Giaraputo, et al v. Xerox Corporation, et al
Filing
507
ORDER: Ruling on Motion for Summary Judgment (Doc. No. 436 ). Signed by Judge Alvin W. Thompson on 3/29/2013. (Gallagher, Robyn)
UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
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:
:
IN RE XEROX CORPORATION
:
SECURITIES LITIGATION
:
:
:
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Civil Action No.
3:99CV02374 (AWT)
RULING ON MOTION FOR SUMMARY JUDGMENT
The plaintiffs bring this class action on behalf of all
persons who purchased common stock from Xerox Corporation
(“Xerox”) during the period from October 22, 1998 through October
7, 1999, alleging violations of the Securities Exchange Act of
1934 (the “Exchange Act”).
The plaintiffs bring their claims
under Sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C.
§§ 78j(b) and 78t(a) respectively, and Rule 10b-5, 17 C.F.R.
§ 240.10b-5, promulgated by the Securities and Exchange
Commission pursuant to Section 10(b).
The defendants, Xerox
Corporation (“Xerox”) and Xerox executive officers Barry Romeril,
Paul A. Allaire and Richard Thoman, move for summary judgment on
all claims in the plaintiffs’ Amended Consolidated Class Action
Complaint (the “Complaint”).
For the reasons set forth below,
the defendants’ motion for summary judgment is being granted.
1
I.
FACTUAL BACKGROUND
A.
The Worldwide Restructuring
On April 7, 1998, Xerox announced a company-wide
restructuring (the “Worldwide Restructuring”).
The Worldwide
Restructuring consisted of 150 initiatives in Europe, Africa,
Latin America, Asia and the United States.
Xerox announced:
As a result of a six-month planning process
involving more than 50 teams, Xerox will implement
some 150 specific projects. Among them:
•
•
•
Streamline
and
rationalize
worldwide
manufacturing, logistics, distribution and
service operations. For example, Xerox will
centralize and consolidate U.S. parts depots
and outsource storage and distribution.
Move from country-centric operations in Europe
to a more “pan-European” structure to provide
more efficient customer support. The company
will rationalize and consolidate functions and
locations to reduce duplication and to
increase speed of response to the marketplace.
Overhaul
administrative
processes
and
associated resources to achieve significantly
greater
productivity
and
speed
of
implementation. For example, Xerox will close
one of four geographically-organized U.S.
customer administrative centers with the
remaining
three
re-focused
by
customer
segment, enabling improved customer support at
lower cost.
When fully implemented the ongoing pre-tax savings
from the initiatives will be approximately $1
billion annually. Initially, more than half of the
savings will be reinvested to implement process and
systems
changes
in
order
to
enable
the
restructuring, and in ongoing efforts to broaden
and strengthen marketing programs and distribution
channels to enhance revenue growth. Paybacks will
be spread over three of four years, particularly in
Europe where the process of implementation is more
2
complex.
Press Release, Xerox Corp., Xerox Announces Worldwide
Restructuring To Enhance Competitiveness in the Digital World:
Company Will Eliminate 9,000 Jobs and Take $1 Billion After-Tax
Charge IRX-PROD-0033970-71 (Apr. 7, 1998) (Levine Decl. Ex. 3).
B.
The 1998 Customer Business Organization Reorganization
Xerox’s July 1998 reorganization of its Customer Business
Organization (“the CBO Reorganization”) was one of the Worldwide
Restructuring initiatives.
The Customer Business Organization
provided administrative support to Xerox’s U.S. sales force, also
known as the North American Solutions Group (“NASG”).
two major components of the CBO Reorganization.
There were
First, Xerox
closed one of its four Customer Administration Centers and
redistributed business among the remaining three centers, which
it renamed Customer Business Centers (“CBCs”).
CBC employees
entered customer orders, recorded revenue, sent out bills, and
answered customer questions.
Second, Xerox removed Customer
Business Representatives (“CBRs”) from its 36 regional sales
offices (the Customer Business Units or “CBUs”) and transferred
their duties, including order entry and processing and scheduling
and delivery of equipment, to employees at the three remaining
CBCs.
CBRs were redeployed into other assignments at the CBUs.
New employees were hired at the CBCs to perform the CBRs’ former
duties.
3
As Senior Vice President of Xerox’s Customer Business
Operations, Kenneth Baugher, observed in September 1999 that
service level problems arose following the CBO Reorganization:
Background
In mid 1998, the Customer Business Centers (CBCs) were
restructured to reduce General & Administrative costs
consistent with Corporate priorities. Specifically, all
order processing was centralized from the Customer
Business Units (CBUs) into the Business Centers and
equipment management was transferred from the CBUs to the
Integrated Supply Chain (ISC). The number of Centers was
reduced from 4 to 3 and the customers handled by each
Center were realigned by customer type rather than by
Sales District. As part of this restructure, roughly 500
heads were captured.
The Problem
Service level problems started to materialize immediately
after the [CBO Reorganization] (especially in Chicago –
our largest Center – which had undergone the largest
degree of change).
Order processing errors were
frequent, order times stretched out to unacceptable
levels, and Sales Reps could not get to the right people
in the CBCs to resolve issues. Days Sales Outstanding
(DSO) and Aged Receivables started to climb, billing
errors increased, and customers could not reach anyone to
answer their questions. As a result, Sales Reps were
drawn into the gulf to try to get orders processed,
equipment
delivered,
and
invoices
corrected.
Additionally, CBC workload, overtime, and pressure
increased to intolerable levels and turnover increased,
which exacerbated the problem.
Root Causes
Root causes for the problem are lack of resources, loss
of skills, and disruption. Specifically, we lacked the
systems and process improvements to support the resource
reduction. Additionally, we lost hundreds of man-years
of experience when we redeployed the highly experienced
Customer Business Representatives into other assignments
in their local CBUs and hired many completely new people
in the Centers.
4
CBC Background Summary IRX-PROD-0110462 (Levine Decl. Ex. 87).1
Compounding these problems, Xerox assigned billing and collection
personnel to order entry, so that there were fewer employees
available to fix the bills and collect on them.
By December
1998, A/R aged more than 120 days had increased 450% from $50
million in December 1997 to $225 million.
DSO increased 17% from
the second quarter of 1998, the quarter immediately preceding the
implementation of the CBO Reorganization, to the third quarter of
1998, the first quarter following its implementation.
C.
The 1999 Sales Force Realignment
On January 6, 1999, Xerox “announced a series of initiatives
designed to allow the company to better capitalize on growing
digital market opportunities and create greater value for
customers and shareholders” (the “1999 Sales Force Realignment”).
Press Release, Xerox Corp., Xerox Realigns Operations to Better
Capitalize on New Growth Opportunities in the Digital Marketplace
(Jan. 6, 1999) (Levine Decl. Ex. 22).
Xerox planned to realign
its sales force territories from geography-based selling to
industry-based selling and realign its document processing
business under four operations: Industry Solutions, General
Markets, Developing Markets and Business Group Operations.
1
The
Accounts receivable, or A/R, refers to outstanding bills
that were recorded as revenue but not yet collected. Days sales
outstanding, or DSO, is a measure of the average number of days
it takes to collect on a bill once a sale is recorded.
5
process would evolve over the course of a “couple of years,” with
“no significant changes to sales force territories or
compensation” planned in 1999. Id.
Xerox began the planning and
implementation of some aspects of the Sales Force Realignment in
the first quarter of 1999.
By the middle of 1999, there was
unrest in the sales force as a result of the sales
reorganization.
D.
Internal Communications
Problems arising out of the CBO Reorganization were
discussed or alluded to in various Xerox internal documents
relied upon by the plaintiffs.
On September 25, 1998, Margaret Tytheley, a 26-year Xerox
employee emailed Paul Alaire and Richard Thoman, stating that "It
appears very [l]ittle planning, if any, went into this
transition. Segment centers were not prepared for the magnitude
of customer calls and inquiries."
Email to Paul Allaire IRX-
PROD-0036150 (Sept. 25, 1998) (Levine Decl. Ex. 9).
The plaintiffs have proffered a conclusion of their
accounting expert, Charles R. Drott, that Xerox had established
an accounts receivable reserve of only $16.6 million for the
third quarter of 1998, which resulted in an understatement of
reserves for uncollectible accounts that quarter of $20 million;
Drott is critical of the fact that the reserve had only been
increased by $3 million.
See Charles R. Drott, Expert Report of
6
Charles R. Drott ¶ 3.3, at 8 (Oct. 15, 2007) (Levine Decl. Ex.
111).
Drott relies on an October 14, 1998 memorandum from Gary
Kabureck, Vice President, Financial Services, to Daniel S.
Marchibroda, the subject of which is “Third Quarter 1998 Reserve
Reviews.”
In that memorandum, Kabureck observes that there has
been “a significant reduction in the volume of write-off
activity,” with respect to both notes receivable and trade
receivables, “due directly to the disruption resulting from the
recent re-organization of the USCO Customer Administration
Organization.”
Memorandum from Gary Kabureck to Daniel S.
Marchibroda KPMGGIA002637B (Oct. 14, 1998) (Levine Decl. Ex. 10).
However, Kaburek also notes that the third quarter trade
receivable write-offs had also declined fairly significantly and
concludes: “While we do not believe we have additional risk to
the 6+6 provision outlook of $3.0M greater than Plan, we will
continue to closely monitor balance of the year write-offs,
recoveries and file aging to ensure the reserve balance is
adequate.”
Id.
On October 26 and 27, 1998, accounting firm KPMG visited the
Xerox North Texas customer administration center.
Under the
heading “CBC Transition Issues,” an internal memo documenting
that visit states:
Sales representatives are very unhappy with the lack of
face to face interaction with the CBRs. . . .
Bill believes the CBC transition has directly impacted
7
the CBU’s performance. Since the transition their best
sold revenue day is approximately $600K. Prior to the
transition $1 million sold revenue days were common. . .
.
Customer service has been impacted significantly by the
restructuring. All the CBC’s have high call response
times.
In addition, there is a large percentage of
abandoned calls.
None of the CBC’s are close to the
KB&CA metrics established for this area. The lack of
tenured personnel is evident in the length of time it
takes to complete each call.
Memorandum from KPMG on Xerox North Texas CBU Summary Memo
KPMGGIA 008857-58 (Nov. 6, 1998) (Levine Decl. Ex. 116).
A November 6, 1998 internal memorandum prepared by Philip D.
Fishbach and sent to the Operations Committee, which was received
by defendants Allaire, Thoman and Romeril, states:
Accounts receivable funds usage was $390 million through
September 30, 1998, which is $224 million worse than
prior year and $77 million worse than plan. Accounts
receivable as a percent of revenue is currently at 12.3%,
which is (0.4) pls. worse than plan. USCO and XBS both
show significant deterioration in DSO since Q2. USCO and
XBS’s DSO at September 30, 1998 is 51.5 days and 48.9
days, respectively, which is 8.2 days and 7.4 days worse
than plan and 7.7 and 5.4 days worse than Q2,
respectively. The deterioration is largely driven by the
reorganization of the customer administration centers in
the U.S.
Memorandum from Philip D. Fishbach on Document Processing Nonfinancing Funds September YTD and Q4 Assessment to Operations
Committee IRX-PROD-0142783 (Nov. 6, 1998) (Levine Decl. Ex. 117).
The memorandum showed “Restructure savings” of $55 million.
Id.
at IRX-PROD-0142782.
On November 23, 1998, Tim White, Tim Egan and W.P. Tehan of
8
KPMG visited the Xerox Chicago customer administration center.
An internal memorandum to file, authored by Tehan, states that
after the realignment the Chicago CBC handled 60% of Xerox’s
customer volume.
However, 51% of the employees in Chicago had
“less than one year of Xerox experience” which was a
“significant challenge because it [took] at least 18
months for an individual to become familiar with
Xerox’[s] systems and OTI procedures,” and that “several
customer care metrics were noticeably below plan and the
prior year. For instance, average call response time,
percentage of calls abandoned and overall customer
satisfaction had declined significantly from June 1998.”
Pl’s. 56(A)(2) Statement ¶ 23 (quoting Anthony Saunders, Expert
Report of Professor Anthony Saunders 23 n.75 (Oct. 15, 2007)
(Levine Decl. Ex. 113)) (alterations in original).
On December 2, 1998, Tehan of KPMG drafted an internal
memorandum documenting the KPMG field visit to the Chicago CBC.
Under the heading “Customer Care,” Tehan states:
During our visit to the North Texas CBU KPMG noted that
several customer care metrics were noticeably below plan
and the prior year. For instance, average call response
time, percentage of calls abandoned and overall customer
satisfaction declined significantly from June 1998.
Although this process may not have an immediate financial
statement impact, continued deterioration in overall
Customer Care performance could present problems in the
future.
Memorandum from W.P. Tehan to File, KPMG Field Visit to the
Chicago Customer Business Center (CBC) KPMGGIA009730 (Levine
Decl. Ex. 20).
Under the heading, “Billing Quality,” Tehan
identified “[p]rocess errors,” “[d]ata errors (i.e., human
9
input),” “[d]elays in processing (market code or pricing table
updated in Sale Range, but not updated in EBS),” and “[p]ricing
(too complex)” as “[t]he top billing quality issues.” Id. at
KPMGGIA009731.
He also stated that Lindsey Bates, a Billing
Quality Manager at Xerox “concurred with problems associated with
invoices not mailed in a timely fashion (this has been a reoccuring theme during our confirmation routine).”
Id.
Under the
heading “Accounts Receivable,” it states: “As of October 1998
Chicago’s trade DSO was 59 days (an increase of approximately 2
weeks over the prior year).
At October 1998 $110 million of
their trade A/R file was aged greater than 120 days.”
Id.
On December 9, 1998, A. Barry Rand, Xerox’s Executive Vice
President, Customer Operations, sent an internal memo to Allaire,
Buehler, Romeril and Thoman observing that he had discussed with
them several times the need to minimize sales force disruption.
See Memorandum from A. Barry Rand to Distribution IRX-PROD0108847 (Dec. 9, 1998) (Levine Decl. Ex. 18).
He pointed out
that in 1993 and 1995 when Xerox had “major ground plans and/or
sales compensation changes,” sales force disruptions led to a
decrease in revenues.
Id.
He stated that “change management is
key to minimize disruption,” and pointed to a number of factors
with respect to 1999: “Public Sector created; CBC Impacts; NAM
organization realigned and verticalized; Centralization of house
accounts; Hybrid marketing launched; Entity/CBU resizing; Anxiety
10
of changes to come.”
Id. at IRX-PROD-0109150-51.
In a Xerox internal memo dated December 17, 1998, Xerox’s
Director of Customer Satisfaction and Loyalty Peter
Garcia states that Xerox was “not meeting customer
expectations for maintaining relationships with them,
[were] not meeting customer expectations for Digital
products, support and/or service and that [Xerox had] not
done a good job in minimizing the customer impacts of
[Xerox’s] operational process changes.”
Pl’s. 56(A)(2) Statement ¶ 29 (quoting Anthony Saunders, Expert
Report of Professor Anthony Saunders 24-25 (Oct. 15, 2007)
(Levine Decl. Ex. 113)) (alterations in original).
