Summary
stating it is inappropriate "to have experts opine 'as to the legal obligations of the parties under the contract'" and "is particularly inappropriate in this case, where the contract does not require 'scientific, technical, or other specialized knowledge' to interpret its terms"
Summary of this case from Meadows at Mainstone Farm Condo. Tr. v. Strathmore Ins. Co.Opinion
CIVIL ACTION, NO. 06-10012-JGD.
December 4, 2007
MEMORANDUM OF DECISION ON DEFENDANTS' MOTIONS FOR PARTIAL SUMMARY JUDGMENT
I. INTRODUCTION
The plaintiff Securities and Exchange Commission ("SEC") has brought this action against Alan C. Goldsworthy ("Goldsworthy"), Walter T. Hilger ("Hilger") and Mark E. Sullivan ("Sullivan"), former officers of Applix, Inc. ("Applix" or the "Company") alleging various violations of the Securities Act of 1933 and the Securities and Exchange Act of 1934. The issue presently before the court is whether the defendants are entitled to summary judgment on the SEC's claim that they wrongfully caused Applix to recognize $1 million in licensing revenues from Consist International ("Consist") in 2001, instead of having the revenue reported throughout 2002, the term of the licensing agreement. Specifically at issue is whether there is sufficient evidence for the jury to find that the defendants knew that the licensing agreement in effect between Applix and Consist executed on December 31, 2001 covered "future products," including a product known as Integra, for which revenues should have been reported in 2002, yet intentionally or recklessly caused Applix to report the revenue in 2001. Because there is evidence from which a jury could find that Goldsworthy and Sullivan knew that the licensing agreement covered Integra, their motions for summary judgment are DENIED. However, as the SEC has not alleged sufficient facts to establish that Hilger acted with the requisite scienter, his motion for summary judgment is ALLOWED.
In addition, the defendant Goldsworthy has moved for partial summary judgment on the SEC's claim of securities fraud premised on whether he falsely reported having "received" on behalf of Applix an installment check from Consist on December 31, 2001, or whether the payment was actually made in 2002. Again, in light of the existence of material facts, this motion for summary judgment is DENIED.
II. STATEMENT OF FACTS
Unless otherwise indicated, the facts are derived from "Defendant Alan C. Goldsworthy's Statement of Material Facts Pursuant to Local Rule 56.1" (Docket No. 83) ("DF") and "Plaintiff Securities and Exchange Commission's Statement of Material Facts Pursuant to Local Rule 56.1" (Docket No. 89), which includes "Plaintiff's Statement of Facts as to Which There Exist Genuine Issues to be Tried" ("PF") and "Plaintiff's Response to Goldsworthy's Statement of Facts" ("PR"). Goldsworthy's Response to the SEC's Statement of Facts is included in Exhibit 1 to Goldsworthy's Reply Memorandum (Docket No. 96) and will be cited as "DR." The exhibits filed by the parties shall be cited as "Def. Ex.," "Pl. Ex." and "Henschke Ex."
At all relevant times, Applix was a NASDAQ-listed public company that sold software worldwide, either directly to customers or through resellers or distributors. (DF ¶¶ 1, 3). In 2001, Applix sold software products designed to assist companies in analyzing, tracking, and managing their sales and customer relations, which were called "Customer Relations Management" software or "CRM." (DF ¶ 2). Its primary software in 2001 was based on a "software platform" called iEnterprise. (DF ¶ 2). In addition, Applix sold "TM1" or "iTM1" software. (DF ¶ 19). TM1, sometimes called "analytic" software, differed from CRM and allowed companies' financial staffs to analyze a business through multi-dimensional modeling. (DF ¶ 19). The defendant Alan Goldsworthy joined Applix in January 2000, and became its president and CEO by April 2000. (DF ¶¶ 4-5). He resigned on February 28, 2003. (DF ¶ 148). The defendant Walter T. Hilger was the CFO of Applix at all relevant times, and the Defendant Mark E. Sullivan was the Director of World-Wide Operations.
The OEM Agreements with Consist
On March 31, 2000, Goldsworthy, as president of Applix, signed a licensing agreement with Consist, a company that distributed software in Latin America. (DF ¶¶ 6-7; Def. Ex. 30). The agreement was signed on behalf of Consist by Natalio Fridman ("Fridman"), Consist's president. (Def. Ex. 30 at 11). This was the first OEM (original equipment manufacturer) agreement between the companies (the "Original OEM Agreement"), and it granted Consist a software license for an annual fee ($1 million in the first year) to sell Applix branded products, or to use Applix's software and sell it as part of software Consist itself would manufacture as OEM software. (DF ¶¶ 7-10). Consist was granted an exclusive license in Latin America, excluding Mexico, and a nonexclusive license world-wide. (DF ¶ 10).
The Original OEM Agreement defined "Software" in § 1.5 as follows:
"Software" means that version of the information processing program(s) in object code or binary form only, stored on some medium, including Related Documentation, developed or marketed by APPLIX under the trade names, and subject to the restrictions, set out in Schedule A item A. "Software" may include third party content for which APPLIX has the necessary sublicensing rights to fulfill the terms of this Agreement. "Software" further includes any subsequent modifications, derivatives, upgrades, successors, replacements or releases of the Software and subsequent developments or product offerings by APPLIX. Initial delivery of Software is identified in Schedule A item A.
(Def. Ex. 30 at 1) (emphasis added).
The referenced "Schedule A" is divided into four (4) parts, entitled "A. CURRENT SOFTWARE," "B. TERRITORY," "C. OEM PRODUCT(S)" and "D. RELATED DOCUMENTATION." In subpart A, Current Software is defined as "All Current APPLIX products and add-ons with the following tradenames . . . or successors in APPLIX e-Business as defined in section 1.5. . . ." (Emphasis added). The listed products are all CMR products. "Generic (`Off the Shelf') iTM1 and APPLIXWARE are excluded" under subpart A. (See DF ¶ 20; OEM Agreement at Schedule A, subpart A). Section 9.16 of the Agreement contains an integration clause, and provides that all modifications, additions or amendments must be in writing and signed by the parties. (Def. Ex. 30 at 11).
The First Amendment to the OEM Agreement was executed by Applix and Consist in March 2001. (DF ¶ 16; Def. Ex. 31). Goldsworthy and Fridman executed the one-page "Amendment #1," which expanded the products Consist was authorized to sell to include, in Mexico only, "Applix iTM1 Software only as branded by Applix." (DF ¶ 18; Def. Ex. 31).
The Second Amendment to the OEM Agreement
On December 31, 2001, Consist and Applix executed the Second Amendment to the OEM Agreement. As detailed more fully below, Schedule A, subpart A of the contract was amended to "include the Applix non-CRM products to the Software available for sublicensing by OEM under the Agreement" thereby "providing Consist with distribution rights described herein and in the original OEM agreement for all Applix products." (Def. Ex. 48). It is undisputed that Goldsworthy, Hilger and Sullivan knew that if the Agreement gave Consist rights to sell future products, including a product then under development known as Integra, Applix could not have recognized revenue on the transaction as of December 31, 2001, but rather had to recognize the revenue throughout 2002. (See PF ¶ 51). Integra, while publicly "launched" prior to December 31, 2001, was not available for distribution until October 2002. The Company originally recognized the revenue from Consist in 2001, but restated its financials in March 2003 to recognize the revenue ratably through 2002.
