Securities & Exchange Commission v. Woodruff
778 F. Supp. 2d 1073
D. Colo.2011Background
- SEC alleges Qwest executives engaged in securities fraud between 1999–2001 related to IRU revenue being reported upfront in the ‘communications services’ bucket.
- IRU revenue was previously in the ‘construction services’ bucket and migrated to the ‘communications services’ bucket without disclosing the shift.
- Public filings and earnings communications touted growth in the ‘communications services’ bucket without disclosing IRU inclusion or magnitude.
- 2000–2001 disclosures eventually revealed IRU materiality; the SEC contends the failure to disclose the nature and magnitude of IRU revenue misled investors.
- Court narrowed SEC theory to the failure to disclose mixing of IRU and monthly-service revenue and magnitude of IRU revenue.
- Individual defendants include Woodruff (CFO), Noyes, Kozlowski, and Mohebbi; SEC seeks various securities-fraud theories and related claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Materiality of undisclosed IRU revenue treatment | SEC contends omissions were material to investors | Deniers argue omissions were immaterial as a matter of law | Genuine issue of materiality present; triable fact standard applied |
| Personal participation/scienter of Woodruff | Woodruff knowingly or recklessly concealed IRU revenue treatment | Woodruff disputes causal role and scienter | Sufficient prima facie evidence of scienter; Woodruff liable to proceed to trial |
| Aiding and abetting liability of Mohebbi and Kozlowski | Mohebbi/Kozlowski aided in drafting/removing IRU disclosure | No sufficient evidence they caused or substantially assisted misstatements | Summary judgment granted for Mohebbi and Kozlowski on these claims |
| Liability as to Noyes and remaining claims | Noyes helped cause misstatements; remaining claims tie to 2001 Enron IRU | Noyes argues severance/limited scope; claims limited | Noyes liable on some claims; summary judgment granted in part and denied in part; severance denied |
Key Cases Cited
- Basic Inc. v. Levinson, 485 U.S. 224 (U.S. 1988) (materiality defined by substantial likelihood of altering total mix of information)
- SEC v. Wolfson, 539 F.3d 1249 (10th Cir. 2008) (elements of securities fraud and scienter standard)
- Aaron v. S.E.C., 446 U.S. 680 (U.S. 1980) (statutory interpretation of 17(a)(2) and (3) claims; scienter not required)
- Nacchio, 519 F.3d 1140 (10th Cir. 2008) (materiality and reliance considerations in phased disclosures)
- Dronsejko v. Thornton, 632 F.3d 658 (10th Cir. 2011) (definition of recklessness in scienter standard)
- Glassman v. Computervision Corp., 90 F.3d 617 (1st Cir. 1996) (general terms of statements and materiality considerations clarified)
- McDonald v. Kinder-Morgan, Inc., 287 F.3d 992 (10th Cir. 2002) (duty to disclose contingencies not imposed for past historic reporting)