On January 6, 1999, defendant Thoman gave a presentation to
Xerox executives.
One part of the presentation is entitled “Much
to be worried about.” Presentation IRX-PROD-0141480 (Jan. 6,
1999) (Levine Decl. Ex. 21).
In that section, he discussed
digital players requiring high growth.
He stated that
“Restructuring is enabling us to deliver on earnings growth,” and
also stated that “Revenue growth has hit a wall.”
In addition,
he stated “Our performance does not equal our promise.” Id.
William Buehler sent a May 3, 1999 memorandum to Thomas
Dolan, with copies to defendants Romeril and Thoman, reviewing
issues related to the CBO Reorganization:
Tom, thanks again for a very thoughtful 3+9 Review. Your
analysis clearly demonstrates the top issues that we must
address to get NASG back on a successful track - namely:
•
Customer Satisfaction
•
Top Line Growth
•
Sales Coverage/Productivity
•
Service Performance CBC and Receivable Performance.
The submitted Full-Year profit assessments are nearly
11
$500 million worse than plan (of which NASG is $200
million) and would deliver a year over year decline in
profits in both Q2 and Full Year, which is obviously
unacceptable.
Memorandum from William F. Buehler to Thomas Dolan on 3+9
Direction IRX-PROD 0252096 (May 3, 1999) (Levine Decl. Ex. 52).
In an internal memo dated May 21, 1999, William Buehler
stated that “‘Sales people spend 25-35% of each day on the
administrative duties (equivalent to 1800 full time people).’”
Pl’s. 56(A)(2) Statement ¶ 30 (quoting Anthony Saunders, Expert
Report of Professor Anthony Saunders 29 (Oct. 15, 2007) (Levine
Decl. Ex. 113)).
Buehler also stated that “Customers [are]
refusing to pay bills that are 4-6 months late. . . . [It is]
difficult to collect on an inaccurate, late bill.”
Id. ¶ 31
(quoting Anthony Saunders, Expert Report of Professor Anthony
Saunders 26 (Oct. 15, 2007) (Levine Decl. Ex. 113)).
Buehler
further stated that “[t]he overriding issue in North America is
the terrible condition of our administrative processes– CBC and
ISC.”
Id. (quoting Memorandum from William Buehler on Roundtable
Meetings to Al Dugan IRX-PROD-0015597 (May 21, 1999) (Levine
Decl. Ex. 114)).
An internal Xerox document prepared in May 1999 states
“CBR’s in Chicago are a problem.
–Don’t know what they are doing
– Don’t return phone calls – Don’t know where to get help.”
Pl’s. 56(A)(2) Statement ¶ 32 (quoting Anthony Saunders, Expert
Report of Professor Anthony Saunders 25 (Oct. 15, 2007) (Levine
12
Decl. Ex. 113)).
In a July 1, 1999 internal memorandum from Patrick Fulford
to Baugher, Ciaschi and others not including any of the
individual defendants, with the subject line “NASG State of
Emergency,” Fulford stated:
I have just spent the last two days reviewing a
preliminary 6+6 NASG Outlook. This outlook was developed
by the finance staffs working with members of your
organizations. I apologize if you haven’t seen any of
this yet, but I thought it was important to get it out as
quickly as possible. Although we will be spending time on
this matter in early July, I felt compelled to give you
a ‘heads-up’ to a very serious situation.
I’ve summarized the key problems included in the 6+6
Outlook . . . . In short, this outlook indicates
approximately a $310 profit risk to the 3+9 Outlook
taking our full year plan miss to $507M.
Our
year-over-year profit decline would be 8% (yes, it takes
my breath away too).
Clearly, we will work together in early July to scrub the
numbers but the risks are real unless we intervene
immediately. In my view, this is a crisis and represents
a state of emergency. . . .
We need to review every investment area.
The review
should include investments under way and those planned
for second half start-up. A state of emergency mind-set
would dramatically reduce the investment profile with
maybe 1 or 3 initiatives surviving.
We also need to
consider a full hiring freeze in all areas including
Selling (probably excluding the CBC’s).
Memorandum from Patrick Fulford on NASG State of Emergency IRXPROD-0254292 (July 1, 1999) (Levine Decl. Ex. 67).
An internal Xerox presentation document dated July 22, 1999
discusses problems related to the CBO Reorganization.
line addresses headcount.
The first
The three bullet points at the bottom
13
read:
•
•
•
“Too far too fast” ahead of enablers
6+6 adds back 275 of 420 heads removed in 1998 +
outsourcing
Still may not be enough
massive backlog (aged receivables, customer
inquiries, billing errors)
less experienced workforce
more complex business (CPC/Pooling, etc.)
Strategy Contract Slides IRX-PROD-0222989 (July 22, 1999) (Levine
Decl. Ex. 70).
The next slide discusses the “Current State.”
One portion of it reads: “We have a five alarm fire – major
impact on customers and sales productivity.” Id. at IRX-PROD0222990.
The slide discusses “Characteristics” and “Results” of
those characteristics, with four bullet points under the Results:
•
•
•
•
Id.
LOS at all time low:
Order Processing
Fulfillment
Billing Timeliness/Accuracy
Customer & Field Inquiries
Excessive cash (Receivables & Inventory) usage
Sales Productivity impacted as reps backstop
process failures and respond to customers
Employees under severe duress
Crisis on multiple fronts - causing unstable
priorities
Workload/Pressure
Do not feel successful
A subsequent slide, captioned “CBO Performance Gap Root
Causes,” identified four categories, “Reduced resources without
major enablers,” “Loss of experience/skill,” “Disruption,” and
“Loss of alignment with Sales.”
Id. at IRX-PROD-0222991.
presentation then set forth a “90 Day Recovery Plan,” which
The
included adding headcount as had been reflected in the [6+6
14
projection].
Id. at IRX-PROD-0222993.
On July 26, 1999, Kenny R. Baugher, who had joined CBO as a
senior vice president in the NASG Customer Business Operations
the prior month, sent a memorandum to Customer Business
Operations Employees on the subject of “CBO Recovery.”
Memorandum from Kenny R. Baugher on CBO Recovery to Customer
Business Operations Employees IRX-PROD-0250787 (July 26, 1999)
(Levine Decl. Ex. 73).
Among other things, he stated:
First, we obviously have gone through a massive change in
the last 12 months. We took a significant reduction in
resources and lost substantial experience and tenure.
There were few process or technology improvements to
enable this reduction, and we did not test or pilot the
strategy.
Senior management has acknowledged we went
“too far, too fast”. [sic]
That now leaves us with serious issues. Our customers
are unhappy because we cannot issue invoices on a timely
and accurate basis, and we cannot respond to their calls
and / or written questions promptly.
The CBU’s are
unhappy because they are not getting the level of support
they received previously and are now spending substantial
amounts of time on administrative issues.
Our
stockholders are unhappy that our cash usage has gotten
much worse with increasing DSO. And our employees are
generally frustrated with the workload and pressure
trying to keep the “ship” afloat. It is a tough picture.
But an honest assessment is the first step to recovery.
(Id. at IRX-PROD-0250787.)
He then summarized the steps that had been taken in three areas:
improving “support to the CBU’s and their effort to drive revenue
growth,” improvement with respect to DSO, which had reached an
all time high in the second quarter of 1999, and improvements in
the area of billing accuracy and timeliness.
15
Id. at IRX-PROD-
0250788.
On August 10, 1999, Romeril sent an internal memorandum to
Thoman and Buehler, which had in the subject line “$165 mn
Restructuring Reserve/XE/2000 Annual Plan.”
Romeril wrote:
Puzzling as to why our financial performance appeared to
inadequately reflect the huge restructuring we took in
1998, the following is of general note and analysis lends
credence to the expectation that Europe should be in a
period of very substantial profit growth.
. . .
(ii) The reserve charge for NASG was $116 mn, which is
very small compared to that for ESG/XE at $644 mn
(numbers are 6+6 outlook rather than originals).
The current estimate of savings are similarly
proportioned with NASG at $103 (net of $30 mn
reinvestment in CBCs) and ESG/XE at $534 mn with
the NASG savings much more front-loaded and XE much
more back-loaded.
. . .
(iv) Overall for Xerox Corporation, the estimated total
savings by year 2001 will be $1,018 mn p.a. By end
Q2 1999 we had only reached $363 mn so most savings
are yet to come. This adds further need/ability to
achieve H2 1999 and 2000 earnings direction
assuming, of course, a reasonable level of revenue
growth.
Memorandum from B.D. Romeril on $165 mn Restructuring
Reserve/XE/2000 Annual to G.R. Thoman & W.F. Buehler IRX-PROD0124662 (Aug. 10, 1999) (Levine Decl. Ex. 77).
On September 17, 1999, a “CBC Background Summary,” which had
been reviewed by Baugher was distributed to certain NASG
personnel in connection with internal presentations to be made by
Buehler.
The background summary included a summary of the
background of the reorganization of the CBCs, the problems as of
16
that date, and the root causes of those problems, as quoted
above.
See supra Section I.B.
After a discussion of the root
cause, the summary discussed the priorities: “The restoration of
CBC service has been established as a major Corporate priority.
Bill Buehler is deeply involved, as is Tom Dolan.
The
organization has new leadership with Ken Baugher now reporting
directly to Tom Dolan.
underway.”
Ex. 87).
An intensive recovery effort is now
CBC Background Summary IRX-PROD-0110462 (Levine Decl.
The summary also contained an assessment of the current
status of efforts to address the problems:
Current Status
Sales
feedback
indicates
that
order
processing
responsiveness is now improving.
Recently issued
response time commitments have been very well received.
Continued improvement is expected over the balance of the
year.
Billing timeliness (number of customers invoiced as a
percent of those who should have been invoiced) has
improved from 80% in March to 87% in August. (Reasons
for not billing center on missing meter reads, and
suspended invoicing due to XBS conversions, P.O.
renewals, disputes, etc.) Billing errors are still a
concern, and a team is working aggressively to deal with
underlying issues, such as cost/copy pooling and XBS
conversions. The ability to respond to customer calls
has improved dramatically in July and August and will
continue to improve.
DSO growth has been contained and reductions are expected
for 4Q99, although the rate is behind targeted levels.
Therefore, DSO is currently the area with the highest
level of operational focus.
Net Conclusion
The CBC problems are well understood and aggressive
actions are underway to fix this issue on a priority
basis.
While there are still many problems, we have
17
“turned the corner” and started to show improvement on
essentially all fronts. Input from the Sales Advisory
Council and CBU Roundtables have confirmed this
conclusion.
Id. at IRX-PROD-0110463.
On September 27, 1999, Thoman sent a memorandum to the
Operations Committee, the subject of which was “Headcount
Approval.”
He stated:
During August, we had over 1200 gross hires, including
950 non-XBS production heads.
I am extremely
disappointed in your manpower management, especially in
light of the hiring restrictions put in place and the
Company’s current financial situation. As a result of
our failure to strictly control resources, we have, in
essence, spent much of the benefit of the restructuring
action. While we can argue that we have filled sales
territories and upgraded skills shortages, we must not
lose sight of the fact that we now have a cost base that
is unaffordable given our current revenue growth in the
low single digits.
Memorandum from G. Richard Thoman on Headcount Approval to
Operations Committee Members IRX-PROD-0241963 (Sept. 27, 1999)
(Levin Decl. Ex. 89).
He then informed the recipients that, with
certain exceptions, all hires must be approved in advance by a
member of the strategy committee.
He concluded: “We must regain
control of manpower and I expect each of you to lead the way.”
Id.
On October 6, 1999, Romeril sent an internal memorandum to
Thoman sharing some thoughts and questions in preparation for the
phone-in on the following day of preliminary third quarter
results, which would be followed by a meeting later in the day at
18
which Romeril did not have good news.
One of the questions he
asked, with the expectation that it would help frame the
discussion at the meeting, was: “What happened to restructuring
benefits? If they were real, they must have been spent, delayed
or offset by deterioration elsewhere.”
Memorandum from B.D.
Romeril to G.R. Thoman IRX-PROD-0020863 (Oct. 6, 1999) (Levine
Decl. Ex. 90).
In an October 18, 1999 internal Xerox memo, Thoman stated
“Sales reps tell me that up to 40 percent of their time is spent
dealing with admin-type problems -- at [a] time when they should
be freed up to be out selling.”
Pl’s. 56(A)(2) Statement ¶ 39
(quoting Anthony Saunders, Expert Report of Professor Anthony
Saunders 29 (Oct. 15, 2007) (Levine Decl. Ex. 113)).
An internal Xerox presentation document dated October 20,
1999 estimated that “‘Sales Disruption’ resulted in “3%-5% lower
field sales for 1999.”
Pl’s. 56(A)(2) Statement ¶ 40 quoting
Anthony Saunders, Expert Report of Professor Anthony Saunders 29
(Oct. 15, 2007) (Levine Decl. Ex. 113)).
E.
External Communications
During the relevant time period there were numerous
statements made by the defendants, in the form of press releases,
public filings, statements during investor conferences or
teleconferences and interviews with analysts, as well as reports
that were issued by analysts who followed Xerox and newspaper
19
articles.
In an April 17, 1998 press release concerning the Worldwide
Restructuring, Xerox predicted that “[w]hen fully implemented the
ongoing pre-tax savings from the initiatives will be
approximately $1 billion annually.”
Press Release, Xerox Corp.,
Xerox Announces Worldwide Restructuring To Enhance
Competitiveness in the Digital World: Company Will Eliminate
9,000 Jobs and Take $1 Billion After-Tax Charge IRX-PROD-003971
(Apr. 7, 1998) (Levine Decl. Ex. 3).
On October 22, 1998, Xerox issued a press release that
stated, among other things, financial results for the company’s
third quarter 1998 ended September 30, 1998.
See Press Release,
Xerox Corp., Xerox Earnings Up 18 Percent in Third Quarter: Eight
Consecutive Quarter of Double-Digit Operating Earnings Growth
IRX-PROD-0161430-41 (Oct. 22, 1998) (Levine Decl. Ex. 12).
The
October 22, 1998 press release stated, among other things, that
“Xerox Corporation’s third quarter diluted earnings per share
[“EPS”] increased 18 percent to $1.05 and income increased 19
percent to $381 million, primarily as a result of outstanding
growth in digital product revenues and improved operating
margins, including the initial benefits from the worldwide
restructuring program,” and that “Operating profit margin
improved by 1.7 percentage points in the quarter, reflecting the
company’s continued focus on productivity and the initial
20
benefits of the Restructuring program announced in April.”
at IRX-PROD-0161430.
Id.
The press release also stated:
Income from continuing operations increased 19 percent to
$381 million in the 1998 third quarter from $320 million
in the 1997 third quarter, primarily as a result of
outstanding growth in digital product revenues and
improved profit margins including the initial benefits
from the worldwide Restructuring program.
. . .
Diluted earnings per share from continuing operations
increased 18% to $1.05 in the third quarter.
Id.
With respect to a decrease in the number of employees, the
press release stated: “In connection with the restructuring
program, 1,700 employees left the company during the third
quarter, bringing the total to 3,200.
will be eliminated . . .”