The defendants contend that the language of the Second Amendment is, at best, ambiguous, and that there is no evidence that they believed anything other than the Second Amendment did not include Integra. Viewing the facts, as I must, in the light most favorable to the SEC in ruling on the defendants' motion for summary judgment, I find that there is sufficient evidence from which a jury could find that the Second Amendment did, in fact, include Integra, and that Goldsworthy and Sullivan knew that the Second Amendment was intended to include Integra, yet caused the Company to report the revenue in 2001. Consequently, their motions for summary judgment are denied.
Nothing herein shall be read to indicate this court's view as to the facts of this case.
Events Leading up to the Second Amendment
The following describes the circumstances leading up to the execution of the Second Amendment to the OEM Agreement. On October 4, 2001, Applix hosted representatives from Consist and other resellers at a "Partners Day" at its headquarters. (PF ¶ 1). Goldsworthy, among others, made a presentation there. Applix introduced its new product, Integra, at the meeting. (PF ¶ 1). Thereafter, on October 23, 2001, Applix issued a press release announcing that it would unveil its "next-generation product" (i.e., Integra) by the end of the fourth quarter. (PF ¶ 2; Pl. Ex. 2 at 2). Goldsworthy was quoted in the press release as stating that "[a]ll of our customers and partners can upgrade to this new platform and take immediate advantage of enhanced functionality and product features" and that the new product "renews our commitment to Applix iTM1, enhances our product offering to Applix iEnterprise [CRM] customers, and provides Applix with a single strategic focus[.]" (Pl. Ex. 2 at 2). In the same press release, which included statements by Hilger as to the financial condition of the Company, Applix reported that it expected its 2001 year-end revenues to be $40 million, and fourth quarter revenue to be approximately $9.4 million. (Pl. Ex. 2 at 1-2; PF ¶ 2).
Later that day, Goldsworthy and Hilger had a telephone conference with analysts and others in which the Company assured the listeners that cash preservation and profitability would be the top priorities for the balance of the year. (PF ¶ 3). To attain its goals, Goldsworthy reported that the Company "needed to execute in four areas — license sales, service delivery and maintenance renewals, cost containment, and collections" and that, so far, the Company had improved in all of the areas except license sales. (Pl. Ex. 4 at 5-6). With respect to the "new generation of product" — Integra — Goldsworthy told the listeners as follows:
On December 12th in Los Angeles Applix will announce single solution platform that will allow both iTM1 and iEnterprise customers and partners to enhance their existing solutions. . . .
This is a win-win-win situation. Our customers win with new functionality, our partners win with new enhancements and new market opportunities and Applix wins with the opportunity to focus on one set of technology and, hopefully, attain greater efficiencies in our operation.
Complete details on availability, pricing and functionality will be available at our announcement in December.
(Pl. Ex. 3 at 3-4). The new technology was expected to be available in the first quarter of 2002. (Pl. Ex. 4 at 9).
During the telephone conference, Hilger, who had recently joined the company, confirmed that the expected revenues for the full year would be "in the $39 to $41 million range, which is flat to the prior year" and a decrease from earlier projections in the $44 to $46 million range. (Pl. Ex. 4 at 1-2, 4).
Shortly after the October 23, 2001 telephone conference Applix, through its Vice President of Channel Sales, Robert Delamore ("Delamore"), initiated discussions with Consist concerning a possible second amendment to the OEM Agreement, which would provide Consist rights to sell Integra and all Applix TM1 products in Latin America, in addition to the products already covered by the OEM Agreement. (PF ¶ 5). There are facts which would establish that Delamore, who was the principal negotiator with Consist until the very last meeting at which the Second Amendment was signed, expressly negotiated with Consist to have Consist sell Integra under the terms of the Second Amendment to the OEM Agreement. It is the defendants' contention, however, that regardless of Delamore's intent, the Second Amendment did not include Integra and that they are not bound by Delamore's statements, either because they were unaware of them or because the Amendment was modified at the last negotiating session where it was signed. This court finds that there are numerous factual disputes, which must be resolved by a jury.
Again, viewing the facts most favorable to the SEC, there is evidence that on December 5, 2001 Delamore sent Fridman of Consist a proposed term sheet in which it was proposed that the "Applix iTM1 Family of Products" be added to Consist's existing OEM contract with Applix, which already covered CRM products. (Pl. Ex. 14). Integra is specifically identified as part of the "iTM1 Family of Products," and Consist's rights with respect to Integra were to be non-exclusive. (Id.). The proposed licensing fee for the iTM1 family of products, including Integra on a non-exclusive basis, was $1,100,000. (Id.). This proposal was sent only after extensive discussions at Applix between, at a minimum, Delamore and David Golan ("Golan"), Applix's Vice-President of North American Operations and Delamore's direct report. (See PF ¶¶ 8-10). In addition, Delamore discussed the Consist proposals with Sullivan. (PF ¶ 10).
There are various components of this $1.1 million fee. The proposed fee for the distribution rights for the "Applix iTM1 family of products," including Integra (non-exclusive), was $887,850. In the final version of the Second Amendment, the fee for the software distribution rights for "Applix non-CRM" products came to $898,000 out of a total cost of $1 million. The closeness of these figures may be considered evidence that Integra remained covered by the final Agreement.
Given the importance of licensing agreements and Integra to the Company, there may be evidence from which a jury may infer that the company's president, Goldsworthy, was aware of the details of the proposal as well, even if he did not see the proposed term sheet. But see Carney v. Cambridge Tech. Partners, Inc., 135 F. Supp. 2d 235, 255 (D. Mass. 2001) ("attributing knowledge to a defendant merely because of the defendant's status in a corporation" generally fails to satisfy requirement of scienter).
There is also evidence from which a jury may find that Consist was insisting that Integra had to be included in any proposal: in fact Consist wanted rights to all Applix products, including products that became generally available during the term of the contract. (PF ¶¶ 13-14). Thus, the only issue during the negotiations was whether the right to sell Integra was to be on an exclusive or non-exclusive basis, not whether it was to be included at all (PF ¶ 13).
As anticipated, Applix launched Integra on December 12, 2001. (Pl. Ex. 16). As detailed in its December 12th press release, Applix was demonstrating Integra that day, and expected that Integra would be generally available in early 2002. (Id. at 1). Following this press release, negotiations continued between Delamore and Fridman. (PF ¶ 17). In a telephone conference on December 18, 2001, Fridman expressed concern that Integra was only being offered on a non-exclusive basis, and requested exclusivity. (PF ¶ 17). Delamore discussed this demand with Golan and Goldsworthy, and the general consensus was that they did not want to give Consist exclusive rights and preclude having other vendors sell Integra in Latin America. (PF ¶ 18; DR ¶ 18). Goldsworthy believed that an exclusive arrangement would require a substantially higher fee — in the $2 million to $2.5 million range. (PF ¶ 23). Consequently, on December 18th Delamore sent Fridman an email, with a copy to Goldsworthy, in which he confirmed that Applix was open to having Consist act as an OEM and its distributor for all of Applix's products, but stated that Applix did not know how to value "a brand new market for unreleased Applix products." (Pl. Ex. 17). Thus, Delamore proposed either coming up with an appropriate annual fee for an exclusive right to all products, or extending the partnership so that Consist could resell all of Applix's products in Latin America while they discussed a time frame for extending exclusivity to Integra, which Delamore described as being among the Applix "Adaptive Planning Market" products. (PF ¶¶ 19-20). As of that time, Integra was expected to be released in June 2002. (Pl. Ex. 17). Thus, as of December 18th Goldsworthy understood that having Consist sell Integra on an exclusive basis was still being discussed as a valid option.
