Opinion ID: 219549
Heading Depth: 2
Heading Rank: 3

Heading: Weitzen's Motion for Summary Judgment

Text: The SEC contends that the district court erred in granting summary judgment in favor of Weitzen because: (1) there were genuine issues of material facts as to Weitzen's direct liability under Section 10(b) and Rule 10b-5; (2) the court applied the wrong legal standard for determining control person liability under Section 20(a); and (3) the court erred in applying Rule 13b2-2.
The SEC contends that there are genuine issues of material fact as to whether Weitzen misrepresented Gateway's revenue growth in the third quarter of 2000 as accelerated. The SEC argues that Weitzen failed to publicly disclose in an analysts' conference call and an earnings press report that Gateway's ability to meet analysts' revenue growth expectations was based largely on the one-time Lockheed and AOL transactions. Only the material misrepresentation and scienter elements of the SEC's claim are in dispute in this appeal. We agree with the SEC that there are genuine issues of material fact, precluding summary judgment, as to these elements.
The SEC contends that Weitzen made material misrepresentations in the conference call with analysts and the earnings press report by characterizing Gateway's growth as accelerated, when the reality was that Gateway only met financial analysts' expectations because of the one-time Lockheed and AOL transactions. [3] The Lockheed transaction resulted in Gateway booking $47.2 million in revenue from the sale of fixed-asset, non-Gateway branded computers and servers to Lockheed. The AOL transaction resulted in a one-time revenue increase of $72 million to Gateway based on a change in the way AOL paid fees to Gateway. Generally, whether a public statement is misleading, or whether adverse facts were adequately disclosed is a mixed question to be decided by the trier of fact. Fecht v. Price Co., 70 F.3d 1078, 1081 (9th Cir.1995); see also Durning v. First Boston Corp., 815 F.2d 1265, 1268 (9th Cir.1987) (stating that adequacy of disclosure is normally a jury question). Accordingly, resolving an issue as a matter of law is only appropriate when the adequacy of the disclosure is so obvious that reasonable minds [could] not differ. Durning, 815 F.2d at 1268; accord TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 450, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976). Information regarding a company's financial condition is material to investment. Reyes, 577 F.3d at 1076 (citing SEC v. Murphy, 626 F.2d 633, 653 (9th Cir.1980) (Surely the materiality of information relating to financial condition, solvency and profitability is not subject to serious challenge.)). Moreover, how officers and directors of a public corporation describe revenue growth to investors is important. See Ronconi v. Larkin, 253 F.3d 423, 430 (9th Cir.2001). We have explained, The statement that sales growth was accelerating, . . . is material and descriptive of historical fact, rather than forward looking. The statement that growth is accelerating means that a graph of sales against time shows a concave line. Prospective investors deciding whether a business is doing well look at whether sales revenue is flat, increasing, or declining, and if it is increasing or declining, whether the change appears to be accelerating or flattening out. Sales that are not only growing, but growing faster and faster, matter to an investor. Id. at 430-31; see also United States v. Ebbers, 458 F.3d 110, 116, 126 (2d Cir. 2006) (holding that a gap closing program that included as revenue several new largely one-time items not previously counted in revenue, violated Section 10(b) because investors would not have been alerted to the fact that revenue as previously calculated was actually down). Here, a rational trier of fact could find that Weitzen misled investors by publicly describing Gateway's growth as accelerated without simultaneously disclosing the unusual nature of the Lockheed and AOL transactions. There is evidence in the record showing that Weitzen participated in the gap filling program that led to the two transactions. Weitzen testified that he understood where the individual [business] units were and what they were going to try to do to close the gaps. These two gap fillers were unusual sources of revenue for Gateway. The Lockheed transaction was unusual because it was a sale of fixed assets, whereas Gateway mainly sold computers to consumers from its inventory. The AOL revenue was also atypical because it was from a one-time advanced payment based on a change in the terms of the contract between Gateway and AOL. The record further demonstrates that Weitzen understood that the transactions were significant and that the revenue gap would not have been closed without them. Weitzen testified that he understood that the Lockheed transaction, which was cash neutral to Lockheed, involved an unusually large sale of non-Gateway IT hardware, and that he was not aware of any large P.C. inventory sales at the end of the quarter that were used for gap filling. Weitzen also thanked AOL's president who acknowledged that the revised AOL contract deal