Approximately 9,000 jobs
Id. at IRX-PROD-0161435.
In its 1998 Third Quarter 10-Q, filed with the Securities
and Exchange Commission on November 10, 1998, Xerox stated:
(a)
“Income from continuing operations increased 19 percent
to $381 million in the 1998 third quarter from $320
million in the 1997 third quarter, primarily as a
result of outstanding growth in digital product
revenues and improved operating profit margins,
including the initial benefits from the worldwide
restructuring program.”
Xerox Corp., Form 10-Q 11 (Nov. 10, 1998) (Goldstein Decl. Ex.
20).
(b)
“Approximately 55 percent of 1998 third quarter
equipment sales was due to products introduced since
1997 . . . . Equipment sales in the first nine months
of 1998 grew 14 percent primarily due to excellent
growth in digital products.”
Id. at 13.
21
(c)
SAG was 27.7 percent of revenue in the 1998 third
quarter and 27.6 percent of revenue for the first
nine months of 1998, 1.8 percentage points better
than the 1997 third quarter and the first nine
months of 1997 due to continuing productivity
initiatives and expense controls, including the
initial benefits from our worldwide restructuring
program.
Id. at 15.
(d)
When fully implemented, the ongoing pre-tax savings
from
the
restructuring
initiatives
will
be
approximately $1 billion annually. Initially, more
than half of the savings will be reinvested to
implement process and systems changes in order to
enable the restructuring, and in ongoing efforts to
broaden and strengthen marketing programs and
distribution channels to enhance revenue growth.
Selling, administrative and general expenses as a
percentage of revenue will move from the high 20's
to the low 20's over time, driven primarily by
large reductions in overhead costs.
Id. at 16.
In addition to the foregoing, Xerox disclosed that
there had been some increase in DSO as a result of the CBO
Reorganization:
Cash usage was $1,115 million and $173 million during the
first nine months of 1998 and 1997, respectively. Net
income
before
depreciation
and
amortization,
restructuring charges, and the change in deferred income
taxes increased $154 million to $1,542 million for the
first nine months of 1998. However, this was more than
offset
by
cash
expenditures
against
the
1998
restructuring reserve, increased inventory investment in
support of accelerated digital product sales growth,
higher accounts receivable due to stronger equipment
sales growth and some increase in days sales outstanding
due to the temporary effects from the reorganization and
consolidation of U.S. customer administrative centers,
and settlement in 1998 of compensation obligations.
Id. at 22.
22
On November 20, 1998, Romeril, Xerox’s Chief Financial
Officer, met with Dave Ravera of Putnam Securities.
Romeril said
that Xerox had not done well on inventory and receivables
management but also “[said] it’s temp & we’re all over it.”
Notes of Leslie F. Varon IRX-PROD-0062963 (Nov. 20, 1998) (Varon
Aff. Ex. A).
Romeril further indicated that the consolidation of
the U.S. administrative centers, i.e. the CBO Reorganization,
resulted in the loss of tenured employees and controls.
According to Romeril, the problem would be temporary, and in
1999, Xerox would go back to the ratios it had in 1997 and go
forward from there.
The meeting notes also indicate that Romeril
told Ravera: “Have sent Europeans to US for lesson learned.” Id.
On December 14, 1998, Romeril met with Kirk Mayer, a
securities analyst at Wellington Management.
Romeril indicated
that there was a temporary disruption in receivables in the
United States due to the administrative restructuring, which
would be fixed by the end of 1999.
Notes of Leslie F. Varon IRX-
PROD-0062956-57 (Dec. 14, 1998) (Varon Aff. Ex. B).
On December
16, 1998, Romeril met with Steven Milunovich of Merrill Lynch.
Romeril told Milunovich that Xerox’s poor cash flow in 1998 was
caused in part by a receivables problem stemming from the U.S.
consolidation in customer administration and changes in
collection processes.
He also observed that DSO had temporarily
increased, that it was not a “write-off” issue and that Xerox
23
would “claw back.”
Notes of Leslie F. Varon IRX-PROD-0062944
(Dec. 16, 1998) (Varon Aff. Ex. C).
According to Xerox’s December 31, 1998 Form 10-K,
Key initiatives of the restructuring include[d]:
1. Consolidation of 56 European customer
support
centers
into
one
facility
and
implementing a shared services organization
for
order
entry,
invoicing,
and
other
back-office and sales operations.
2.
Streamlining
manufacturing
logistics,
distribution and service operations.
This
will include centralizing U.S. parts depots
and outsourcing storage and distribution.
3. Overhauling our internal processes and
associated resources, including closing one of
four geographically-organized U.S. customer
administrative centers with the remaining
three refocused by customer segment, enabling
improved customer support at lower cost.
Xerox Corp., Annual Report (Form 10-K) 13 (Mar. 22, 1999)
(Goldstein Decl. Ex. 40).
On January 6, 1999, Xerox announced a new initiative to
realign its sales force to provide industry-oriented global
document solutions, i.e. the Sales Force Realignment.
See Xerox
Realigns Operations to Better Capitalize on New Growth
Opportunities in the Digital Marketplace, Business Wire, Jan. 6,
1999 (Levine Decl. Ex. 22).
Thoman stated: “This migration to an
industry global account and solutions focus will evolve over the
next couple of years.
In 1999, there will be no significant
changes to sales force territories or compensation.”
24
Id.
On January 26, 1999, Xerox held its earning release
conference for the fourth quarter of 1998.
At that conference,
Romeril made the following statements:
(a)
I’ll address some of the underlying trends in Xerox
. . . . Our fourth quarter document processing
earnings increased by 16 percent to $1.69 a share
[a]nd income increased 17 percent to $615 million.
This is primarily as a result of outstanding growth
in digital product revenues, improved operating
margins, and the ongoing benefits from our
worldwide restructuring program.
Barry Romeril,
Xerox
Corporation
Fourth
Quarter
Earnings
Release Teleconference 3:21-4:7 (Jan. 26, 1999) (Levine Decl.
Ex. 30).
(b)
“Fourth quarter pre-currency . . . , revenue growth,
was 7 percent. That included 11 percent growth in the
United States . . . .”
Id. at 4:20-23.
(c)
“Let’s move on to productivity. Operating profit
margin improved by 160 basis points in the fourth
quarter, reflecting our focus on productivity, and the
ongoing benefits of our worldwide restructuring.”
Id. at 10:5-10.
(d)
“Gross margin improved by 110 basis points in the
quarter to 48.1 percent. As manufacturing and service
productivity was only partially offset by reduced
competitive price pressures. Our unit manufacturing
cost productivity in 1998 was by far the best recorded
in decades.”
Id. at 10:10-17.
(e)
“We’ve also taken what we believe is an appropriate
posture with bad debt reserves given the environment.
And this impacted the fourth quarter SG&A to revenue
ratio by about 60 basis points.”
25
Id. at 11:16-20.
(f)
“[A]s we implement the worldwide restructuring, SG&A as
a percent of revenue will move from the high 20s to the
low 20s, driven primarily by large reductions in G&A
overhead costs.”
Id. at 11:21-25.
Alex Henderson of Prudential Securities asked Romeril: “I was
wondering if you could give us some input on where you are with
respect to the restructuring.”
Id. at 29:14-16.
In response,
Romeril stated:
[I]n Europe . . . we’re still in the relatively early
phases of moving from the country centric to the Pan
European basis. And we have had to put in a lot of costs
to get the systems and the back offices up and running in
the center as they were. . . . So I would say in the
fourth quarter the evidence is that we reinvested most,
if not all of the savings. But in a calculated way, both
that which we had to do for the front end loading in
Europe, and that which was somewhat discretionary in
advertising and marketing programs, which go well beyond
advertising.
Id. at 30:19-31:9.
With respect to selling, general and
administrative expense, Romeril stated as to DSO and other
matters:
In the fourth quarter, we were 40 basis points better on
a ratio of SG&A to revenue. That would have been 100
basis points better, but for the bad debts. Now given the
growth in the business, you would expect probably some
increase in the bad debts. We felt it was appropriate
looking around particularly in some of the more difficult
economies. Brazil and Russia. Some of the restructuring
that we did in the United States gave us a dislocation so
that our day sales outstanding went out a bit. And on a
mechanistic basis alone, that gives you a bit more in the
bad debts. And we felt that that was appropriate.
26
Id. at 31:14-32:3.
In response to a question as to when costs
would actually start to accrue, Romeril responded “Second half of
1999 I would say.”
Id. at 32:18-19.
On January 26, 1999, Xerox issued a press release that
stated the benefits and impact of the Worldwide Restructuring on
Xerox's financial performance for its fourth quarter ended
December 31, 1998 and year ended December 31, 1998.
See Press
Release, Xerox Corp., Xerox Earnings Up 16 Percent in Fourth
Quarter: Board Approves 11 Percent Dividend Increase, 2-For-1
Stock Split IRX-PROD-005100-02 (Jan. 26, 1999) (Levine Decl. Ex.
29).
The press release contained, among others, the following
statements regarding the Worldwide Restructuring:
(a)
“Xerox Corporation's fourth quarter diluted earnings
per share ["EPS"] increased 16 percent to $1.69 and
income increased 17 percent to $615 million, primarily
as a result of outstanding growth in digital product
revenues, improved operating margins and ongoing
benefits from the worldwide restructuring program.”
Id. at IRX-PROD-0005100.
(b)
“The operating profit margin improved by 1.6 percentage
points in the quarter, reflecting the company's
continued focus on productivity and the benefits of the
restructuring program announced in April.”
Id.
In discussing the “Outlook for 1999 and Beyond,” the press
release stated “‘While economic uncertainty could hinder our
ability to achieve double-digit revenue growth in the near term,
the global growth opportunities for document processing products
27
and solutions remain substantial.’”
Id. at IRX-PROD-0005101
(quoting Rick Thoman, Xerox President and Chief Operating
Officer).
With respect to headcount, Xerox reported that 2,300
employees left the company during the fourth quarter, making a
total of 5,500, and approximately 9,000 jobs would be eliminated
as part of the Worldwide Restructuring.
Id.
Also on January 26, 1999, Romeril spoke with Rebecca Runkle
of Morgan Stanley.
He told her that Xerox had experienced a
growth in receivables because of the restructuring in the United
States.
He stated: “We were too optimistic believing [that the]
DSO spike in [the] US would be too temp[orary].”
Notes of Leslie
F. Varon IRX-PROD-0062940 (Jan. 26, 1999) (Varon Aff. Ex. D).
He
also stated that Xerox had been “too ambitious,” that it had “put
some resources back,” and that “[he had] no doubt it’s
temp[orary].”
Id.
On January 27, 1999, Runkle issued a report
warning investors that Xerox was experiencing increased levels of
receivables and DSO:
In addition, we raise a cautionary eyebrow at Xerox’s
working capital performance in 1998. While full details
have yet to be disclosed, management stated that both
inventory
levels/turns and
receivables/Days
Sales
Outstanding proved disappointments in 1998. We believe
that DSO’s increased by about 5 days and that inventory
turns fell to less than three times. This is both below
Xerox’s historical performance and industry benchmarks,
according to management. So, while unit manufacturing
costs reached all time lows in the period, it seems XRX
will have to “pay the piper” in the first-half o[f] 1999.
28
Rebecca Runkle, Morgan Stanley Dean Witter, Xerox: Xerox Swaggers
On - Reiterate Outperform IRX-PROD-0042746, IRX-PROD-0042748
(Jan. 27, 1999) (Goldstein Decl. 34).
Under the heading
“Restructuring Update ––- Benefits Continue to Show,” the report
further stated: “Worldwide employment decreased by 200 in the
quarter to 92,700 (down from 92,900 in 4Q98 and 91,400 in 4Q97).”
(Id. at IRX-PROD-0042752.)
She noted, however, that “[t]he
decrease of 2,200 employees due to the restructuring program was
partially offset by the net hiring of 2,000 employees . . . .”
Id.
On February 16, 1999, Runkle reiterated that
“receivables/days’ sales outstanding proved disappointments in
1998.”
Rebecca Runkle, Morgan Stanley Dean Witter, Xerox (XRX):
Xerox Swaggers On - Reiterate Outperform; Raise Target MS00038,
MS00039 (Feb. 16, 1999) (Goldstein Decl. Ex. 35).
Runkle issued
another report on February 25, 1999, which stated:
Xerox’s A/R balance increased 25% year-over-year, to $2.7
billion. The receivables ballooned as Xerox attempted to
restructure
several
operations
in
the
US.
The
reorganization and reorientation of business units (from
geographical to customer focused) led to the disruption
in billing cycle productivity. Once again, management
remains committed to reducing receivable levels back to
those found in 1997 by year-end 1999.
Rebecca Runkle, Morgan Stanley Dean Witter, Xerox (XRX):
Preliminary Update on Year-End Balance Sheet and Cash Flow Items
29
IRX-PROC-0000222, 0000223 (Feb. 25, 1999) (Goldstein Decl. Ex.
36).
On March 1, 1999, Romeril met Philip Rueppel, a securities
analyst with BT Alex. Brown.
Notes from the meeting indicate
that Romeril discussed the “[r]eceiv[ables] issue in [the] US
assoc[iated] w[ith] restruc[turing].”
Notes of Leslie F. Varon
IRX-PROD-0062471 (Mar. 1, 1999) (Varon Aff. Ex. E).
stated that the issue “[would] reverse in ‘99.”
Id.
Romeril
On March 2,
1999, Rueppel issued a report stating:
One area of concern has been the poor cash flow results
in 1998, driven especially by working capital issues -receivables
and
inventory
turns.
Management
was
refreshingly frank about the core issue --internal
execution,
rather
than
citing
external
factors.
Management attention to both areas has been elevated
significantly, with compensation tied to improvement, and
we would be surprised not to see consistently better DSO
and inventory turns metrics throughout 1999. We remain
comfortable with our assessment that the balance sheet
deterioration does not point to any competitive or
product issues.
Philip C. Rueppel, Alex Brown, XRX: Meeting With CFO Confirms
Positive Business Tone – Brazil Remai[n]– Strong Buy, IRX-PROD0011038, IRX-PROD- 0011039 (Mar. 2, 1999) (Goldstein Decl. Ex.
37).
Also on March 2, 1999, Henderson of Prudential Securities
issued a report, which stated:
Xerox experienced a substantial spike in inventories
during 1998, DSOs were up and turns down. We believe this
is a function of overzealous ordering in a couple of
critical lines as well as the disruption caused by
earlier and deeper than expected G&A cuts. Management
30
believes the disruptions to operations in Brazil and the
U.S. as a result of the G&A cuts cost six to seven days
of DSOs. It expects a rapid snap back on this line.
B. Alex Henderson, Prudential Securities, XRX: Xerox Accelerating
Cost Cutting Beyond Restructuring – Reiterating Strong IRX-PROD0000264, IRX-PROD-0000268 (Mar. 2, 1999) (Goldstein Decl. Ex.
38).
On March 15, 1999, Runkle issued a report stating:
Xerox’s A/R balance increased 25% year-over-year, to $2.7
billion. The receivables ballooned as Xerox attempted to
restructure several operations in the U.S.