Delamore and Fridman met on December 21, 2001 to continue their discussions. (PF ¶ 22). At this meeting, Fridman continued to insist on exclusive rights to Integra in Latin America, to which Delamore responded that such exclusive rights would cost Consist about $2.5 million. (PF ¶ 24). When Fridman objected to that amount, Delamore suggested a compromise pursuant to which Consist would receive exclusive rights only in Brazil, Argentina, Uruguay, Paraguay and Chile, and non-exclusive rights in all other countries in Latin America. (PF ¶ 24). Fridman was also concerned with contract language which named specific products, since product names might change. Therefore, Fridman proposed using the term "non-CRM" products. (PF ¶ 25). Because Consist already had rights to CRM products under the original OEM Agreement, the phrase "non-CRM" was intended, at least by Delamore and Fridman, to encompass all other Applix products, including Integra, even if Integra became generally available under a new name. (See id.).
After leaving the meeting, Delamore called Goldsworthy. (DR ¶ 26). Delamore contends that he told Goldsworthy that the parties had reached a potential compromise pursuant to which Consist would get rights to Integra and all other TM1 products, with exclusivity in only certain Latin American countries, and that it seemed that Consist would agree to a fee of $1 million for such rights. (PF ¶ 26). Delamore also contends that Goldsworthy responded to this information by telling Delamore that he had done a "great job" and asking if the deal could be finalized before Christmas. (PF ¶ 26). Goldsworthy wanted to finalize the deal so that Applix could recognize revenue from the deal in 2001. (PF ¶ 26). Goldsworthy denies being told about Integra in the phone conversation. (DR ¶ 26).
On December 22, 2001 Delamore sent Fridman an email, with a copy to Goldsworthy, and later to Sullivan. (PF ¶¶ 27, 28). Therein, Delamore wrote:
I spoke with Al [Goldsworthy] from the airport and explained exactly what you wanted in the agreement. Clarifying the exclusivity by specific countries will allow us to offer you a proposal along the lines we discussed and at a price I believe you will find reasonable. Keeping with our discussion I have delineated below the specific points we discussed in "simple" language. If we are in agreement with the major concepts and the price then we can develop the language for a contract or an amendment to our existing contract.
Please review:
1) Consist International will be Applix's exclusive distributor for all it's non-CRM products (iTM1 Family of products) in the South American countries of Brazil, Argentina, Chile, Paraguay, and Uruguay.
2) In the remainder of Latin America Consist will distribute all of Applix's non-CRM products (iTM1 Family of products) on a nonexclusive basis.
3) The first years contract fee for the above arrangement is $1,300,000.
4) Subsequent years will be calculated at 5% of Applix's non-CRM revenue less consulting services. The revenue will be based upon license and support revenue only.
5) Ten days worth of training on Applix's non CRM training is included with this agreement.
6) All maintenance and support is included in this agreement.
As you know Applix and I both want to conclude on this agreement before the end of December. . . .
The reference to "iTM1 Family of products" is consistent with the original proposal sent to Consist on December 5, 2001 (Pl. Ex. 14), which expressly included Integra as such a product.
(Pl. Ex. 19).
It is at this juncture that the facts become highly contested. Goldsworthy and Sullivan adamantly deny that they understood "non-CRM products (iTM1 Family of products)" to include Integra. They marshal a number of facts which, if the jury finds to be true, would support their position, including, without limitation, facts relating to Integra being a unique product, different from iTM1 products. The SEC, however, marshals other facts which, in addition to the language of the Amendment itself, would lead the jury to believe that Goldsworthy and Sullivan understood that the Second Amendment was intended to cover Integra. The existence of such facts mandates that Goldsworthy's and Sullivan's motions for summary judgment be denied.
Assuming that the history of negotiations is relevant, as a general statement, a jury may be convinced, given the history up to this point, that Goldsworthy and Sullivan fully understood that the goal of the Second Amendment was to provide Consist rights to all Applix products, including Integra, and that Consist was not interested in proceeding without those rights. The reference to non-CRM products must, then, have been intended to include Integra. Moreover, the jury may find that if the parties did not intend to include Integra in the Agreement, its omission would have been expressly referenced. This would be consistent with the Original OEM Agreement in which the parties expressly excluded iTM1 products. Finally, but without limitation, the jury may find it unpersuasive that Goldsworthy and Sullivan believed that Consist should be asked to pay more ($1.3 million) for a smaller exclusive territory than originally offered to Consist on December 5, 2001, unless Goldsworthy and Sullivan also believed that the arrangement would include Integra. In the original proposal, which was for $1.1 million, Consist had been offered exclusivity throughout Latin America for all of the iTM1 Family of products except for Integra, which was offered on a non-exclusive basis. Subsequently, for $1.3 million, Consist was being offered exclusivity in only designated countries. These and other facts would support the conclusion that Goldsworthy and Sullivan acted with the requisite scienter to support the claims against them.
While the December 5th offer did include limits on exclusivity due to prior commitments of Applix, on the present record it appears that such limits would apply to any contract with Consist. The December 5th offer did not include any geographic limitation on exclusivity.
There is evidence in the record that following receipt of Delamore's email, Fridman and Delamore spoke on December 24, 2001. (PF ¶ 29). Fridman objected to the $1.3 million cost, and asked for information about what Applix was forecasting for 2002 non-CRM revenue, as it would form the basis for future fees. (PF ¶ 29). Delamore then asked Golan and Hilger for "a round number on the total TM1 plus maintenance revenue" for 2001 and the "budget number for 2002." (Pl. Ex. 20). In response, Hilger sent Delamore, Golan and Sullivan (who was charged with drafting the final contract), the "[l]icense and maintenance projections for TM1 worldwide, excluding Integra." (Pl. Ex. 21). Less than an hour later, Golan sent Hilger, Delamore and Sullivan an email in which he stated that the 2002 number presented of $14.5 million represented "only Applix iTM1 revenue" and that by adding the "projected Integra revenue for 2002 ($3M), we return to the 17.5M original revenue projection." (Pl. Ex. 21). Delamore then emailed Fridman and told him that the projected 2002 "non-CRM revenue" was $17 million, and that, in the hopes of closing the deal before the end of the year, the first year fee would be reduced to $1 million and the 5% renewal fee would be reduced to 3.5%. (Pl. Ex. 22). The projection of $17 million is consistent with Delamore's understanding that non-CRM products included Integra. Proposed payment terms were 1/3 in 30 days, and 1/3 in 60 days. (Id.).
There is nothing in these communications to indicate that Hilger understood that the proposed arrangement with Consist included (or excluded) Integra. There is no evidence that Hilger was privy to proposed contractual language or the substance of ongoing negotiations.
On December 27, 2001, Sullivan drafted Amendment #2 and sent it to Delamore, Golan, Hilger and Goldsworthy for review. (PF ¶ 35). He modified the draft after receiving comments. (PF ¶¶ 35-38). It is disputed whether Delamore expressly told Sullivan that Integra was included. (See DR ¶ 37). In Sullivan's drafts, the added products were described as "non-CRM products," and there is no longer any reference to the "iTM1 Family of products." (Pl. Exs. 23, 24).
The defendants argue strenuously that they would not have understood the Second Amendment to include Integra since Delamore described the products to be added as "non-CRM (iTM1 Family of products)," and Integra is not a part of the iTM1 Family of products, but a unique item. A jury may find, however, that Sullivan's deletion of the reference to iTM1 products may have been intended to clear up any confusion, and to make it clear that "non-CRM" products did, in fact, include all other products and not just iTM1 products. The existence of multiple interpretations of facts mandates that summary judgment be denied.