would allow Gateway to take top line rev[enues]for providing Gateway with favorable accounting treatment. It's helping us. Viewed in the light most favorable to the SEC, a rational trier of fact could reasonably infer from these facts that the two unusual transactions were the primary reason why Gateway met analysts' expectations, and that they did not fall within Gateway's traditional core business model of selling to consumers. Despite his understanding of the true nature of the Lockheed and AOL transactions, however, Weitzen publicly stated in the conference call with analysts that Gateway was experiencing accelerating revenue growth and further explained that Gateway's growth in 2000, compared to 1999, demonstrated that [w]e've had acceleration of revenue growth. Weitzen also substantially participated in preparing Gateway's press release for the third quarter of 2000, which claimed that Gateway had accelerated year-over-year revenue growth. Weitzen contrasted Gateway's financial success with the rest of the industry, which was facing troubling news. Gateway's purported success was at least impliedly attributed to Gateway's strong growth in sales to consumers, small business sales, and the beyond-the-box strategy, all of which were emphasized in public statements. However, Weitzen did not disclose that but for the unusual and large Lockheed and AOL transactions, Gateway would not have met analysts' revenue expectations, and would have been experiencing the same troubling news as others in the business. The fact that Gateway would not have met analysts' expectations without booking the unusual Lockheed and AOL transactions as revenue could lead a reasonable juror to find that Gateway's revenue was not growing faster and faster as a characteristic of accelerated growth. If Gateway had not met analysts' expectations or Weitzen had disclosed the true source of the revenue, the investing public would have been alerted to the lesser rate of growth for Gateway's traditional sources of revenue. Under the circumstances, a rational trier of fact could conclude that Weitzen omitted material information regarding the Lockheed and AOL transactions, which misled investors into believing that Gateway was experiencing a higher rate of growth based on its public business model than it was achieving in fact.
Based on the foregoing facts, a rational juror could conclude that Weitzen acted at least recklessly when he did not disclose the unusual sources of revenue that enabled Gateway to meet analysts' revenue expectations. The record suggests that Weitzen knew that the Lockheed and AOL transactions were unusual, one-time events used to meet the quarterly revenue targets. The record further demonstrates that Weitzen understood that without the Lockheed and AOL transactions, Gateway would not meet the analysts' quarterly expectations. This is sufficient to create an issue of fact as to whether Weitzen at least acted recklessly (and thus with scienter) when he claimed that Gateway's financial growth was accelerated. Accordingly, we conclude that there is a genuine issue of material fact as to whether Weitzen made material misrepresentations when he stated in a press release and in a conference call with analysts that Gateway was achieving accelerated growth while failing to disclose the unusual, significant sources of the revenue derived from the Lockheed and AOL transactions, and whether Weitzen acted with scienter. Thus, summary judgment was inappropriate on the Section 10(b) and Rule 10b-5 claims.
The SEC asserts that there are genuine issues of material fact as to whether Weitzen was a control person for purposes of finding liability under Section 20(a) of the Act, 15 U.S.C. § 78t(a). It also maintains that the district court erred in ruling that Weitzen met his burden of establishing a good-faith defense of relying on others, and that he did not induce fraud when he reported misleading information about Gateway's financial condition. We agree. We conclude that there is a genuine issue of material fact concerning Weitzen's control over Gateway. Moreover, because Weitzen substantially participated in the preparation of the press release, his knowledge that he misrepresented the nature of the one-time transactions vitiates his good-faith-reliance defense at the summary judgment stage of this litigation. The Act provides: Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable . . . unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action. 15 U.S.C. § 78t(a). Accordingly, under Section 20(a), a defendant may be liable for securities violations if (1) there is a violation of the Act and (2) the defendant directly or indirectly controls any person liable for the violation. Howard v. Everex Sys., Inc., 228 F.3d 1057, 1065 (9th Cir. 2000). [4] The definition of person under the Act encompasses a company, 15 U.S.C. § 78c(a)(9), rendering Gateway the violator at issue here, as discussed supra. However, even if a securities violation occurs, there is no liability if the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation. 