The
reorganization and reorientation of business units (from
geographical to customer-focused) led to the disruption
in billing cycle productivity. Once again, management
remains committed to reducing receivable levels back to
those found in 1997 by year-end 1999.
Rebecca Runkle, Morgan Stanley Dean Witter, Xerox (XRX):
Preliminary Update on Year-End Balance Sheet and Cash Flow Items
MS00054, MS00055 (Mar. 15, 1999) (Goldstein Decl. Ex. 39).
In its Form 10-K for 1998, dated March 22, 1999, Xerox
disclosed: “Accounts receivable growth reflects strong equipment
sales in 1998 and some increase in days sales outstanding due to
temporary effects from the reorganization and consolidation of
U.S. customer administrative centers.”
Xerox Corp., Annual
Report (Form 10-K) 53 (Mar. 22, 1999) (Goldstein Decl. Ex. 40).
On April 19, 1999, the Center for Financial Research and
Analysis (“CFRA”) issued a report stating that Xerox was
experiencing “Rapid Receivables Growth.”
Ctr. for Financial
Research & Analysis, Inc., CFRA Company Report: Xerox Corporation
IRX-PROD-0060214 (Apr. 19, 1999) (Goldstein Decl. Ex. 41).
31
The
CFRA report identified “[s]igns of possible operational
deterioration for XRX during 1998 includ[ing] a surge in
receivables and inventory relative to revenue and a growing
operating cash flow shortfall.”
Id.
It also reported that Xerox
“attributed the December-to-December DSO increase to temporary
effects from the reorganization and consolidation of U.S.
customer administrative centers.”
Id.
In a press release dated April 22, 1999, Thoman stated
“Although we are pleased that we achieved earnings growth of 14
percent, our revenue performance in the quarter was clearly
disappointing but not indicative of our expectations for the full
year.”
Press Release, Xerox Corp., Xerox Earnings Up 14 Percent
in First Quarter: Tenth Consecutive Quarter of Double-Digit
Operating Earnings Growth IRX-PROD-0060120 (Apr. 22, 1999)
(Levine Decl. Ex. 45).
He stated “‘The turmoil in Brazil and the
economic slowdown in other Latin American countries, combined
with several operational factors in the U.S. and Europe,
depressed our first quarter revenues.’”
Id. (quoting Rick
Thoman, Xerox President and Chief Executive Officer).
He further
stated:
“The initiatives we announced in January to provide
industry-oriented global document solutions for major
customers required substantial one-time investments,
including enhanced sales training and development, and
some changes in customer relationships, which impacted
first quarter sales productivity more than anticipated”
. . . “We are very confident that revenue growth will
improve as the year progresses.”
32
Id. (quoting Rick Thoman).
In discussing Xerox’s operating
profit margin, the press release stated that “The operating
profit margin of 12.8 percent in the quarter represented a 1.1
percentage point improvement.”
Id. at IRX-PROD-0060121. Thoman
further stated that “The operating margin improvement reflects
the benefits of our restructuring program . . .”
Id.
When
discussing headcount in connection with the Worldwide
Restructuring, the press release stated that “1,000 employees
left the company in the first quarter, bringing the total to
6,400.”
Id.
During an April 22, 1999 earnings release teleconference for
the first quarter of 1999 Romeril stated: “I would encourage you
to focus on the total growth of service, outsourcing and rental,
rather than the constituent parts, as looking at the total,
avoids the possibility of misinterpretation about any constituent
part where substitution may have been an important driver in any
year-over-year comparison.”
Barry Romeril, Xerox Corporation
First Quarter Earnings Release Teleconference 7:15-21 (Apr. 22,
1999) (Levine Decl. Ex. 46).
He further stated:
Overall,
for
the
shortfall
in revenues,
versus
expectations was very much a known goal. If we didn’t
quite shoot ourselves in the foot, we certainly hit
several toes. Activity rather than price was therefore
the real culprit. And we are confident that there will
be a significant rebound in the coming months.
33
Id. at 10:12-19.
In discussing headcount changes associated with
the Worldwide Restructuring, Romeril stated: “In connection with
the restructuring program, 1,000 employees left the company
during the first quarter, bringing the total to 6,400 since the
program was announced.”
Id. at 11:24-12:3.
During the
teleconference, Henderson asked, “So you’re really characterizing
the miss here in the revenues in the first quarter as a one-time
event.
And you are going to snap back fully in the second
quarter.”
Id. at 19:6-10.
Romeril responded: “We’re going to
come back Alex, significantly.
And we’re going to see the sort
of number – you gave us a nice range.
I’m not sure that I want
to get into forecasting precise numbers. But it will be a
significant rebound.”
Id. at 19:11-16.
Later, Runkle asked: “Is
it fair to expect that the DSO’s in the inventory balances net
net still going to take another I would say two quarters or so to
really normalize back down to levels that you’re happy with?”
Id. at 21:19-23.
Romeril answered “Yes” and stated that “The run
rate we should be significantly better as we exit the year than
we were last year.
And I mean significantly.
It’s the path
there that you know, is not a necessarily a smooth one everywhere
around the world.”
Id. at 21:24-22:4.
On April 23, 1999, Lehman Brothers reported:
Xerox does not expect to have any significant share
repurchases in 1999, given what it would take to have a
meaningful impact on EPS. The company instead will focus
on cash flow generation, which was weak in 1998. The
34
company did not provide preliminary balance sheet data,
but acknowledged that there was little improvement in
receivables and inventories in the quarter.
Working
capital remains a priority for the company, although it
may be another quarter or two before there is meaningful
improvement in DSOs and inventories.
Lehman Bros., Xerox: Renewed Focus on Top Line; We Regard 1Q Slip
As Temporary IRX-PROD-0000454 (Apr. 23, 1999) (Goldstein Decl.
Ex. 42).
On April 23, 1999, Milunovich of Merrill Lynch issued a
report stating:
Xerox’s revenue growth was hurt by sales force and
restructuring initiatives, a self-inflected [sic] wound.
Xerox is moving to an industry solutions approach similar
to IBM’s, so spent time on sales force training, which
reduced their time spent with customers.
Some sales
people spent almost half their time away from customers.
In Europe, management spent time complying with panEuropean
regulations
while
in-country
facility
consolidations also hurt customer focus.
. . .
The company estimates that it can reduce inventories by
$300-400 million (no write-offs) and improve DSOs through
faster collections. The company expects DSOs to improve
by year-end.
Steven Milunovich, Merrill Lynch, Xerox Corporation: Revenue
Challenged 2 (Apr. 23, 1999) (Goldstein Decl. Ex. 75).
On April 27, 1999, Investor’s Business Daily reported that
Rick Thoman, Xerox’s chief executive said “‘We had salespeople
away from customers more than we should have . . . . But we
should see benefits going forward.’”
Copiers:
Michael Lyster, Digital
Xerox Ticket to Networking Service Plans,
35
Investor’s Bus. Daily, Apr. 27, 1999, at A6, IRX-PROD-0050433
(quoting Rick Thoman) (Goldstein Decl. Ex. 43).
The article also
states: “Thoman blames the [revenue] drop on Xerox’s ongoing
restructuring and the realignment of its sales force.
Financial
trouble in Brazil, a key market, didn’t help either.”
Id.
On April 27, 1999, The Wall Street Journal reported that
"Xerox has reorganized its 14,000-person sales force away from
geographical coverage toward coverage of specific industries. . .
.
Xerox said last week that sales retraining was part of the
reason its first-quarter earnings were disappointing.”
Alec
Klein, Xerox Reorganizes Sales Force in Push to Bundle Services
to Corporate Clients, Wall St. J., Apr. 27, 1999, at B15, IRXPROD-0050431 (Levine Decl. Ex. 49).
On May 6, 1999, Stephen Weber, a securities analyst with SG
Cowen Securities Inc., issued a report stating that Xerox’s
“revenues grew just 3% . . .
in Q1, owing to extra sales
training (i.e., time not on the street) and organizational
dislocations, both in the U.S. and Europe.” Steven Weber, SG
Cowen, Xerox Corporation: The Tenets of This Growth Story Very
Much Intact IRX-PROD-0012720 (May 6, 1999) (Goldstein Decl. Ex.
44).
The report also states that “[a]s Q1's disrupting factors
abate, we think revenue growth will accelerate markedly.”
On May 14, 1999, Xerox hosted its annual Investors
Conference which was attended by Henderson of Prudential
36
Id.
Securities, Ben Reitzes of PaineWebber, Weber of SG Cowen, Jerry
Hersch from MTD, Steven Raphael from RBC Dominion Securities,
Jack Kelly from Goldman Sachs, Milunovich from Merrill Lynch,
Flay Lewis from Compton Capital, John Rosenthal from Salomon
Smith Barney, Pete Enderlin from FAC\Equities, Ted Kuntz from
Needham, Runkle from Morgan Stanley, Peter Boyson from Lazard
Asset Management and Fred Weiss from Pell Rudman.
See Barry
Romeril, Xerox Corporation Investor Conference 134:18-19,
140:22-23, 147:16-17, 152:22-23, 154:25-155:1, 156:8-9, 159:3-4,
161:6-7, 164:5-6, 175:19-20, 180:18, 186:22-23, 196:16-17,
200:5-6 (May 14, 1999) (Goldstein Decl. Ex. 45).
Romeril stated
the following:
But 1998 cash generation was clearly unsatisfactory. And
it was principally caused by a deterioration in
receivables, in day sales outstanding and our inventory
performance. The growth in accounts receivable was
primarily
the result
of the
reorganization and
restructuring
in
our
US
administrative
support
activities. We closed one customer admin center and we
reorganized the remaining three admin centers from a
geographic to a customer segment basis. Much along the
lines that we’re doing for the business as a whole. And
frankly, we reduced the headcount as we did that at too
fast a rate. And it was too much change, too fast, but
the problem is being addressed, and you will certainly
see improvements as we go through 1999.
Id. at 122:23-123:15.
At the same conference, Thoman stated:
[T]here was no question that we had, as we rolled out our
G&A program, individual areas where we caused some lack
of focus on our sales force because of our G&A
activities.
For example, we talked about our Chicago
center. Unquestionably that had some impact on our sales
force. They had to worry about the billing being done
correctly.
In Paris for example, we literally moved
37
everybody, everybody moved their office. And that takes
as you know when you do that it takes about a month to
settle down those of you who’ve done that. I suspect a
lot of you in this room have.
And then the last thing is sales productivity. Part of
which was affected by the G&A activity, but most of it
really was the fact that we let people plan their own
training programs, and other things. And we didn’t get
enough feet on the street focused in front of customers.
Id. at 136:24-137:19.
The plaintiffs highlight that Romeril edited one portion of
his notes for the conference.
That portion of his notes
originally read:
There were actually two similar problems that impacted
the sales force:
- Too much time in training
- Too much time fixing customer problems because of our
consolidation of admin centers
That translated into a 5 percent sales productivity hit
in the first quarter, we wouldn't be having this
conversation. So the real question is: Can we get that
back on track and the answer is yes.
Remarks for Rick Thoman
Decl. Ex. 57).
IRX-PROD-0056273
(May 14, 1999) (Levine
After the edits that portion of his notes read:
There were actually problem that impacted the sales
force. The key was too little sales time in front of
customers, eg.
- Too much time in training
That translated into a 5 Percent sales productivity hit.
If we hadn't had a 5 percent sales productivity hit in
the first quarter, we wouldn't be having this
conversation. So the real question is: Can we get that
back on track and we think the answer is yes.
Id.
In its Form 10-Q for the first quarter of 1999, filed with
the SEC on May 14, 1999, Xerox stated:
38
(a)
First quarter revenue growth in both the U.S. and
Europe was disappointing, slowing significantly
from prior quarters due to substantial one-time
investments, including enhanced sales training and
development,
and
some
changes
in
customer
relationships, associated with the initiatives
announced
in
January
1999
to
provide
industry-oriented global document solutions for
major customers.
These initiatives temporarily
reduced sales time with customers and impacted
sales productivity more than anticipated.
Xerox Corp., Form 10-Q: Quarterly Report 13 (May 14, 1999)
(Goldstein Decl. Ex. 26).
(b)
“Income from continuing operations increased 14 percent
to $343 million in the 1999 first quarter from $301 in
the 1998 first quarter. The increase was primarily due
to improved operating margins that reflected ongoing
benefits from the company’s worldwide restructuring
program . . . .”
Id. at 12.
(c)
“Selling, administrative and general expenses (SAG)
declined 2 percent in the 1999 first quarter from the
1998 first quarter driven by a substantial decline in
general and administrative expenses reflecting the
benefits of our 1998 restructuring program . . . .”
Id. at 16.
(d)
“On April 7, 1998, we announced a worldwide
restructuring program associated with enhancing our
competitive position and lowering our overall cost
structure . . . . There have been no material changes
to the program since its announcement in April 1998"
Id. at 16-17.
On May 17, 1999, Runkle issued a report stating “the US and
Europe each fell short by about $75-80 million due to low sales
productivity and the consolidation of Xerox’s administration
39
efforts.
Management believes these were one-time issues and that
the company will get back on its growth track going forward —-with material improvement in the second quarter.”
Rebecca
Runkle, Morgan Stanley Dean Witter, Xerox (XRX): Annual Investor
Meeting Review IRX-PROD-0000675 (May 17, 1999) (Goldstein Decl.
Ex. 46).
Also on May 17, 1999, Enderlin of FAC\Equities
reported:
About $150 million-$160 million of the revenue miss of
1Q99 occurred in the U.S. and Europe, primarily due to
diversion of the sales force for training and
restructuring. Xerox will now re-emphasize the customer
interface, and the effects of the restructuring should
diminish. Management also said that the weakness at the
low end of the digital color copier/printer market
resulted from a lag in new product development, which has
now been partially addressed with the introduction of the
very successful NC60 color laser printer.
Absent the factors that temporarily depressed revenue
growth in 1Q99 in management’s view, Xerox believes it
can resume double-digit revenue growth on a pre-currency
basis, given a reasonable economic environment.
Pete Enderlin, FAC\Equities, XRX -- Xerox Projects Double-Digit
Revenue Growth IRX-PROD-000666 (May 17, 1999)(Goldstein Decl. Ex.
76).
On May 17, 1999, CIBC World Markets issued an analyst report
recommending Xerox stock with a "Strong Buy" rating, stating that
cash flow in 1999 was expected to rebound to 1997 levels, one of
two topics the author found “encouraging.”
Rudolf A. Hokanson,
CIBC World Markets, XRX Holds Investor Meeting, Raising Target to
$82 Per Share IRX-PROD-0097419 (May 17, 1999) (Levine Decl. Ex.
61).
On May 26, 1999, Runkle of Morgan Stanley reported:
40
Further Insight into the March Quarter.
Management started off the meeting with more details
about its first-quarter performance. Brazil’s economy
and recent devaluation hurt revenue growth by about 4
percentage points. In addition, management now believes
it had about $40 million in excess inventory that hurt
the Channels Group performance in the period. Finally,
the US and Europe each fell short by about $75-80 million
due to low sales productivity and the consolidation of
Xerox’s administration efforts.