On December 31, 2001, Goldsworthy and Golan traveled to New York to meet with Fridman and execute Amendment #2. (PF ¶ 39). It was a lengthy meeting, and it is undisputed that at no time was Consist told that it was not getting any rights to Integra under the agreement. (See PF ¶ 43; DR ¶ 43; DF ¶¶ 60, 64). Much of the meeting involved social conversation, with the business portion only lasting about an hour. (DF ¶ 64). At some point Goldsworthy grew frustrated, and stood up to leave. (DF ¶ 69). While the defendants attribute this conduct to Fridman's request for language that could be interpreted as giving Consist rights to future products (including Integra), the SEC contends that it was because it appeared that the agreement would not be signed that day due to Fridman's desire to discuss "non-consequential" matters. (DF ¶¶ 68-69, PR ¶ 69).
The Language of the Second Amendment
The Second Amendment, as executed, adds products which are subject to the OEM Agreement, and describes them only as "non-CRM products." Thus, Amendment #2 provides in relevant part:
1) Schedule A, part A of the Agreement will be amended so that the entire existing text will become subsection 1, and a subsection 2 will be added to include the Applix non-CRM products to the Software available for sublicensing by OEM under the Agreement as amended by this second Amendment, hereby providing Consist with distribution rights described herein and in the original OEM agreement for all Applix products.
The bold language was added at the December 31, 2001 meeting.
(Def. Ex. 48) (underlined emphasis added). Consist's exclusive distribution rights to the non-CRM products were limited to Brazil, Argentina, Chile, Paraguay and Uruguay. It was given non-exclusive distribution rights to non-CRM products in the rest of Latin America. (Id. at ¶ 2). As detailed above, part A of Schedule A, which is amended by the Second Amendment, is entitled "Current Software."
The defendants focus in on the words "Current Software" and "available for sublicensing" in paragraph 1 as compelling evidence that the Second Amendment does not include future products and that, by reading the Second Amendment, they clearly understood that it did not cover products which were not "available for sublicensing" at the moment the Amendment was signed. A jury may find this argument unpersuasive, and that it plucks language out of the Amendment and reads it out of context. A jury may find that the Amendment does not limit its coverage to products then available for sublicensing. Rather, the paragraph states that "non-CRM products" are being added to the description of the "Software" available for sublicensing by the OEM under the Agreement, i.e., that the OEM has the authority to sublicense "non-CRM products" under the terms of the Second Amendment. In addition, given that "Software" is expressly defined in the original OEM Agreement to include "subsequent developments or product offerings by APPLIX" (Def. Ex. 30 at § 1.5), and the fact that the new paragraph provides that between the original Agreement and the Second Amendment, Consist is being granted distribution rights "for all Applix products," the jury may find that the defendants' reading of the Second Amendment as limiting its coverage to products presently available for sublicensing is not supportable or credible.
No party has asked the court to rule on the meaning of the Second Amendment.
Similarly, a jury may reject the defendants' reliance on the "Current Software" heading. The parties dispute whether the language of paragraph 1 amends Schedule A so that the new paragraph adding "Applix non-CRM products" falls under the heading of "Current Software." Even assuming that the defendants' interpretation that it does fall under that heading is correct, it does not resolve the controversy. A fair reading of the contract could include Integra as "current software" since it had been launched as of the date of the Second Amendment, and was expected to be generally available during the term of the contract. In addition, as noted above, "software" is expressly defined in § 1.5 to include "subsequent developments or product offerings by APPLIX."
Schedule B of the Original OEM Agreement, entitled "Fees and Charges," was also amended by the Second Amendment. In the Original Agreement, subpart A of Schedule B was entitled as follows: "A. Annual Program Fee." The Second Amendment provides as follows:
3) Schedule B, part A of the Agreement will be amended so that the entire existing text will become subsection 1, and a subsection 2 will be added to describe the fee calculation for the Applix non-CRM products. The fee for the period ended December 31, 2002 shall be as follows:Software distribution rights for Applix non-CRM products $898,000 First Year Maintenance for Applix non-CRM products $90,000 Ten days of training on Applix non-CRM products $12,000 Total $1,000,000 As noted above, the fees charged for distribution rights are similar to those proposed in the December 5, 2001 initial proposal, which specifically included Integra. (See note 4,supra).
On January 1, 2002, following the execution of the Second Amendment, Goldsworthy sent an email to Applix's Board of Directors and others stating that "[t]he year is ending on a positive note. Revenue is forecasted in the $9.2-$9.3 range awaiting final review by E Y. Additionally, we brought in the Consist deal for $1.0M which included $880k in Licenses. Cash is on target at $9.0 for a second cash neutral quarter." (Pl. Ex. 26).
Payment of the Check
The SEC is seeking to hold Goldsworthy liable for what it contends are fraudulent misrepresentations about when Applix received the first payment under the Agreement. This court finds that material factual disputes preclude summary judgment on this claim as well.
The defendants posit the following facts relating to the payment by Consist of the first installment due under the Second Amendment. For its part, the SEC contends that the relevant persons had no memory of the relevant events during the investigatory stage, therefore raising for the jury the question whether the following scenario actually occurred or is a later-created version of events. (See PR ¶¶ 104-109).
According to the defendants, after the Second Amendment was executed on December 31, 2001, Fridman handed Goldsworthy a check for $333,333.34, which was the first payment due under the Second Agreement. (DF ¶ 104). It is undisputed that sometime after the meeting, on December 31st, Goldsworthy called Hilger and told him that the Consist deal had closed and that he had received the check from Fridman. (Henschke Ex. 4 at 221). According to the defendants, Goldsworthy inadvertently left the check at Consist's offices, and it was sent to Applix by Federal Express on January 3, 2002. (DF ¶ 106). The fact that the check was mailed on January 3, 2002 is not disputed. (See Def Ex. 49).
There is conflicting evidence whether, during the company's year end audit, Goldsworthy told the auditors that he had brought the check back with him from Consist on December 31, 2001. (See PF ¶ 58; DF ¶ 109). There is a significant amount of testimony on this point, and the language used by the witnesses can be interpreted in several ways. (See, e.g., Docket No. 103 which includes the defendants' review of various depositions). For example, the defendants contend that a witnesses' statement that Goldsworthy told him that he left the meeting on December 31, 2001 "with the check in his possession" is "perfectly consistent with Mr. Goldsworthy's testimony that Mr. Fridman gave Mr. Goldsworthy the check upon signing the agreement, that when the meeting with Mr. Fridman came to an end, Mr. Goldsworthy left Mr. Fridman's presence with the check still in hand, and that Mr. Goldsworthy then left the check behind at a secretary's desk at Consist's offices before boarding the plane to return to Boston." (Docket No. 103 at pp. 1-2). While the witnesses' statement may, in fact, be consistent with Goldsworthy's version of events, a jury may also find that Goldsworthy was stating to the auditor that he came back to Boston with the check. It will be up to the jury to determine what was said to whom, and whether there were misrepresentations made or not.
It is undisputed, however, that Applix consistently reported the $333,333.34 as revenue received in 2001. The SEC contends that this representation is false because the funds were not received until 2002. That issue will be left for the jury.
The defendants contend that this amount of cash was de minimis and would not have affected earnings. Therefore, the defendants contend, misrepresentations concerning when the cash was received cannot form the basis of a claim of securities fraud. (See Docket No. 100). The SEC argues, however, that Applix made its cash position relevant by highlighting it in a press release issued on January 29, 2002. (See Docket No. 101). Therefore, it is up to a jury to decide whether, assuming there was a misrepresentation, it was material. This issue will not be resolved in the context of this motion for summary judgment. As the SEC correctly notes, the motions were premised on scienter, and it is not appropriate at this late date to introduce new issues for the Court's consideration, especially given the upcoming trial date. (See Docket No. 101 at 2).