15 U.S.C. § 78t(a). The burden is on the defendant to show that both requirements of the good-faith exception are met. Howard, 228 F.3d at 1065 ([A] defendant is entitled to a good faith defense if he can show no scienter and an effective lack of participation.). When determining control person status, the issue is whether the defendant exercised power or control over the primary violator, and the plaintiff need not show that the defendant was a culpable participant in the violation. Howard, 228 F.3d at 1065. Whether [the defendant] is a controlling person is an intensely factual question, involving scrutiny of the defendant's participation in the day-to-day affairs of the corporation and the defendant's power to control corporate actions. Kaplan v. Rose, 49 F.3d 1363, 1382 (9th Cir.1994) (citation and internal quotation marks omitted). The fact that a person is a CEO or other high-ranking officer within a company does not create a presumption that he or she is a controlling person. Paracor Fin., Inc. v. Gen. Elec. Capital Corp., 96 F.3d 1151, 1163 (9th Cir.1996). Rather, indicia of control include whether the person managed the company on a day-to-day basis and was involved in the formulation of financial statements, which is sufficient to presume control over the `transactions giving rise to the alleged securities violation.' Howard, 228 F.3d at 1065 (citing Wool v. Tandem Computers Inc., 818 F.2d 1433, 1441 (9th Cir.1987)). Moreover, actual authority over the preparation and presentation to the public of financial statements is sufficient to demonstrate control. Howard, 228 F.3d at 1066. Here, there is sufficient evidence to create a genuine issue of fact as to whether Weitzen was properly considered a control person within the meaning of the statute. According to Gateway's bylaws, Weitzen, as president and CEO, had general management and control of the business and the officers and the employees of the Company. He had day-to-day control of the company, and could veto any plan or strategy. He was responsible for Gateway's financial reporting. Weitzen also signed the management representation letter to PwC confirming the 10-Q report. Additionally, Weitzen substantially assisted in preparing the press release that reported the results from the third quarter, including the unusual Lockheed and AOL transactions. Moreover, Weitzen does not meet his burden of showing that he is entitled to a good-faith defense. To be eligible for the defense, Weitzen must demonstrate that he acted in good faith based on an absence of scienter, and did not directly or indirectly induce the act or acts constituting the violation. 15 U.S.C. § 78t(a); Paracor, 96 F.3d at 1164. Here, there is a genuine issue of material fact as to whether Weitzen acted in good faith. As discussed supra, there is evidence that Weitzen acted with at least recklessness, or scienter, when he reported the Lockheed and AOL transactions as accelerated growth. This precludes his ability to rely on the good-faith defense to defeat summary judgment. [5] See Howard, 228 F.3d at 1065. We are further persuaded that there is a genuine issue of material fact whether Weitzen indirectly induced fraud, thereby precluding him from using the good-faith defense to defeat summary judgment. The SEC, relying on Nordstrom, Inc. v. Chubb & Son, Inc., 54 F.3d 1424 (9th Cir.1995), argues that Weitzen induced fraud when he substantially participated in the press release that reported the unusual and one-time Lockheed and VenServ transactions. Under our case law, these facts are sufficient to vitiate Weitzen's defense at the summary judgment stage. In Nordstrom, we held that officers and directors could be liable under Section 20(a) when they authorized misleading public disclosures, press releases, and statements to the press that were allegedly fraudulent. Id. at 1434. We further concluded that the good-faith defense is unavailable even when the defendants who induced the fraud believed in good faith that they were not perpetrating a fraud. Id. Here, not only is there evidence of Weitzen's scienter, but he engaged in disseminating misleading information to the public regarding Gateway's purported financial health in the third quarter of 2000. Accordingly, we conclude that there is a genuine issue of material fact as to whether Weitzen is a control person under Section 20(a), and that summary judgment on this claim was inappropriate. We further conclude that Weitzen's good-faith defense fails at the summary judgment stage.
The SEC argues that the district court erred by requiring that Weitzen know that the representation letter to PwC was false when he signed it. We disagree. As discussed above, to be directly liable for improperly reporting to accountants, Weitzen had to have knowledge that he was signing a false management representation letter to PwC. See Goyal, 629 F.3d at 916. Here, the SEC does not point to any evidence in the record that Weitzen knew that the revenue from any of the transactions was improperly booked. Accordingly, the SEC cannot demonstrate that Weitzen knew he was falsely signing the management representation letter sent to Gateway's outside auditors. Therefore, we conclude that the district court properly granted Weitzen's motion for summary judgment as to this claim.