Management believes these were one-time issues and that
the company will get back on its growth track, with
material improvement in the second quarter.
Rebecca Runkle, Morgan Stanley Dean Witter, Xerox (XRX): Annualy
Investor’s Meeting Review MS00107 (May 26, 1999) (Goldstein Decl.
Ex. 47).
On June 1, 1999, Romeril met with Jonathan Rosenzweig of
Salomon Smith Barney.
See Notes of Leslie F. Varon IRX-PROD-
0060244 - 47 (June 1, 1999) (Varon Aff. Ex. F).
Romeril (who is
identified as "BDR") stated that Xerox "took out too many admin
people-didn’t heed warning signs.”
Id. at IRX-PROD-0060244.
Romeril also explained that Xerox was “[h]iring back with good
payback over time (about 150 people),” and that it did not expect
to see improvement in cash flow until the second half of 1999.
Id.
In that meeting, Romeril also discussed the status of the
Worldwide Restructuring efforts in the United States, Canada and
Europe.
Id. at IRX-PROD-0060245.
On June 2, 1999, Rosenzweig issued a report stating:
(3) RESTRUCTURING HAS LONG WAY TO GO.
Most of the
restructuring appears to be complete in North America,
41
including facilities and workforce reductions. However,
Europe requires more focus. . . . [C]ost savings should
really begin to accumulate after 1999 as investments in
the pan-European infrastructure start to pay off. New
workforce reductions in Europe so far have been minimal
and probably will be until early 2000. At that point,
savings really begin to accumulate.
In its total
restructuring, we estimate that Xerox is eliminating
11,000 positions gross, partially offset by 2,000 new
hires.
(4) CASH FLOW OUTLOOK SOLID FOR SECOND HALF. While the
second quarter could be seasonally weak, management
expects cash flow to improve dramatically in the second
half of the year. The company has added back 150 people
in the U.S. customer administrative centers, where it had
become too thin in an effort to improve inventories and
receivables quickly. In Europe, the focus is on reducing
the absolute DSO figure given how high it is relative to
domestic levels.
Rosenzweig & Kalinowski, Salomon Smith Barney, XRX: Introducing
Fortune 500 Survey and Mtg. w/ Mgmt. IRX-PROD-0099513 (June 2,
1999) (Goldstein Decl. Ex. 48); see also Rosenzweig & Kalinowski,
Salomon Smith Barney, XRX: Introducing Fortune 500 Survey and mtg
w/ Mgmt. Part 2 2 (June 4, 1999) (Goldstein Decl. Ex. 50).
On June 3, 1999, Romeril spoke at the Prudential Imaging
Technology Conference.
He stated:
1998 cash generation was clearly unsatisfactory,
principally caused by deterioration in our receivables
and inventory performance.
The growth in accounts
receivable is primarily the result of the reorganization
and restructuring of our U.S. administrative support
activities, where we closed one customer administration
center and reorganized the remaining three customer
administration centers from a geographic to a customersegment basis, much along the line as we’re doing for the
business as a whole.
Frankly, we reduced headcount in this function by 30
percent, too much change, too fast. This problem has
42
been addressed, and you will see improvement [as] we go
thru ‘99.
Barry Romeril, Xerox Vice Chairman & CFO, Remarks at Prudential
Imaging Technology Conference IRX-PROD-0027213 - 14 (June 3,
1999) (Goldstein Decl. Ex. 49).
On June 4, 1999, Romeril told Ben Reitzes of PaineWebber
that the United States had experienced a training and
administrative disruption as a result of the CBO Reorganization
and that DSO had increased by about 10 days.
Notes from the
meeting also state: “[b]y end ‘99/Q1 ‘00 will get to ‘97 yrend
DSO.
Will begin Q3” and “[c]urrently hiring/training admin
people to fix. Lots of sr. mgt focus.”
Notes of Leslie F. Varon
IRX-PROD-0060223 (June 4, 1999) (Varon Aff. Ex. G).
On June 7, 1999, Reitzes issued a report stating:
•
•
•
Xerox's sales force is responding as planned, after
an intensive training program and reorganization in
1Q 1999. Distractions from restructuring appear to
be on the decline, in both the U.S. and Europe.
Mr. Romeril demonstrated the strongest conviction
we have seen to date in Xerox's ability to improve
DSO's and inventories, improving cash flow by at
least $500 - $600 million by year-end 1999 . . . .
. . .
All in all, the meeting eased many of our concerns
and we continue to believe that XRX is positioned
for a strong second half 1999 performance.
Ben Reitzes, PaineWebber, XEROX: Meeting With CFO Eases Many of
Our Concerns IRX-PROD-0000313 (June 7, 1999) (Goldstein Decl. Ex.
51).
He further stated: “Xerox’s sales force intensity is
improving on plan, after an intensive training program and
43
reorganization in 1Q 1999.
In addition, distractions from
restructuring appear to be on the decline . . . .” Id. at IRXPROD-0000315.
Reitzes also reported on the impact of the CBO
Reorganization program on the company’s receivables in the fourth
quarter of 1998 and the first quarter of 1999:
It appears [sic] that Xerox’s restructuring program in
the US had quite an adverse effect on the company’s
receivables in 4Q 1998 and 1Q 19[99]. In the second half
of 1998, XRX reduced its US administrative centers to 3
from 4 previously, reducing administration headcount by
30% in the process. The 3 administrative centers were
reorganized to specialize on General Markets (channel,
agent, concessionaire and tele-web sales), the public
sector and other (direct sales force included). As a
result of the significant disruption from moving and
layoffs, the company's order and invoicing processes
experienced significant delays and even errors, pushing
up receivables. In fact, XRX is now in the process of
re-hiring some laid off personnel in an effort to improve
the order process at the 3 new administration centers.
Id.
The report also states that “[i]mprovements are already
underway and Xerox expects significant improvement in receivables
by second half 1999.”
Id.
On June 8, 1999, Romeril met with Milunovich of Merrill
Lynch.
Notes from that meeting read:
US DSO deteriorated 9-10 days in Q3/Q4 ‘98. Discussed 4
cust admin changes. Have added resources – need about 2 mo.
training, some sys enablers delayed to 2nd half (automating
order checking). Hope to stabilize DSO in US in Q2 +
back/almost back to ‘97 levels by Q4. Will capture about
$400 m. Have changed Euro sequencing to avoid repeating
these issues.
Notes of Leslie F. Varon IRX-PROD-0060241 (June 8, 1999) (Varon
Aff. Ex. H).
44
On June 9, 1999, Merrill Lynch reported that “[t]he cash
conversion cycle is under intense scrutiny,” that “[m]anagement
thinks it can reduce inventories by $300-400 million” for both
1999 and 2000, that “[r]eceivables could also improve by about
$400 million,” and that “[c]ash flow improvements should put
share repurchases back on the radar screen early next year.”
Steven Milunovich, Merrill Lynch IRX-PROD-0051058 (June 9, 1999)
(Goldstein Decl. Ex. 52).
On June 9, 1999, Reitzes of PaineWebber reported:
It appears that Xerox’s restructuring program in the U.S.
had quite an adverse effect on the company’s receivables
in fourth quarter 1998 and first quarter 199[9]. In the
second half of 1998, the company reduced the number of
its U.S. administrative centers to three from four,
reducing administration headcount by 30% in the process.
The three administrative centers were reorganized to
concentrate
on
general
markets
(channel,
agent,
concessionaire and teleweb sales), the public sector and
other (direct sales force included). As a result of the
significant disruption from moving and layoffs, the
company’s order and invoicing processes experienced
significant
delays
and
even
errors,
pushing
up
receivables. In fact, Xerox is now in the process of
rehiring some laid-off personnel in an effort to improve
the order process at the three new administration
centers. Programs are already under way and management
expects significant improvement in receivables by second
half 1999.
Benjamin Reitzes, PaineWebber, Xerox Corporation: Meeting with
CFO Eases Many of Our Concerns 2 (June 9, 1999) (Goldstein Decl.
Ex. 53).
45
On June 28, 1999, Henderson of Prudential Securities issued
a report based on Romeril’s remarks at the June 3, 1999
Prudential Imaging Technology Conference.
Henderson reported:
The two items here that I want to concentrate on are
inventories and receivables, which is where the
disappointment in 1998 came. The difference between our
inventory and receivables performance in 1998 over 1997
is, in order of magnitude, $700 or $800 million.
In
other words, if we’d achieved the levels of inventory in
1998 which we achieved in 1997, than we would have been
$700-$800 better.
There were a number of reasons, mostly self induced, why
this occurred. On the receivables side, we cut back too
fast and too many in the administrative side as we
restructured in the United States. And on the inventory
side, we over forecast the demand.
The good news is that I can assure you that we have
initiated an aggressive working capital improvement
program. It is our intention to exit this year at 1997
levels in terms of the Cash Conversion Cycle (days sales
outstanding plus days sales inventory less days payable).
If we do that, we will achieve in 1999 the sort of cash
flow performance on the working capital line that you saw
in 1997. Therefore, our cash flow should get back to the
$1 billion level.
This is a turn around that management is focused on. I
personally have a lot of focus in this area.
And
although you didn’t see any progress in this in the 1Q
(there won’t be much, if any, in the second quarter), by
the end of the year, we have most of the programs in
place today and this will yield the cash flow performance
in the order of magnitude similar to what you saw in
1997.
And the momentum will be to get the inventory
turns up to produce an even better performance next year.
B. Alex Henderson, Prudential Securities, Xerox Delivers Upbeat
Presentation At Prudential Securities’ 2nd Annual Imaging
46
Technology Conference AS- PROD-00309 (June 28, 1999) (Goldstein
Decl. Ex. 54).
On July 1, 1999, Henderson reported: “No Distractions-No
Excuses.
Xerox cited a laundry list of distractions which
encumbered the sales force in 1Q. Many sales offices were closed
or moved as a result of the restructuring.
Salespeople were
distracted by too many training programs.”
B. Alex Henderson,
Prudential Securities, XRX: We Expect XRX to Report at Least the
First Call Consensus and Believe a Strong 2Q Could Lift Shares
Higher IRX-PROD-0011190 (July 1, 1999) (Goldstein Decl. Ex. 55).
Henderson also reported, though, that “Management sent out an
edict to the sales force to double face time with clients, and we
think this will deliver better revenue growth in 2Q.”
0011190.
Id. at
Henderson reported Xerox's belief that the
"stabilization of [its] back office" would contribute to “a
fairly sharp rebound in the top line.”
Id. at IRX-PROD-0011192.
Henderson further reported:
In an effort to compensate for the difficult operating
environment in Brazil during the quarter, management
accelerated consolidation of branches and, at the same
time, moved forward in at least one critical region with
the relocation of a major office. Management believes
the distraction of this activity contributed to the
decline in salesforce productivity. With the back office
stabilized, and the early-year training done, management
believes the salesforce should quickly pick up momentum.
Id. at 0011192.
The report also states: “The stabilization and
recovery of Brazil, stabilization of back-office operations, and
47
the cessation of salesforce training cost which caused roughly a
5% 1Q decline in salesforce productivity should drive a fairly
sharp rebound in the top line.”
Id.
On July 22, 1999, Xerox held a teleconference with analysts
concerning second quarter 1999 earnings.
(a)
Romeril stated:
Now second quarter earnings per share increased by
15 percent to 62 cents a share and income increased
13 percent to $448 million before last year’s
restructuring
charge.
The
earnings
increase
reflects improved revenue growth, particularly in
the United States and Europe, and ongoing benefits
from our worldwide restructuring program . . . .
Barry Romeril, Xerox Corporation Second Quarter Earnings Release
Teleconference 3:23-4:6 (July 22, 1999) (Levine Decl. Ex. 72).
(b)
SG&A expenses declined 2 percent in the quarter, driven
by a substantial decline in G&A, the general and admin
expense category, and that reflected the benefits of
our 1998 restructuring program . . . .
Id. at 11:14-19.
(c)
Our restructuring provision provides for large savings
and the significant proportion of which we have to
reinvest in the first year of two to enable those
savings. Particularly in Europe, as we centralized our
front and back office operations.
Id. at 12:10-16.
(d)
[O]ur SG&A commitments as a percentage of revenue are
not in question.
Id. at 12:22-23.
(e)
With receivables, we have had to work through the
bow
wave
of
U.S.
customer
administration
dislocation, and we are now looking forward to
substantial improvements in the coming months in
the United States, to complement the improvement
48
that we have already seen in the second quarter in
Europe.
Id. at 15:5-11.
During the question and answer portion of the teleconference,
Romeril also stated:
In the receivables side, it’s still turning. The bow
wave took longer to get to stabilization, but I have
reviewed this recently and we will be looking for a very
considerable [decrease] in day sales outstanding, in the
remaining part of this year. The plans are in place, the
people to the extent there was a resources issue, are in
place. There are incentives to do it, and we just are
better placed and much more focused in that area.
Id. at 24:6-17.
In talking about the restructuring in Europe,
Romeril stated: “We’re a little more cautionary how we've gone
about some of the customer admin things there to make sure we
don't repeat any of the United States experiences, but I would
say that is not significant.”
Id. at 31:5-11.
On July 22, 1999, Xerox issued a press release which
announced financial results for Xerox’s second quarter ended June
30, 1999.
(a)
The press release stated:
Xerox Corporation’s second quarter diluted earnings
per share increased 15 percent to 62 cents and
income increased 13 percent to $448 million, before
last year’s restructuring change.
The earnings
increase
reflects
improved
revenue
growth,
particularly in the United States and Europe, and
ongoing benefits from the company's worldwide
restructuring program . . . .
Press Release, Xerox Corp., Xerox Earnings Up 15 Percent in
Second Quarter: Significant Revenue Growth Improvement in U.S.
49
and Europe IRX-PROD-0010509 (July 22, 1999) (Levine Decl. Ex.
71).
(b)
[Thoman said] While we remain focused on improving
pre-currency revenue growth and achieving mid- to
high
teens
earnings-per-share
growth,
any
continuation of the current weak European exchange
rates together with ongoing weakness in Brazil and
Japan, make this earnings growth a much more
challenging objective for the remainder of the
year. . . .
Longer term, our growth will be driven by our
expanding
product,
document
outsourcing
and
solutions
offerings
as
well
as
indirect
distribution channels, and by realizing the ongoing
benefits of the restructuring program . . . .
Id. at IRX-PROD-0010510.
(c)
Income increased 13 percent to $448 million in the
1999 second quarter from $395 million in the 1998
second
quarter,
before
the
1998
worldwide
restructuring program charge of $1,107 million. The
increase
reflects
improved
revenue
growth,
particularly in the United States and Europe, and
ongoing benefits from the company’s worldwide
restructuring program. . . .
. . .
Diluted earnings per share increased 15 percent to
$0.62 in the 1999 second quarter from $0.54 in the
1998 second quarter, before the 1998 restructuring
charge.
Id. at IRX-PROD-0010514.
(d)
[SAG] declined 2 percent in the 1999 second quarter
from the 1998 second quarter driven by a substantial
decline in general and administrative expenses
reflecting the benefits of our 1998 restructuring
program . . . .