Events Following the Execution of the Second Amendment
In January 2002, Hilger made the decision to recognize the entire $898,000 from the Second Amendment as revenue in 2001, after both Goldsworthy and Sullivan told him that the Second Amendment did not give Consist rights to Integra. (PF ¶¶ 47-48). The Consist transaction accounted for more revenue than any other transaction in 2001. (PF ¶ 47). On January 29, 2002, Applix announced its 2001 revenue of $40.3 million, which was "slightly ahead of the prior year." (PF ¶ 52). By including the fees due from Consist, the fourth-quarter and year-end revenue figures were slightly better than Applix had publicly projected in October 2001. (Id.).
While there is some vague evidence that Hilger communicated with Delamore about what the Second Amendment meant, the SEC does not cite to any testimony as to the substance of what was conveyed to Hilger. (See PF ¶ 49 and cited testimony).
Applix issued a press release announcing its financial results on January 29, 2002. That release may be read to credit some of its financial results to Integra, further supporting the idea that Integra was covered by the Second Amendment. Thus, as Goldsworthy is quoted as saying:
I am very pleased with our results. This year we focused on achieving a business model to return Applix to profitability in a difficult global market. We created a structure and revenue mix that allows for conservative revenue growth while returning to profitability and positive cash flow. At the same time, we continue to invest in technology. We recently launched Applix Integra, an integrated platform that enables companies to be more competitive and more responsive to the rapidly changing markets. And we are encouraged by the initial reactions of our partners and customers to this new platform.
(Pl. Ex. 28 at 2) (emphasis added). Moreover, Applix implied that Integra was currently available. As reported in the press release:
During Q4, the company announced Applix Integra, the first realtime, enterprise-wide interactive planning and CRM analytics solution on a single platform. Applix Integra provides immediate visibility into operational data, which allows managers to quickly stabilize operational fluctuations and take advantage of opportunities. Applix Integra integrates planning, analytics, business workflow, collaboration, exception alerting and forecasting.
"Applix Integra integrates planning, performance measurement and operational data to enable companies to optimize business effectiveness and customer interaction regardless of geography or structure," Goldsworthy said.
(Id. at 4-5).
In the press release, Hilger is quoted as saying "We are very pleased to have exceeded the guidance provided for the fourth quarter in all of the key areas: revenue, profitability and cash flow." (Id. at 3). According to the SEC, by wrongfully including the Consist fees the Company "misleadingly reported a loss of $2.3 million, or $0.19 per share, for the quarter, when the actual loss was $3.2 million, or $0.27 per share." (PF ¶ 53). "It also falsely reported that the net income for the year was a loss of $9.9 million, or $0.83 per share, when the actual loss was $10.8 million or $0.91 per share." (Id.). Goldsworthy received a $45,000 discretionary bonus from Applix's Compensation Committee "based on the Corporation's operating results for the fourth quarter of fiscal 2001." (PF ¶ 54). Hilger received a bonus of $29,495 for the fourth quarter of 2001, $9,549 of which was based on Applix having attained its revenue goal for the year. (PF ¶ 55).
It is undisputed that Goldsworthy did not qualify for a bonus in 2001 under his compensation plan, even with the Consist revenue. (DF ¶¶ 152-155).
Applix's accountants, Ernst Young, conducted an audit of the Company's year-end financial condition. Goldsworthy, Sullivan and Hilger all informed the accountants that Amendment #2 did not give Consist rights to Integra when it became generally available. (PF ¶¶ 56-57). Consequently, the Consist revenue was reported in 2001 in all of the Company's financial filings, including its April 1, 2002 form 10-K. In addition, Applix reported that the payment of $333,333.34 had been received in 2001. (See, e.g., PF ¶ 62). The SEC contends that these alleged misrepresentations understated Applix's net loss for 2001 by 8.3%. (PF ¶ 62).
While Goldsworthy, Hilger and Sullivan were all taking the position that the Second Amendment did not include Integra, Delamore was telling Consist that it "can now sell all products in Latin America." (PF ¶ 63). In addition, throughout 2002, with the knowledge and consent of Goldsworthy and Sullivan, Applix was training Consist personnel on Integra. (PF ¶ 65). In February 2002, Applix's sales force assisted Consist in putting together sales presentations relating to Integra for Consist's accounts. (PF ¶ 68). At this time it appeared that Integra would not be released until the summer, but Consist was "listed as a partner to get an early version of the product[.]" (Pl. Ex. 43; PF ¶ 67). Goldsworthy, Hilger and Sullivan were all aware of Consist's sales calls to its customers regarding Integra. (PF ¶ 68). The defendants contend that all of these activities were normal pre-release events, and do not evidence any acknowledgment that Consist had any rights to Integra. (See, e.g., DR ¶¶ 65, 71). The SEC argues to the contrary.
A jury may find that, while these were normal pre-release events, they would lead to Consist sales of Integra to customers in 2002 under the terms of the Second Amendment. There is no evidence in the record that Consist understood that it could not sell Integra in 2002, or that the parties were engaged in negotiations concerning Consist's right to sell Integra separate and apart from its rights to sell other products.
On March 5, 2002, Delamore informed Goldsworthy that Consist was interested in getting rights to Integra beyond the territories set forth in the Second Amendment. (PF ¶ 69). Thus, Delamore wrote to Goldsworthy:
[Fridman] is interested in his other offices to have the ability to sell TM1 and Integra. He may also want the ability to sell applications his people write in TM1 and/or Integra outside Latin America. Obviously this is outside the scope of the TM1 contract so some type of pricing would have to be worked out.
(Pl. Ex. 47). Again the parties disagree as to whether this is an acknowledgment that Integra was included in the Second Amendment or a recognition that it was not included. (See DR ¶ 69).
By July 2002, Consist was affirmatively stating that it had already paid for Integra and was awaiting product delivery. (PF ¶ 72). Around this time, in July, Fred Sullivan became Applix's Vice-President of North American operations, and the subject of Consist's rights in Integra were again the subject of discussions. Fred Sullivan has testified that it was his understanding, based on conversations with Goldsworthy, Hilger and Sullivan, that the defendants believed that Consist had rights to Integra as part of the non-CRM contract. (PF ¶¶ 73-74). The defendants dispute the admissibility and import of his testimony. (DR ¶¶ 73-74). Nevertheless, there is also undisputed evidence that Fred Sullivan acted in accordance with his understanding that Consist had rights to Integra. (See, e.g., PF ¶¶ 81-82).
In the summer or fall of 2002, Applix began formulating the next agreement with Consist. The parties engaged in a series of communications, leading up to the Third Amendment, which was signed on December 31, 2002. (Def. Ex. 126; see, e.g., PF ¶¶ 76-83; DR ¶¶ 76-83). Many of these communications reference Integra, and it is undisputed that the Third Amendment includes Integra, although it is not expressly referenced therein. The defendants contend that no express reference is necessary because by 2002 Integra qualified as "current software" "available for sublicensing." The SEC contends that no express reference was necessary because Integra was already included as a "non-CRM" product. (See DF ¶ 115, PF ¶ 83). The Third Amendment does provide:
Except for the modifications described herein, all other terms and conditions of the existing Agreement shall remain in full force and effect. The full spectrum of rights and benefits will be available to Consist under the Agreement, including but not limited to the latest upgrades, technical support, and access to the latest revision of the license generator.
(Def. Ex. 126).
