees offered testimony that the extent of the problems was not known until after customers began using the products and that Convergent responded to the complaints by fixing and replacing products. Supp.E.R. 205:6-7 at p 14 (Director of Finance and Admin. of Data Systems Division); Supp.E.R. 261:2-3 at pp 4-8 (Manufacturing Manager for Data Systems Division). 35 The appellants offer no proof that because some of Convergent's products did not meet Convergent's own performance projections, the products were too defective to market. They also offer no proof that the numbers of complaining customers and performance problems were unusual for the second quarter or unusual for a computer manufacturer generally. 36 L. Shipment Against Cancelled Order--BB 32 n. 21, RB 67 n. 53, DCT 20 37 November 30, 1984 internal notes at Convergent indicate that $700,000 worth of products were returned from Burroughs because they were shipped against a cancelled order. The appellants allege that the shipment occurred in the second quarter. They offer no proof for their allegation. M. Duplicate Billings and Shipments--BB 23 38 The appellants offer no proof that $147,695 in duplicate shipments and $101,073 in duplicate billings was anything, but a legitimate mistake to be expected in the ordinary course of business. N. Summary 39 If the appellants have established a genuine issue of fact regarding the propriety of transactions that have a material effect on second quarter earnings, summary judgment should be reversed. The appellants raised a genuine issue regarding only two of the transactions. One was the sale of software to Unisystems for $200,000 in the last few days of the second quarter. See supra, section D5. The other was $811,005 of revenue recognized in the second quarter from the sale of products that may have been shipped on July 1, one day after the close of the second quarter. See supra, section F. Assuming that both of these transactions were improper and part of a scheme to inflate second quarter earnings, they inflated earnings per share by 7.3%. That is, minus the transactions, earnings per share would have been reported at 10cents per share rather than 11cents per share. The difference is not significant enough to provide circumstantial evidence of an intent to fraudulently inflate earnings. 40 If we also assume that all of the shipping and billing mistakes in the second quarter that were pointed out by the appellants were actually deliberate attempts to inflate earnings, see supra, sections D1-2, E, I, L, and M, the effect of the mistakes inflated earnings per share by 10.7%. Combined with the Unisoft and alleged July transactions, earnings per share would have been inflated from 9cents per share to 11cents per share. That difference is likewise not strong enough circumstantial evidence of fraud, absent more direct evidence of scienter, to create a genuine issue for trial. 41 We affirm the district court's grant of summary judgment against appellants with respect to securities fraud in the second quarter.