Id. at IRX-PROD-0010515.
50
Xerox’s Form 10-Q for the Second Quarter of 1999, filed with
the SEC on August 11, 1999, included the following statements:
(a)
Income increased 13 percent to $448 million in the
1999 second quarter from $395 million in the 1998
second
quarter,
before
the
1998
worldwide
restructuring program charge of $1,107 million. The
increase
reflects
improved
revenue
growth,
particularly in the United States and Europe, and
ongoing benefits from the company's worldwide
restructuring program.
Xerox Corp., Form 10-Q: Quarterly Report 11-12 (Aug. 11, 1999)
(Levine Decl. Ex. 76).
(b)
Selling, administrative and general expenses (SAG)
declined 2 percent in the 1999 second quarter from
the 1998 second quarter and 2 percent in the 1999
first half from the 1998 first half driven by a
substantial decline in general and administrative
expenses reflecting the benefits of our 1998
restructuring program, our continued focus on
productivity and expense controls to mitigate the
impact of the economic turmoil in Brazil . . . .
Id. at 15.
On August 13, 1999, Rosenzweig of Salomon Smith Barney
reported:
Accounts receivable also seemed to be an area of concern.
The figure rose by 21% year-to-year and 5% sequentially
from Q1. While disappointing, this should not have come
as too much of a surprise, since management has indicated
repeatedly that receivables would start to come down more
in the second half than the first. The company is adding
over 100 people back to its customer admin centers, in
part to help bolster collections efforts, which were
damaged by headcount reductions during the restructuring.
This will be an important issue to monitor for
improvement in Q3 and Q4.
51
Rosenzweig & Kalinowski, Salomon Smith Barney, XRX: Comments on
the 10Q IRX-PROD-0010522 (Aug. 13, 1999) (Goldstein Decl. Ex.
56).
Notes from an August 16, 1999 meeting between Romeril and
Rosenzweig state: “[b]y Q4, [we] hope DSO is at/slightly better
than a [year] ago--w[ith] signif[icant] momentum going into
2000/2001.” Notes of Leslie F. Varon IRX-PROD-0059675 (Aug. 16,
1999) (Varon Aff. Ex. I); see also Varon Aff. ¶ 11.
On the same
day, under the heading “Cash Flow Should Improve in Second Half,”
Rosenzweig reported:
Accounts receivable rose dramatically in the second
quarter, largely due to the U.S. operations. DSOs, which
were up by 20% year-over-year in Q2, should start coming
down sequentially in the third quarter, as new hires in
collections begin to take hold. By the end of 1999, DSOs
actually could be even or down versus last year, and by
2000, the average could approximate 1997 levels.
Rosenzweig & Kalinowski, Salomon Smith Barney, XRX: Upbeat
Conversation with Management IRX-PROD-0000175 (Aug. 16, 1999)
(Goldstein Decl. Ex. 57).
On August 16, 1999, Weber authored a report stating:
“Revenue growth rebounded to 4% in constant currency terms in Q2
(+7% ex Brazil), as Q1's disruptive factors - extra training,
reorganizations, channel inventory adjustments - abated and the
growth in recurring revenue accelerated by a full point to 4%.”
Stephen R. Weber, SG Cowen, Growth Prospects Still Terrific;
Stock Very Undervalued 5 (Aug. 16, 1999) (Goldstein Decl. Ex.
52
72).
On the same page, the report also states in the margins
“Overcoming Major Obstacles” and “Should be back on track.”
Id.
On August 18, 1999, Romeril met with Henderson of Prudential
Securities.
Notes from that meeting read:
Impact of Q1 sls disruption gradually fading?
Impact is gradually fading
Admin disruption impact on sls force
queries)
Will manifest itself on rev growth +
Not using sls force to reign in DSO?
Puts pressure on overhead costs offset in other areas.
(billing
DSO
No
yes, but
Notes of Leslie F. Varon IRX-PROD-0059676 (Aug. 18, 1999) (Varon
Aff. Ex. J).
The plaintiffs assert that there were two corrective
disclosures.
The first corrective disclosure they identify is a
September 16, 1999 report by Henderson, a Prudential Securities
analyst.
Under the heading “Xerox to Implement Another Round of
Salesforce Realignments in 1Q00-Lowers Revenue Visibility and
Likely to Pressure XRX Until Impact can be Determined” the report
states:
Our field contacts are indicating that Xerox is readying
another round of salesforce account realignment similar
to the program which disrupted the first half 1999
revenue performance. We confronted Xerox's management
and they acknowledged that another round is planned for
1Q 2000 and indicated the number of people involved and
accounts involved would be larger than the 1Q 1999
realignment which was cited as a large portion of the
cause for the 1H 1999 revenue shortfall.
Xerox’s
management must be cognizant of the painful experience
they had last year, and they are indicating they are
taking every possible step to minimize any disruption
from this move. While we believe this program is the
53
correct one for Xerox over the long-term, the history of
salesforce compensation [and] account realignments has
been one of consistent disruption. We believe this issue
will cause considerable investor concern over the next
several quarters until the impact size and impact can be
quantified.
Extending The Current Uncertainty Into 2000– This Is The
Last Thing Xerox’s Battered And Weary Shareholders’ Need.
We believe investors deserve adequate forewarning of
changes in the salesforce structure since this has
historically caused material perturbations in Xerox’s
revenues and earnings.
In fact, its [sic] rare for
companies
in this
industry
to materially
alter
compensation or sales coverage without missing the
revenue/earnings expectations.
. . .
Can’t Afford More Problems-Management Should Know They
Need to Deliver. We seriously doubt the impact of a new
sales realignment program will be as disruptive as last
years [sic].
-First,
the
restructuring
program
has
advanced
substantially and likely will not compound problems in
2000 the way it did in 1Q99.
. . .
-Third, Xerox claims the disruption last year came
primarily from the lack of prospecting at accounts which
were being left by the salesforce and they are
implementing a program to insure the salespeople being
reassigned are incented to continue to work the accounts
they are leaving until they actually leave.
A. Henderson, Prudential Securities, XRX: Another Salesforce
Realignment Slated for 1Q00 At Xerox IRX-PROD-0000292 - 93 (Sept.
16, 1999) (Goldstein Decl. Ex. 30).
On September 16, 1999, Reuters published an article entitled
“Xerox shares tumble amid fresh growth concerns.”
54
Eric Auchard,
Xerox Shares Tumble Amid Fresh Growth Concerns, Reuters News,
Sept. 16, 1999, 1 (Levine Decl. Ex. 79).
The article stated:
Shares of Xerox Corp. Fell more than 10 percent on
Thursday after an analyst warned that sales-force changes
at the No. 1 copier equipment maker could further delay
any pickup in its stalled revenue growth.
Spokesmen for the Stamford, Conn.-based company confirmed
that it had announced new sales-force changes internally
a week ago, but they said the moves were merely a
continuation of restructuring plans Xerox had set in
motion in January.
Id.
The article quoted Henderson as stating, “Most people
thought they had done the bulk of the sales-force realignment
earlier this year.”
Id. “‘These new moves extend the uncertainty
for another six months,’ he said, referring to the first half of
[2000].”
Id. The article also stated: “‘I am not sure that the
world was privy to the entire plan in January,’ the Xerox
spokesman allowed, but said that the scope of the plan had been
communicated to company employees.
changes involved no job cuts.”
He said the latest sales
Id.
On the same day, Dow Jones Business News Reported that
“Xerox Shares Tumble On Word Of Plan To Further Realign Sales
Force,” noting “that the second phase of a sales-force
realignment will pressure earnings in the first half of 2000.”
Dow Jones Business News, Xerox Shares Tumble on Word of Plan to
Further Realign Sales Force, Sept. 16, 1999, 1 (Levine Decl. Ex.
81).
It mentioned “that the company made an internal
announcement [the preceding] week that it would expand the sales55
force realignment it began in January to include all 4,300 sales
employees.”
Id.
Reitzes of PaineWebber issued a report dated September 17,
1999 entitled “Xerox: What Did we Learn That is New?”
See Ben
Reitzes, PaineWebber, Xerox: What Did We Learn That is New? 1
(Sept. 17, 1999) (Levine Decl. Ex. 85).
Under “Key Points,” the
following were stated:
Yesterday, concerns surfaced regarding the stability of
Xerox’s salesforce in the first half of 2000. In early
1999, Xerox announced it would realign its salesforce to
focus by industry group (over the course of a few years),
including Government, Manufacturing, Financial Services
and Graphic Arts. The company has acknowledged that a
move to complete this restructuring is slated for January
2000.
What’s new are some of the details regarding this
reorganization. The investment community had hoped that
the 1Q 1999's sales productivity hit of 500 basis points
from increased training and administrative issues were
the last we had heard of any disruption attributable to
reorganization.
However, we now know that the large
Government industry group is the only sales unit almost
fully organized to date– and the manufacturing, financial
and graphic arts groups are yet to be formed.
. . .
But what is really new since yesterday besides the
details above? To be fair, have we forgotten that every
office equipment company is restructuring its copier
salesforce toward selling digital “solutions”?
IKON,
Pitney Bowes, Danka and even Canon’s own direct sales
force are in the midst of transitions- - and unlike IKON,
Xerox is doing its reorganization work rather quickly.
In fact, do we really know all the fine details of all of
these other restructurings? It is likely that if we got
ahold of internal memos regarding these restructurings,
we would find something that lends uncertainty to the
performance of each sales team . . .
56
Id.
During a September 22, 1999 teleconference with securities
analysts that began at 11:30 a.m., Romeril stated:
(a)
As I said at the second quarter earnings
teleconference, though I reiterated last week, we
are targeting to have somewhat higher revenue
growth in the third quarter than the second
quarter’s pre-currency, pre-Brazil growth, which
was 7 percent. You’ll recall we reported 3 percent
growth, currency was 1 point unfavorable, and
Brazil was 3 points unfavorable.
In the third
quarter, currency has worsened in continental
Europe. I haven't checked today’s rates, because
it’s very volatile, but definitely a weakness in
Brazil, and that includes the economic activity
there.
Barry Romeril, Xerox Corporation Tektronix Announcement 4:16-5:3
(Sept. 22, 1999) (Goldstein Decl. Ex. 58).
(b)
And that’s literally the arithmetic of using two
month actuals and one month estimated for the
exchange rates.
And we kept Brazil at about 3
points adverse, the same as in the second quarter.
So the pre-currency pre-Brazil target was therefore
still the eight to eight and a half, nine percent
growth.
No change at all to earlier statements,
despite several reports to the contrary. But, as I
said, it all hangs, obviously, on the last few
weeks of the quarter.
Now regarding the direct
sales force, there seems to have been some
misconception that we announced a new restructuring
of the sales organization, last week.
No such
announcement occurred. The previous week, we had
made an internal presentation and communication to
U.S. managers.
In fact, we simply took another
step implementing the direction we announced last
January. In January, we said we were migrating our
direct sales force to an industry and solutions
focus over several years, and we announced the
first four industry sectors. Financial services,
graphic arts, manufacturing, and the public sector.
Building on this announcement, in April of this
year, we unveiled the first 17 industry solutions.
57
In January next year, we’ll complete the alignment
of our North American and European sales forces by
industry.
Id. at 5:6-6:9.
(c)
What will this mean for the business? In the short
term, all customer sales force relationship changes
than in an average year. The U.S. is an example of
roughly two-thirds of our direct sales force, will
be aligned by industry.
The rest- it will map
around an industry doesn’t exist in reasonable
proximity- to cover customer, we will continue to
cover customers geographically. Of the U.S. sales
reps, who have an industry alignment next January,
about 80 percent currently have over half their
customers in one industry today.
In the past,
revenue disappointments associated with sales force
changes have resulted in part due to a lack of
prospecting by the sales rep who’s losing a
customer account. Therefore, the new sales rep has
to both develop customer relations and new
prospects. To mitigate a portion of this problem,
we’re contemplating in the first quarter in 2000,
compensation for prospects developed in the fourth
quarter, for which business end up being closed in
the first quarter of the following year.
It is
also
very
clear
that
we
significantly
underestimated the revenue impact in the first
quarter of this year of all the customer
administration changes we made in the USA last
year. The amount of customer face time our sales
representatives had was substantially curtailed as
they dealt with administrative rather than sales
issues.
And that was in addition to, and
compounded by, all the training and communications
that we had surrounding the industry and solutions
changes. This customer administration problem will
obviously and clearly not be repeated in 2000.
Id. at 6:20-8:5 (emphasis added).
At 3:19 p.m. on September 22, 1999, Weber of SG Cowen
reported:
Investor Concerns Seem Overblown – - Past problems in
sales have almost always been associated with changes in
58
the sales comp plan, not the organization per se. While
Xerox will be completing shift to an industry-focused
selling model in Q1, we expect no meaningful change in
sales incentives other than to institute a reward for
sales consummated in Q1 that were proposed by the former
sales person in Q4. Morever, the disruption in Q1:99
caused by extra training and necessary attention in the
U.S. to curing billing glitches should not repeat. Thus,
given the very easy base for comparison, we are
optimistic re double-digit top-line growth in Q1:2000 and
beyond.
Stephen R. Weber, SG Cowen, XRX/The Acquisition A Solid Move IRXPROD-0011066 (Sept. 22, 1999) (Goldstein Decl. Ex. 59).
There
was no specific reference in the report to the Worldwide
Restructuring or the CBO Reorganization.
On September 22, 1999, Moody’s Investors Services reported
“The rating agency said that it expects . . . continued
investment requirements and some sales force disruption stemming
from its ongoing restructuring activities commenced in mid 1998.”
Press Release, Moody’s Investors Serv., Moodys Confirms Credit
Ratings of Xerox Corporation and its Supported Subsidiaries
(Senior at A2) IRX-PROD-0027058 (Sept. 22, 1999) (Goldstein Decl.
Ex. 60).
There was no other reference in the Moody’s press
release to the Worldwide Restructuring or the CBO Reorganization.
On October 8, 1999, Xerox announced that it would miss its
projected earnings for the third quarter of 1999.
Press Release,
Xerox Corp., Xerox Announces Preliminary Third Quarter Results,
Business Wire IRX-PROD-0095847 (Oct. 8, 1999) (Goldstein Decl.
Ex. 31).
The press release stated:
59
Xerox Corporation announced today that it expects to
report essentially flat revenues for the third quarter
and about a 10-12 percent decline in diluted earnings per
share from 53 cents in the 1998 third quarter.
Overall, revenue was weaker than anticipated both in the
United States and Europe, particularly in September. The
earnings shortfall is a combination of weaker revenues
together with unfavorable product mix and increased
competitive pressures, which significantly impacted
operating margins. Sales productivity was affected by
the continued realignment to an industry-oriented
approach and in the U.S. by the ongoing impact of the
customer administration restructuring.
In addition,
results in Brazil were hurt by the continuing effects of
the currency devaluation and economic weakness.
Fuji
Xerox results were lower than anticipated.
Id.
F.
Communications Following the October 8, 1999 PreAnnouncement
Kunstler of J.P. Morgan issued a report later in the day on
October 8, 1999.