Some of the communications from Applix employees expressly acknowledged that Consist had rights to Integra as a "non-CRM product," including at least one internal communication from Sullivan in November 2002. (See PF ¶ 79; Pl. Ex. 59). In October 2002, Sullivan and Hilger calculated fees which would be due in 2003 for the "non-CRM products," and they included Integra. (PF ¶ 78). In November 2002, a draft Applix business plan, reviewed by Goldsworthy, stated "[f]or the Applix non-CRM products, which include iTM1 and Integra, Consist has Exclusive distribution rights in Brazil, Argentina, Chile, Paraguay and Uruguay" and non-exclusive rights in the rest of Latin America. (PF ¶ 80). The defendants either deny knowledge of such communications, or ask the court to consider these statements immaterial, since they were made at a time when it was clear that a new agreement was going to include Integra. (See, e.g., DR ¶¶ 79-81). While these communications may ultimately be found to be insignificant to the jury, their existence constitutes further evidence of the factual dispute in this case, which renders summary judgment for Goldsworthy and Sullivan inappropriate.
It appears that Integra was appropriately included in these calculations regardless whether it was covered under the Second Amendment, since the calculations were being done for 2003 based on products sold in 2002 — irrespective of contract coverage.
Applix's Restatement of Financial Condition
According to the defendants, after Ernst Young learned about problems with Applix having reported income from an unrelated German transaction involving a company named AKDB, it began questioning whether the term "non-CRM" in the Third and Second Amendments included Integra. (See PR ¶¶ 118-127). The defendants and the accountants had various communications with Fridman, during which Fridman took the position that Consist had rights to Integra under the Second Amendment. (See PF ¶¶ 84-85; PR ¶¶ 129-41). The parties dispute Fridman's motivation in making these statements, as well as the meaning of some of the statements. It is undisputed, however, that the defendants continued to publicly maintain with the accountants that the Second Amendment did not, in fact, include Integra. (See DF ¶ 142).
At Ernst Young's insistence, Applix hired the law firm of Hale and Dorr to conduct an internal investigation regarding the accounting for the Consist transactions. (DF ¶ 144). Hale and Dorr decided that the Second Amendment was ambiguous and that a better reading was that it included the rights to Integra and other future products. (See DR ¶ 145). Ernst Young took the position that it would not complete its audit if Goldsworthy remained as CEO, and he resigned on February 28, 2003 at the request of the Board of Directors. (DF ¶¶ 147-48). Applix announced Goldsworthy's resignation that day, along with its intention to restate its financial statements to correct errors relating to its recognition of revenue in connection with the Consist and AKDB transactions. (PF ¶ 95). Applix filed its restated Form 10-K for the period ended December 31, 2001 on March 31, 2003. (PF ¶ 96). Therein, the Company reported that as a result of an error in its revenue reported for the Consist transaction, it was restating its financial statement to defer the $898,000 it had recognized for the quarter ended December 31, 2001, and was recognizing the revenue ratably over the one-year term of the agreement beginning in January 2002. (PF ¶ 96). Hilger signed the restated financial form. (PF ¶ 97).
The admissibility of Hale and Dorr's opinion is the subject of a motion in limine. Nothing herein shall be read to indicate the court's position on that motion, which has not yet been argued.
Additional facts will be discussed below where appropriate.
III. ANALYSIS
A. Summary Judgment Standard of Review
Summary judgment is appropriate when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). "A dispute is `genuine' if the evidence about the fact is such that a reasonable jury could resolve the point in the favor of the non-moving party." Sanchez v. Alvarado, 101 F.3d 223, 227 (1st Cir. 1996) (quotations and citations omitted). A material fact is one which has the "potential to affect the outcome of the suit under the applicable law." Id. (quotations and citations omitted).
The moving party bears the initial burden of establishing that there is no genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548, 2553, 91 L. Ed. 2d 265 (1986). If that burden is met, the opposing party can avoid summary judgment only by providing properly supported evidence of disputed material facts that would require trial. See id. at 324, 106 S. Ct. at 2553. The non-moving party "may not rest upon mere allegation or denials of his pleading," but must set forth specific facts showing that there is a genuine issue for trial.LeBlanc v. Great Am. Ins. Co., 6 F.3d 836, 841 (1st Cir. 1993) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S. Ct. 2505, 2514, 91 L. Ed. 2d 202 (1986)). The court must view the record in the light most favorable to the non-moving party and indulge all reasonable inferences in that party's favor. See O'Connor v. Steeves, 994 F.2d 905, 907 (1st Cir. 1993). "If, after viewing the record in the non-moving party's favor, the Court determines that no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law, summary judgment is appropriate." Walsh v. Town of Lakeville, 431 F. Supp. 2d 134, 143 (D. Mass. 2006).
B. Scienter — Standard of Review
The parties are in substantial agreement as to the legal standards to be applied to the SEC's claims, with any differences being minor and not critical to the summary judgment motions. See Hilger's Reply Mem. (Docket No. 91) at 15-16. Moreover, although a number of the claims brought by the SEC have nominally different standards of proof, the SEC is relying on the same evidence for all its claims. Thus, according to the SEC, either summary judgment is appropriate on all counts brought against a specific defendant, or on none of the claims against that defendant. Finally, as the parties all recognize, the straightforward issue raised by the defendants in these motions is whether each of them acted with scienter when they publicly took the position that the Second Amendment did not include Integra. Since the intracacies of the securities laws are not relevant to these motions, a broad overview of the relevant standards is all that is necessary.
The SEC contends in Counts One and Two that the defendants each violated § 17(a)(1) of the Securities Act of 1933, 15 U.S.C. § 77q(a)(1), as well as § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5. The crux of the complaint is that the defendants made a "materially false or misleading statement or omitted to state a material fact necessary to make a statement not misleading[.]" Geffon v. Micrion, 249 F.3d 29, 34 (1st Cir. 2001). "It is ultimately a question for the trier of fact, here the jury, whether statements are false or misleading so as to be actionable under 10b-5. It is up to the court, however, to determine whether the evidence is such that no reasonable jury could conclude that statements are false and misleading, and, if so, to grant summary judgment." Id. at 35 n. 6 (internal citations omitted). "A statement or omission is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision." SEC v. Durgarian, 477 F. Supp. 2d 342, 349 (D. Mass. 2007) (quotation omitted). As with respect to issues concerning the misleading nature of statements, disputes as to whether an allegedly false or misleading statement is material is generally a question of fact for the jury. See Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1217 (1st Cir. 1996).
Assuming that the statements at issue were material and false and misleading, to prevail on these claims, the SEC must establish "that the defendants had the requisite scienter, namely the `intent to deceive, manipulate, or defraud.'" Geffon v. Micrion, 249 F.3d at 35 (quoting Ernst Ernst v. Hochfelder, 425 U.S. 185, 193, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976)). See also SEC v. Durgarian, 477 F. Supp. 2d at 355 (the requirements for establishing a violation of Section 17(a)(1) are virtually the same as under Section 10(b) and Rule 10b-5). Thus, to "win a section 10(b) case, the plaintiff must show either that the defendants consciously intended to defraud, or that they acted with a high degree of recklessness." Aldridge v. A.T. Cross Corp., 284 F.3d 72, 82 (1st Cir. 2002). Recklessness "comes closer to being a lesser form of intent than merely a greater degree of ordinary negligence . . . [It is] not just a difference in degree, but also in kind." Greebel v. FTP Software, Inc., 194 F.3d 185, 199 (1st Cir. 1999) (quoting Sanders v. John Nuveen Co., 554 F.2d 790, 793 (7th Cir. 1977)). Therefore, "[a] showing of negligence or `mere recklessness' does not suffice." In re Segue Software, Inc. Sec. Litig., 106 F. Supp. 2d 161, 166 (D. Mass. 2000) (quoting In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 976 (9th Cir. 1999)). "Rather, plaintiffs must show a deviation from ordinary standards of care so extreme as to support a `strong' inference that defendants were aware of the misleading nature of their conduct or so blatant that the capacity of their actions to mislead would have been obvious to any reasonable actor." Id. See also Greebel, 194 F.3d at 198, and cases cited.