He stated:
Xerox’s pre-announcement of a revenue and earnings below
expectations and, in the case of earnings, lower than
last year is a very big disappointment. Our chagrin is
less a function of arithmetic magnitude of the earnings
shortfall, and more tied to how badly our confidence has
been shaken. Let’s take what we know piece by piece.
1.
Brazil is hurting, but we knew this . . .
2.
Fugi Xerox is weaker than anticipated. . . .
3.
Competition is hurting revenues and margins. . . .
4.
Xerox has allowed competition to be more effective
by failing to keep its sales force on line. While
further realignment of the sales force to comply
with
Xerox’[s]
vertical
industry
focus
was
expected, the impact of more tinkering was to be
modest and to be felt, if at all, past this last
quarter. In fact, the sales force issue in 3Q was
not about the realignment per se, but rather, tied
60
to poor back office support in the wake of
administrative centralization instituted a year
ago. The sales force was compelled to do the admin
work on outstanding orders and shipments, rather
than focus their full attention on selling. This
just at the time when competitors were starting to
get their act together.
Taking this a step
further, we have to ask ourselves in what kind of
mood this puts the sales force. While they are not
selling, not only does Xerox suffer the opportunity
cost - and judging from 3Q it is immense - but
sales people lose out on bonuses, which are tied to
performance versus quota.
Daniel Kunstler, J.P. Morgan Securities Inc., Our Disappointment
is Bigger Than the 3Q Miss IRX-PROD-001139A - 001139B (Oct. 8,
1999) (Levine Decl. Ex. 92).
On October 11, 1999, Reitzes of PaineWebber issued a
research note entitled “XRX: What We Learned & What to Look for
Going Forward.”
Benjamin Reitzes, PaineWebber, XRX: What We
Learned & What to Look for Going Forward (Oct. 11, 1999) (Levine
Decl. Ex. 93). Under the heading “The Perils of Restructuring Too
Much, Too Fast (A Look at Management’s Major Moves Since 1998),”
he stated:
FIRST, in April 1998, Xerox announced that it was taking
a $1 billion restructuring charge (after-tax).
Xerox
consolidated its U.S. administration centers from four to
three and reorganized them among industry groups and
European administrative and customer service operations
began to centralize in Ireland. While cost savings began
to pour in, the rapid administrative changes caused
accounts receivables to balloon by year-end 1998.
SECOND, management announced that it was reorganizing the
company toward providing industry specific solutions in
January 1999, including a salesforce realignment to cater
to different industry groups. Investors now know that
the only group realigned in 1Q 1999 was the Government
sector. In early September 1999, an internal Xerox memo
61
surfaced stating that the remainder of its salesforce
would be realigned by industry effective January 2000.
It now appears that this memo had a disruptive effect
sooner than anyone had realized. THIRD, in September
1999,
Xerox
announced
its
intention
to
acquire
Tektronix’s Color Printing & Imaging division . . . .
Given the magnitude of Xerox’s pending sales misses, we
now fear that the infamous “September salesforce memo”
included or hinted at a pending change of sales force
compensation, not just account realignment.
Friday’s
pre-announcement also reveals the destructive effects of
an overly aggressive restructuring program: management
has clearly impaired its ability to monitor and predict
its own business.
Id. at 2.
G.
Savings Realized as a Result of the Worldwide
Restructuring
The plaintiffs contend that although Xerox realized $550
million in savings as a result of the Worldwide Restructuring
during the Class Period, those savings were offset by at least
$775 million in costs caused by the CBO Reorganization during the
Class Period.
Because there were no net savings from the
Worldwide Restructuring, the plaintiffs argue, the defendants'
statements regarding the benefits of the Worldwide Restructuring
were materially misleading.
The defendants contend that the
plaintiffs' analysis with respect to the savings realized as a
result of the Worldwide Restructuring (net of costs caused by the
CBO Reorganization) contains numerous errors, and that there was
$613 million in undisputed Worldwide Restructuring savings during
the Class Period while the total maximum costs caused by the CBO
Reorganization during the Class Period was $154 million dollars.
62
Thus, the defendants contend, their statements were not just
literally true, but entirely accurate and not misleading.
Drawing all inferences in favor of the plaintiffs, the court
concludes that Xerox realized savings from the Worldwide
Restructuring of $254.5 million during the Class Period, which
does not include $63 million in undisputed pre-Class Period
savings.
The plaintiffs contend that the court should consider $50
million per quarter as a “conservative sales loss” amount when
determining the net benefit realized by Xerox from the Worldwide
Restructuring.
This amount appears to be speculative and without
support in the record.
As a result, the court does not consider
the plaintiffs' figure for sales losses during the Class Period.
The plaintiffs contend that the court should consider $100
million of alleged accounting manipulations occurring during
fiscal years 1998 and 1999.
The plaintiffs' claims as to
accounting manipulations were the subject of a separate lawsuit
and are no part of this case.
Therefore, there should not be any
offset for alleged accounting manipulations.
The plaintiffs have submitted the report of their accounting
expert Charles R. Drott (the “Drott Report”). See Levine Decl.
Ex. 111.
Drott opines as to the amount of adverse restructuring
effects resulting from the CBO Reorganization for the fourth
63
quarter of 1998 and the first and second quarters of 1999.2
Drott opines with respect to four categories: inadequate reserves
for uncollectible accounts receivable, inadequate reserves for
uncollectible notes receivable, billing errors and excess DSO
interest.
Drott concludes that, during the Class Period, Xerox
incurred adverse restructuring effects of $49.6 million in
inadequate reserves for uncollectible accounts receivable, $35.6
million in inadequate reserves for uncollectible notes
receivable, $87.8 million in billing errors and $19.5 million in
interest on the increase in DSO, for a total of $192.5 million.
The defendants have submitted a chart prepared by Xerox
employee Patrick Fulford (the “Fulford Chart”), which quantifies
many expenses that are included in the Drott Report for calendar
year 1999.3 (See Goldstein Decl. Ex. 63.)
The Fulford Chart
includes expenses for accommodations, bad debt/bad notes, higher
general and administrative expenses, billing adjustments, sales
disruption and interest on higher DSO.
The Fulford Chart shows
that during the Class Period Xerox incurred expenses of $10
million for accommodations, $42 million for bad debt/bad notes,
$25 million for higher general and administrative expenses, $15
2
Drott also opined on the amount of such adverse effects for the third
quarter of 1998. However, the third quarter of 1998 is not part of the Class
Period.
3
The Fulford Chart includes additional costs incurred during the fourth
quarter of 1999. However, the fourth quarter of 1999 is not part of the Class
Period.
64
million for billing adjustments, $32 million for sales disruption
and $23 million for interest on DSO, for a total of $147 million.
Together the Fulford Chart and the Drott Report indicate
that approximately $339.5 million in expense was incurred during
the Class Period as a result of the CBO Reorganization.
However,
both the Fulford Chart and the Drott Report include estimated
amounts for the first and second quarters of 1999.
Furthermore,
both the Fulford Chart and the Drott Report include amounts for
uncollectible bad notes and accounts receivable, billing
adjustments and interest on DSO.
Therefore, to avoid double-
counting expenses with respect to the first half of 1999 that are
included in both the Drott Report and the Fulford Chart, the
amount of the expense must be decreased by $29 million in bad
debts and $15 million in interest on DSO.4
Therefore, together
the Drott Report and the Fulford Chart show a total combined
expense of $295.5.
According to the plaintiffs, Xerox recognized an undisputed
$550 million in cost savings for the Worldwide Restructuring.
Therefore, Xerox had a net cost savings from the Worldwide
Restructuring of at least $254.5 million.
4
Because the court draws all inferences in favor of the
plaintiffs, it subtracted the lower Fulford Chart expenses rather
than the Drott Report expenses in those categories where there
was a risk of double-counting.
65
II.
LEGAL STANDARD
A motion for summary judgment may not be granted unless the
court determines that there is no genuine issue of material fact
to be tried and that the facts as to which there is no such issue
warrant judgment for the moving party as a matter of law.
R. Civ. P. 56(a).
Fed.
See Celotex Corp. v. Catrett, 477 U.S. 317,
322-23 (1986); Gallo v. Prudential Residential Servs., 22 F.3d
1219, 1223 (2d Cir. 1994).
Rule 56(a) “mandates the entry of
summary judgment . . . against a party who fails to make a
showing sufficient to establish the existence of an element
essential to that party’s case, and on which that party will bear
the burden of proof at trial.”
Celotex Corp., 477 U.S. at 322.
When ruling on a motion for summary judgment, the court must
respect the province of the jury.
try issues of fact.
The court, therefore, may not
See, e.g., Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 255 (1986); Donahue v. Windsor Locks Bd. of Fire
Comm’rs, 834 F.2d 54, 58 (2d Cir. 1987); Heyman v. Commerce &
Indus. Ins. Co., 524 F.2d 1317, 1319-20 (2d Cir. 1975).
It is
well-established that “[c]redibility determinations, the weighing
of the evidence, and the drawing of legitimate inferences from
the facts are jury functions, not those of the judge.”
477 U.S. at 255.
Anderson,
Thus, the trial court’s task is “carefully
limited to discerning whether there are any genuine issues of
material fact to be tried, not to deciding them.
66
Its duty, in
short, is confined . . . to issue-finding; it does not extend to
issue-resolution.”
Gallo, 22 F.3d at 1224.
Summary judgment is inappropriate only if the issue to be
resolved is both genuine and related to a material fact.
Therefore, the mere existence of some alleged factual dispute
between the parties will not defeat an otherwise properly
supported motion for summary judgment.
An issue is “genuine
. . . if the evidence is such that a reasonable jury could return
a verdict for the nonmoving party.”
Anderson, 477 U.S. at 248
(internal quotation marks omitted).
A material fact is one that
would “affect the outcome of the suit under the governing law.”
Id.
As the Court observed in Anderson: “[T]he materiality
determination rests on the substantive law, [and] it is the
substantive law’s identification of which facts are critical and
which facts are irrelevant that governs.”
Id.
Thus, only those
facts that must be decided in order to resolve a claim or defense
will prevent summary judgment from being granted.
When
confronted with an asserted factual dispute, the court must
examine the elements of the claims and defenses at issue on the
motion to determine whether a resolution of that dispute could
affect the disposition of any of those claims or defenses.
Immaterial or minor facts will not prevent summary judgment.
Howard v. Gleason Corp., 901 F.2d 1154, 1159 (2d Cir. 1990).
67
See
When reviewing the evidence on a motion for summary
judgment, the court must “assess the record in the light most
favorable to the non-movant and . . . draw all reasonable
inferences in its favor.”
Weinstock v. Columbia Univ., 224 F.3d
33, 41 (2d Cir. 2000) (quoting Delaware & Hudson Ry. Co. v.
Consol. Rail Corp., 902 F.2d 174, 177 (2d Cir. 1990)).
Because
credibility is not an issue on summary judgment, the nonmovant’s
evidence must be accepted as true for purposes of the motion.
Nonetheless, the inferences drawn in favor of the nonmovant must
be supported by the evidence.
“[M]ere speculation and conjecture
is insufficient to defeat a motion for summary judgment.”
Stern
v. Trustees of Columbia Univ., 131 F.3d 305, 315 (2d Cir. 1997)
(internal quotation marks omitted) (quoting Western World Ins.
Co. v. Stack Oil, Inc., 922 F.2d 118, 121 (2d. Cir. 1990)).
Moreover, the “mere existence of a scintilla of evidence in
support of the [nonmovant’s] position will be insufficient; there
must be evidence on which [a] jury could reasonably find for the
[nonmovant].”
Anderson, 477 U.S. at 252.
Finally, the nonmoving party cannot simply rest on the
allegations in its pleadings since the essence of summary
judgment is to go beyond the pleadings to determine if a genuine
issue of material fact exists.
324.
See Celotex Corp., 477 U.S. at
“Although the moving party bears the initial burden of
establishing that there are no genuine issues of material fact,”
68
Weinstock, 224 F.3d at 41, if the movant demonstrates an absence
of such issues, a limited burden of production shifts to the
nonmovant, who must “demonstrate more than some metaphysical
doubt as to the material facts, . . . [and] must come forward
with specific facts showing that there is a genuine issue for
trial.”
Aslanidis v. United States Lines, Inc., 7 F.3d 1067,
1072 (2d Cir. 1993)(quotation marks, citations and emphasis
omitted). Furthermore, “unsupported allegations do not create a
material issue of fact.”
Weinstock, 224 F.3d at 41.
If the
nonmovant fails to meet this burden, summary judgment should be
granted.
III. DISCUSSION
The plaintiffs claim that the defendants violated Sections
10(b) and 20(a) and Rule 10b-5 of the Exchange Act by
misrepresenting the success of the Worldwide Restructuring.
The
plaintiffs contend that the defendants' statements were
materially false and misleading because they claimed the benefits
of the Worldwide Restructuring without disclosing problems
associated with the CBO Reorganization that negated those
benefits.
The plaintiffs claim the defendants were required to,
but did not, disclose the negative impact of the CBO
Reorganization on Xerox’s administrative operations in the areas
of order processing, billing and collections; the negative impact
of the CBO Reorganization on the performance of Xerox’s sales
69
force; and the ongoing nature of the problems associated with the
CBO Reorganization.5
The defendants argue that they are entitled to summary
judgment based on the fact that their statements about the
Worldwide Restructuring were at all times accurate because the
Worldwide Restructuring produced millions of dollars of benefits
during the Class Period.
Also, the defendants contend that they
had no duty to disclose the operational problems associated with
the CBO Reorganization but, despite not having a duty to do so,
did fully disclose the allegedly concealed problems.
In
addition, the defendants argue that they are entitled to summary
judgment because the plaintiffs cannot establish loss causation.
To prevail on a Section 10(b) and Rule 10b-5 claim, the
plaintiffs must prove six elements:
(1)
a material misrepresentation (or omission);
(2)
scienter, i.e., a wrongful state of mind;
5
The plaintiffs’ damages expert, Professor Anthony Saunders,
identified the negative impact on administrative operations as
both “[t]he damage to customer relationships from the delayed and
inept customer response of the restructured customer
administration centers” and “[a]n increase in errors in the
billing and order process, resulting in the reduced ability of
Xerox to collect receivables in a timely manner.” Anthony
Saunders, Expert Report of Professor Anthony Saunders 8 (Oct. 15,
2007) (Levine Decl. Ex. 113). Professor Saunders identified the
negative impact on the performance of Xerox’s sales force as an
“impaired ability of sales staff to generate revenue due to lower
support levels and reduced time in the field." Id. Finally,
Professor Saunders identified as a category of omitted facts
information regarding “[t]he ongoing nature of the problems
associated with the reorganization.” Id.
70
(3)
a
connection
with
the
purchase
or
sale
of
a
security;
(4)
reliance,
public
often referred
securities
to
markets
in
cases
involving
(fraud-on-the-market
cases) as “transaction causation;
(5)
economic loss; and
(6)
“loss causation,” i.e., a causal connection between
the material misrepresentation and the loss.
Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341 (2005) (internal
citations omitted).