The SEC also claims that the defendants violated sections 17(a)(2) and (3), which only require negligence to establish liability. See SEC v. Fife, 311 F.3d 1, 9 (1st Cir. 2002). However, the SEC makes no distinction between the conduct necessary to establish liability under these sections and under section 17(a)(1). See SEC Mem. (Docket No. 87) at 40-41.
The "SEC must . . . set forth facts giving rise to a `strong inference' that the defendants acted with the required state of mind." SEC v. Durgarian, 477 F. Supp. 2d at 353 (internal quotation omitted). "To qualify as `strong' . . . an inference of scienter must be more than merely plausible or reasonable — it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent." Tellabs, Inc. v. Makor Issues Rights, Ltd., ___ U.S. ___, 127 S. Ct. 2499, 2504-05, 168 L. Ed. 2d 179 (2007). "[T]he plaintiff may combine various facts and circumstances indicating fraudulent intent to show a strong inference of scienter." Aldridge, 284 F.3d at 82. See also In re Cabletron Sys., Inc., 311 F.3d 11, 38 (1st Cir. 2002) (scienter may be demonstrated by indirect evidence). There is no "rigid formula" for establishing scienter. Rather, it a fact-specific analysis that must be addressed on a case by case basis. Id. at 38.
The SEC also contends that each of the defendants aided and abetted Applix's fraud in connection with the purchase and sale of securities in violation of Section 10(b) and Rule 10b-5 (Count Six). "The three principal elements required to establish liability for aiding and abetting a violation of Section 10(b) and Rule 10b-5 are: 1) that a securities violation was committed by a primary wrongdoer, 2) that the aider and abettor provided substantial assistance to the primary violator and 3) that the aider and abettor provided such assistance knowingly or recklessly." SEC v. Durgarian, 477 F. Supp. 2d at 357. In the instant case, the SEC relies on the same facts to support this claim and its contention that the defendants acted intentionally and recklessly as it does to support its claims of violation of Rule 10b-5 and Section 10(b).
The SEC has also alleged that Hilger and Sullivan circumvented internal accounting controls and/or falsified books and records in violation of Section 13(b)(5) of the Exchange Act (Count Three). In addition, the SEC has alleged that Goldsworthy, Hilger and Sullivan falsified accounting records in violation of the Exchange Act Rule 13b2-1 (Count Four) and that Goldsworthy and Hilger provided false and misleading information to accountants in violation of Exchange Act Rule 13b2-2 (Count Five). Proof of scienter is not required for claims under Section 13 of the Exchange Act or the regulations promulgated thereunder. See SEC v. McNulty, 137 F.3d 732, 740-41 (2d Cir. 1998), and cases cited. However, to prevail on its claim of violation of Section 13(b)(5), the SEC must establish that the defendants acted knowingly. See SEC v. Cohen, No. 4:05CV371-DJS, 2007 WL 1192438, *18 (E.D. Mo. April 19, 2007), and authorities cited. Again, however, the SEC is relying on the same evidence in support of these claims as to support its Rule 10b-5 and Section 10(b) claims. See SEC Mem. (Docket No. 87) at 38-39.
Finally, the SEC has alleged that the defendants aided and abetted Applix's Section 13 violations (Counts Seven through Eleven). To prevail on this claim the SEC must establish that (1) the primary party violated the relevant securities law, (2) the defendant had knowledge of the primary violation and his role in furthering it; and (3) the defendant provided substantial assistance in the primary violation. Ponce v. SEC, 345 F.3d 722, 737 (9th Cir. 2003). Here again, however, the SEC relies on the same facts to support its contention that "the Defendants had knowledge of Applix's violative conduct and their role in furthering it." SEC Mem. at 39-40.
Applying these principles to the instant case, this court finds that the motions of Goldsworthy and Sullivan for summary judgment should be denied, while Hilger's motion should be allowed.
C. Goldworthy
The Meaning of the Second Amendment
Goldsworthy contends that there is no evidence from which a jury could find that he believed that the Second Amendment covered Integra. While there is no evidence that Goldsworthy ever publicly took the position that Integra was covered, viewing the facts most favorably to the SEC, there is evidence from which a jury could find that he did understand that Integra was included.Very briefly, since the facts are provided in such detail above, there is evidence that Goldsworthy was informed that Consist wanted the right to sell Integra and that Consist never changed its position throughout the negotiations. In addition, Goldsworthy knew that Delamore, on behalf of Applix, was offering Consist those rights. By no later than December 18, 2001, when Goldsworthy received a copy of the email Delamore sent to Fridman (Pl. Ex. 17), he knew that the parties were still discussing granting Consist an exclusive license to unreleased Applix products, albeit at a fee which had not yet been determined. He subsequently learned about a "compromise" which Consist might be willing to accept, i.e. exclusivity but only in limited countries. A jury might find that when he walked into the final meeting with Fridman, Goldsworthy knew that Fridman expected to be acquiring rights to Integra, and those were the rights which were included in the final version of the Second Amendment. Thus, Goldsworthy agreed to add language to the Second Amendment that made it clear that it was intended to give Consist rights to "all Applix products." He also signed the Second Amendment although it did not expressly exclude Integra, despite the fact that omitted products were clearly identified in the Original OEM Agreement. It is also undisputed that Goldsworthy never orally mentioned to Fridman that Integra was not included. These facts support a finding of scienter.
As described above, a jury also may reject the defendants' reading of the Second Amendment as excluding Integra. While the defendants rely on the fact that Integra had not been "released," it certainly had been "launched" and publicly announced. The jury may find that Integra was "current software" of Applix — Integra was apparently undergoing fine-tuning, but it clearly existed and was being touted to the public, partners and customers as of the time of the Second Amendment. Similarly, the jury might find that the defendants' reliance on the phrase "available for sublicensing" is misplaced. A fair reading of the Second Amendment could be that Integra, a "non-CRM" product, was being added to the list of products "available for sublicensing by OEM[.]" Moreover, a jury may discredit the defendants' argument that they did not believe Integra to be included because it is not an iTM1 product, since the phrase "iTM1 Family of products" was omitted from the final draft of the Second Amendment, which was written by Sullivan and reviewed by Goldsworthy. A jury may find that this is not, as defendants' contend, simply a case involving a disagreement about the meaning of the words in the Second Amendment. Rather, the jury may find that Goldsworthy knew what the language meant when he signed the Agreement, yet took a different stance with the auditors.
This court accepts the defendants' argument that the restatement of the Company's financials is not an admission of wrongdoing. "[A] restatement of earnings, without more, does not support a `strong inference' of fraud, or for that matter, a weak one." Segue Software, Inc., 106 F. Supp. 2d at 169. Nevertheless, the restatement does call into question the defendants' claim that no fair reading of the Second Agreement could include Integra as a covered product.
The parties' conduct following the execution of the Second Amendment may also be viewed as supporting the fact that Goldsworthy knew that Integra was included in the Second Amendment. Despite his earlier insistence that Integra was a unique product, which clearly could not be covered by the Second Amendment, it was not treated any differently from other Applix non-CRM products covered in the Third Amendment. The Agreement was not modified in any way to expressly include Integra, yet the parties do not dispute that the Third Amendment included Integra. At a minimum, a jury could find that Goldsworthy's conduct after the execution of the Second Amendment was consistent with his earlier understanding that the language of the Second Amendment included Integra as a "non-CRM" product.
Finally, but without limitation, a jury might find that it was important for Goldsworthy to be able to announce the agreement with Consist, and since granting Consist a license with Integra was the only way to accomplish that, it was done. In October 2001, Goldsworthy reported that it was important for the company to make progress in four areas, and that license sales was the one area which still needed improvement. (Pl. Ex. 4 at 5-6). There is evidence that Goldsworthy felt it important for Applix to recognize revenue from the Consist transaction in 2001, and that he conveyed this to Delamore. By accounting for the Consist revenue as he did, Goldsworthy was able to inform the Applix Board of Directors on January 1, 2002 that the year was ending "on a positive note." Revenue was actually slightly higher than Applix had publicly projected in October 2001. The fourth quarter results were of importance to the Board, and resulted in Goldsworthy receiving a bonus, which he otherwise clearly was not going to earn. While there is no evidence that Goldsworthy knew he was to receive a bonus, there is evidence that he clearly was not going to qualify for a bonus unless there was better than expected performance at some point. In sum, viewing the evidence in the light most favorable to the SEC, there is sufficient evidence from which a jury may find a strong inference that Goldsworthy acted with the conscious intent to defraud when he affirmatively represented that Integra was not included in the Second Amendment.
Receipt of the Consist Check
The existence of material facts in dispute also require the denial of Goldsworthy's motion for summary judgment with respect to his reporting to the auditors that he had received the check from Consist in 2001. As detailed above, a jury may find that Goldsworthy believed it was important to improve the Company's revenue situation before year-end. A jury may also find that he never told the auditors that he had left the check in New York. There is some indication that he also failed to tell the SEC that he left the check in New York during his initial interviews with the plaintiff. By affirmatively telling the auditors that the Company had received the check in 2001, and remaining silent about having left the check, Goldsworthy may be found to have intended to mislead the auditors about the revenues received by Applix in 2001.
If there was a misrepresentation, there is also a question whether it was of a material fact. As noted above, the defendants focus on the amount of the check in arguing that it was immaterial. The SEC, however, argues that the defendants made the amount of revenue received in 2001 material by highlighting it in a press release. This case falls within the majority of situations where materiality and the existence of misrepresentations are for the jury to decide. D. Sullivan
There is also sufficient evidence from which a jury can find that Sullivan knew that the Second Amendment included Integra. Like Goldsworthy, Sullivan was informed about Consist's requirement that the Second Amendment include Integra. He was copied on much of the same correspondence as Goldsworthy, and there is testimony from Delamore that he kept Sullivan informed of the negotiations. For the same reasons that the negotiations leading up to the execution of the Amendment and the language of the Second Amendment are sufficient for a jury to find that Goldsworthy acted with scienter, a jury may find that Sullivan had the requisite intent as well.
In addition, Sullivan is the one who drafted the Second Amendment. There is no evidence in the record which would explain why he did not expressly state that the Amendment did not include Integra, even though Sullivan knew that Fridman wanted the rights for Integra. Similarly, at this juncture there is no explanation for why the reference to the iTM1 Family of products was omitted from the final draft, if such language was intended to make it clear that Integra was not included. The record is equally silent on why, if Sullivan was supposed to express the intent of the parties to the agreement, he used the broad language of "non-CRM" products if he intended to limit the Amendment's coverage. Thus, given Sullivan's role as drafter of the Amendment, a jury could find that he understood that the Amendment included Integra, so his public position to the contrary was undertaken with the intent to defraud.
The significance of the events following the execution of the Second Amendment apply equally to Sullivan as they do to Goldsworthy. In fact, Sullivan expressly wrote in an internal memorandum dated November 14, 2002 that the contractual reference to non-CRM product lines "by definition includes Integra[.]" (Pl. Ex. 59). The absence of any need to modify the definition of non-CRM products in the Third Amendment to include Integra is further evidence that Sullivan knew that the same language included Integra in the Second Amendment. These facts, without limitation, require that Sullivan's motion for summary judgment be denied.
E. Hilger
Hilger's participation in the Consist transaction differed significantly from that of Goldsworthy and Sullivan. There is no evidence that he had direct, substantive communications with Delamore concerning Consist's requirement that it obtain rights to Integra. Nor does the record show that Hilger played any role in the negotiations or in the drafting of the Second Amendment. Instead, the record shows, at most, that Hilger was interested in how to account for the transaction. Thus, Hilger apparently had some conversations with Goldsworthy, who negotiated the Amendment, and Sullivan, who drafted the Amendment. However, they expressly told him that it did not cover Integra. Under such circumstances, there is insufficient evidence for the jury to find that Hilger acted with any intent to deceive when he told the auditors that Integra was not included. Similarly, the undisputed facts establish that Goldsworthy told Hilger that he received the check from Consist in 2001. Therefore, there is insufficient evidence for the jury to find that Hilger acted with wrongful intent when he reported the check in Applix's 2001 revenues.
While the record may support the conclusion that Hilger had some generalized conversations with Delamore, or was present when the Consist transaction was discussed internally, such vague assertions are insufficient to establish scienter. See Carney v. Cambridge Tech. Partners, Inc., 135 F. Supp. 2d 235, 255 (D. Mass. 2001), and cases cited (generalized allegations about access to unspecified corporate information do not establish scienter).
The facts relied on by the SEC do not compel a different conclusion. As an initial matter, there is no evidence that Hilger had any reason to distrust Goldsworthy or Sullivan. Thus, a jury could not find, based on the record presently before the court, that Hilger acted recklessly in relying on the information that they conveyed to him. The SEC also relies on the fact that Hilger provided information concerning Applix's 2002 revenues for the purpose of projecting Consist's 2003 fees, and that the revenues conveyed to Consist included Integra. See SEC Mem. (Docket No. 87) at 35-36. However, there is nothing in the record which indicates that Hilger was aware of the purpose of the requested information, or the role the information was to play in contract negotiations. These communications do not establish scienter.
Hilger's 2002 conduct does not support a finding of scienter either. Hilger continued to act in accordance with the instructions of Goldsworthy and Sullivan as to the meaning and intent of the Second Amendment. Thus, there was no reason for Hilger to doubt that the Third Amendment could include Integra as "current software" without the need to modify the language of the Agreement, since that was the position of Goldsworthy and Sullivan. Information concerning Integra gathered in connection with the negotiation of the Third Amendment, therefore, would not put Hilger on notice that Consist had acquired such rights under the Second Amendment. Similarly, the fact that Consist was being provided with training and information about Integra would not put Hilger on notice that Consist's rights had been established in the earlier Amendment. Hilger may have viewed these facts as supporting the (undisputed) fact that Consist's contractual rights to Integra would be included in the Third Amendment, and that Consist was getting ready to sell Integra. In sum, there are not sufficient facts for the jury to find that Hilger acted with scienter in reporting either that the Second Amendment did not include Integra, or that Applix had received Consist's check in 2001. Therefore, Hilger's motion for summary judgment shall be allowed.
IV. CONCLUSION
For all the reasons detailed herein, Goldsworthy's Motion for Partial Summary Judgment (Docket No. 80) and Sullivan's Motion for Partial Summary Judgment (Docket No. 77) are DENIED, and Hilger's Motion for Partial Summary Judgment (Docket No. 78) is ALLOWED.