The court concludes that, even if the defendants had a duty
to disclose, the plaintiffs cannot show an actionable
misrepresentation or omission, and in addition, that the
plaintiffs cannot establish loss causation.
A. Duty to Disclose
The defendants argue that there is no evidence that their
statements about the benefits of the Worldwide Restructuring were
false and also that their statements about the benefits of the
Worldwide Restructuring did not create a duty to disclose
information about the CBO Reorganization.
With respect to the defendants' argument concerning a duty
to disclose, “a duty to update opinions and projections may arise
if the original opinions or projections have become misleading as
71
the result of intervening events.”
In re Time Warner Inc. Sec.
Litig., 9 F.3d 259, 267 (2d Cir. 1993).
But a corporation is not required to
disclose a fact merely because a reasonable
investor would very much like to know that
fact. Rather, an omission is actionable under
the securities laws only when the corporation
is subject to a duty to disclose the omitted
facts. As Time Warner pointedly reminds us,
we have not only emphasized the importance of
ascertaining a duty to disclose when omissions
are at issue but have also drawn a distinction
between the concepts of a duty to disclose and
materiality.
It appears, however, that the
distinction has meaning only in certain
contexts.
For example, where the issue is
whether
an
individual’s relationship
to
information imposed upon him a duty to
disclose, the inquiry as to his duty is quite
distinct
from
the
inquiry
as
to
the
information’s materiality. On the other hand,
where the disclosure duty arises from the
combination of a prior statement and a
subsequent event, which, if not disclosed,
renders
the
prior
statement
false
or
misleading, the inquiries as to duty and
materiality
coalesce.
The
undisclosed
information is material if there is a
substantial likelihood that the disclosure of
the omitted fact would have been viewed by the
reasonable investor as having significantly
altered
the
total
mix
of
information
available. If a reasonable investor would so
regard the omitted fact, it is difficult to
imagine a circumstance where the prior
statement would not be rendered misleading in
the absence of the disclosure.
As Glazer
makes clear, one circumstance creating a duty
to
disclose
arises
when
disclosure
is
necessary to make prior statements not
misleading.
Id. at 267-68 (citations ommitted).
72
The defendants argue that they had no duty to speak out
about the CBO Reorganization’s problems, even assuming those
problems would have been material to investors, because (i) the
alleged misstatements refer to the Worldwide Restructuring as a
whole, (ii) the defendants never touted the benefits of the CBO
Reorganization or any of the other individual initiatives that
comprised the Worldwide Restructuring and (iii) there is no
evidence that the defendants ever misstated the impact of the
Worldwide Restructuring.
The defendants contend that the law is
clear that under such circumstances, they had no duty to
disclose.
They rely primarily on In re Raytheon Sec. Litig., 157
F. Supp. 2d 131 (D. Mass. 2001), and In re Winn-Dixie Stores, 531
F. Supp. 2d 1334 (M.D. Fla. 2007), and they characterize Raytheon
as directly on point.
In Raytheon, the corporate defendant had undertaken "a
massive consolidation and cost reduction program” in one of its
segments, Raytheon Systems Company ("RSC").
141.
157 F. Supp. 2d at
The plaintiff alleged that, the defendants never disclosed
that a “dearth of software engineers was directly attributable to
the inhospitable employment climate created by RSC’s aggressive
and far-reaching consolidation program.”
Id. at 142.
“At
various times, [the defendants] reported publicly on the progress
of RSC’s consolidation efforts. . . . What the defendants did not
disclose was that the ongoing consolidation was impairing
73
Raytheon’s ability to attract and retain new engineers for
several important projects.”
Id. at 149.
“At the end of the
Class Period, Raytheon disclosed that nearly one-third of the
company’s 1999 revenue shortfall - approximately $170 million was attributable to the shortage of engineers.”
Id. at 142.
The
court held:
Here, the statements concerning the
success of RSC’s consolidation efforts did not
give rise to a duty to disclose the ongoing
shortage of engineers. Although information
about the shortage of engineers may have been
interesting marketwise, its omission did not
alter
the
meaning
of
the
defendants’
consistent
statements
that
RSC
was
successfully restructuring and scaling down
its operations.
Id. at 150.
At issue in Raytheon was a plan for reducing costs
and the omitted disclosures related to a situation that lead to a
shortfall in revenues.
However, here what is at issue is a plan
to reduce costs and claims of failure to disclose not only
conditions which lead to a shortfall in revenue, but also
additional costs that offset the savings expected to be realized
pursuant to the plan.
Thus, the court does not view Raytheon as
directly on point.
In re Winn-Dixie Stores involved a chain of grocery stores
that had undertaken a centralization and restructuring program.
While the court concluded that the “[d]efendants had no duty to
discuss the bumps along the road to centralization, or the fact
that centralization posed new challenges in Winn-Dixie’s
74
respective divisions,” pivotal in the court’s analysis was its
determination that “the Consolidated Complaint’s description of
centralization’s alleged failure . . . is a description of
alleged mismanagement.” In re Winn-Dixie Stores, 531 F. Supp. 2d
at 1348.
The court held that:
[e]ach and every statement alleged to be
fraudulent by Plaintiff is either (1) a
forward looking statement protected by the
PSLRA’s safe harbor or (2) clearly immaterial
corporate puffery. In addition, the alleged
material omission - that Defendants failed to
disclose that centralization was a failure is
akin
to
a
failure
to
disclose
mismanagement, which is not actionable.
Id. at 1347.
In view of the net savings realized by Xerox from the
Worldwide Restructuring, the court agrees that there is no
genuine issue as to the fact that the defendants' statements
about the benefits of the Worldwide Restructuring were not false.
However, the court concludes that Raytheon, Winn-Dixie and the
other cases cited by the defendants6 do not establish that as a
6
Stepak v. Aetna Life and Cas. Co., Civ. No.
H:90CV00886(AVC), 1994 WL 858045, at *11 (D. Conn. Aug. 29, 1994)
(company’s statements regarding the value of its investments did
not create a duty to disclose the company’s techniques for
valuing those investments); Gaines v. Guidant Corp., No.
1:03CV00892-SEB-WTL, 2004 WL 2538374, at *11 (S.D. Ind. Nov. 8,
2004) (statements describing a medical device’s test results and
its acceptance in the clinical community did not create a duty to
disclose FDA compliance problems associated with the device);
Debora v. WPP Group PLC, No. 91 Civ. 1775 (KTD), 1994 WL 177291,
at *6-7 (S.D.N.Y. May 5, 1994) (no duty to disclose where omitted
information was “not within the scope of any prior disclosure");
Bragger v. Trinity Capital Enter. Corp., No. 92 CIV. 2124 (LMM),
75
matter of law the defendants in this case had no duty to speak
about the CBO Reorganization’s problems because what must be
considered in determining whether there was a duty to disclose is
the particular prior statement, the particular undisclosed
information and whether disclosure of the omitted fact(s) at
issue would be viewed by a reasonable investor as having
significantly altered the total mix of the information
available.7
Thus, the court cannot conclude that, as a matter of
law, when a corporation makes statements about a restructuring as
a whole, it has no duty to disclose with respect to any of the
components of that restructuring so long as the statements about
the restructuring as a whole are literally true.
Cf. Basic Inc.
v. Levinson, 485 U.S. 223, 236 (1988) (“Any approach that
designates a single fact or occurrence as always determinative of
an inherently fact-specific finding such as materiality, must
necessarily be overinclusive or underinclusive.”).
Here, the
1994 WL 75239, at *4 (S.D.N.Y. Mar. 7, 1994) (statement
announcing terms of a proposed merger and describing the business
of each merger participant did not create a duty to disclose that
one of the merging companies was exposed to sanctions for
violating FDA regulations).
7
Notably, in a portion of the Raytheon opinion not
discussed above and dealing with the issue of nondisclosure of
RSC's defense contract problems, the court concluded that
"[h]aving opened the door to discussing the schedule and progress
on the contract, Raytheon was obligated to disclose the material
information regarding delays and overruns that would affect RSC's
ability to complete the contract in a timely fashion." 157 F.
Supp. 2d at 151.
76
defendants’ argument that they had no duty to disclose is
premised on the court finding that as a matter of law there is no
duty to disclose under such circumstances.
There is no analysis
of whether disclosure of the allegedly omitted facts would have
been viewed by a reasonable investor as having significantly
altered the total mix of information available.
Therefore, the
court concludes that the defendants have not met their initial
burden in moving for summary judgment as to this point.
B. Full Disclosure
The defendants argue, in the alternative, that if they did
have a duty to disclose the impact of the CBO Reorganization they
fully met that obligation.
The court agrees with the defendants
that they are not limited to a "truth-on-the-market defense."
Cf. Ganino v. Citizens Utilities Co., 228 F.3d 154, 167 (2d Cir.
2001) (Under the truth-on-the-market defense "[a] defendant may
rebut the presumption that its misrepresentations have affected
the market price of its stock by showing that the truth of the
matter was already known.").
“[I]t is indisputable that there
can be no omission where the allegedly omitted facts are
disclosed.”
In re Progress Energy, Inc., 371 F. Supp. 2d 548,
552 (S.D.N.Y. 2005).
Furthermore, the identity of the individual
or group disclosing the allegedly omitted information does not
affect the disclosure analysis.
See Iron Workers Local 16
Pension Fund v. Hilb Rogal & Hobbs Co., 432 F. Supp. 2d 571, 580
77
(E.D. Va. 2006) (“Where information about a company was made
available in an analyst report, or by newspaper articles, any
withholding of information by the company is immaterial and cured
any omissions by the company.” (emphasis in original)).
“Because
an alleged misrepresentation or omission must be examined in
light of the information available to the market, no securities
law disclosure violation can occur when information allegedly
omitted from a corporation’s public disclosures is already
available to the market.”
Stepak v. Aetna Life and Cas. Co.,
Civ. No. H:90CV00886(AVC), 1994 WL 858045 at *7 (D. Conn. Aug.
29, 1994).
The plaintiffs contend that the defendants failed to
disclose information to the marketplace in three areas: first,
the impact of the CBO Reorganization on Xerox's operations in the
areas of order processing, billing and collections; second, the
impact of the CBO Reorganization on the performance of Xerox's
sales force; and third, the ongoing nature of the problems
associated with the CBO Reorganization.
The court finds that
there is no genuine issue as to the fact that such information
was disclosed to the market.
Thus, the defendants are entitled
to summary judgment.
1.
The Impact on Operations
The plaintiffs contend that the defendants failed to
disclose that the CBO Reorganization was interfering with
78
operations and that this interference was offsetting dramatically
the claimed benefits from the Worldwide Restructuring.
The
record shows, however, that the defendants repeatedly disclosed
metrics, such as the increase in both accounts receivable and
DSO, that were indicative of operational difficulties.8
The
plaintiffs argue that the defendants attributed these problems to
the Sales Force Realignment rather than to the CBO Reorganization
in an attempt to mask problems with the CBO Reorganization.
However, the record shows that the defendants attributed
increases in accounts receivable and DSO to both the CBO
Reorganization and the Sales Force Realignment.9
Consistent
terminology is not always used in documents created by the
defendants and by market analysts, and where there it is
8
The plaintiffs argue that while the defendants disclosed
that certain billing metrics were declining, they did not
disclose the severity of those problems or how they would
ultimately impact earnings. However, “‘[a] company has no duty
to disparage its own competitive position in the market where it
has provided accurate hard data from which analysts and investors
can draw their own conclusions about the company’s condition and
the value of its stock.’” In re New York Community Bacorp, Inc.,
Sec. Litig., 448 F. Supp. 2d 466, 480 (E.D.N.Y. 2006) (quoting In
re Donna Karan Intern. Secs. Litig., No. 97-2011, 1998 WL 637547,
at *13 (E.D.N.Y. Aug. 14, 1998)).
9
The plaintiffs argue that attributing any part of the
operational difficulties to the Sales Force Realignment is
misleading because the defendants had stated that no significant
changes to sales force territories or compensation would be made
during 1999 in connection with the Sales Force Realignment.
However, the record reflects that initial steps, including
training initiatives, were taken in 1999 to implement the Sales
Force Realignment.
.
79
ambiguous as to whether a document refers to, e.g. the CBO
Reorganization, reasonable inferences are drawn in favor of the
plaintiffs.
The internal memorandum from Fishbach to Allaire, Thoman and
Romeril stating that the deterioration in DSO at September 30,
1998 was largely driven by the CBO Reorganization is dated
November 6, 1998.
On November 10, 1998, Xerox's third quarter
10-Q stated that accounts receivable had increased “due to
stronger equipment sales growth and some increase in days sales
outstanding due to the temporary effects from the reorganization
and consolidation of U.S. customer administrative centers . . .”
Xerox Corp. Form 10-Q 22(Nov. 10, 1998) (Goldstein Decl., Ex.
20).
On February 25, 1999, Morgan Stanley disclosed that both the
CBO Reorganization and the Sales Force Realignment were
negatively affecting accounts receivable, stating that
“receivables ballooned as Xerox attempted to restructure several
operations in the US.
The reorganization and reorientation of
business units (from geographical to customer-focused) led to the
disruption in billing cycle productivity.”
Rebecca Runkle,
Morgan Stanley Dean Witter, Xerox (XRX): Preliminary Update on
Year-End Balance Sheet and Cash Flow Items IRX-PROC-0000222,
0000223 (Feb. 25, 1999) (Goldstein Decl. Ex. 36).
made the same statement on March 15, 1999.
80
Morgan Stanley
See Rebecca Runkle,
Morgan Stanley Dean Witter, Xerox (XRX): Preliminary Update on
Year-End Balance Sheet and Cash Flow Items MS00054, MS00055 (Mar.
15, 1999) (Goldstein Decl. Ex. 39).
On March 22, 1999, Xerox
issued its 10-K for 1998, in which it disclosed that “[a]ccounts
receivable growth reflects strong equipment sales in 1998 and
some increase in days sales outstanding due to temporary effects
from the reorganization and consolidation of U.S. customer
administrative centers.” Xerox Corp., Annual Report (Form 10-K)
53 (Mar. 22, 1999) (Goldstein Decl. Ex. 40).
In a report issued by CFRA on April 19, 1999, “operational
deterioration” was linked with “the December-to-December DSO
increase due to temporary effects from the reorganization and
consolidation of U.S. customer administrative centers.”
Ctr. for
Financial Research & Analysis, Inc., CFRA Company Report: Xerox
Corporation IRX-PROD-0060214 (Apr. 19, 1999) (Goldstein Decl. Ex.
41).
Statements attributed to Thoman in April 1999 link
disappointing sales performance in the first quarter with
“Xerox’s ongoing restructuring and the realignment of its sales
force.”
Michael Lyster, Digital Copiers:
Xerox Ticket to
Networking Service Plans, Investor’s Bus. Daily, Apr. 27, 1999,
at A6, IRX-PROD-0050433 (quoting Rick Thoman) (Goldstein Decl.
Ex. 43); see also Steven Milunovich, Merrill Lynch, Xerox
Corporation: Revenue Challenged 2 (Apr. 23, 1999) (Goldstein
Decl. Ex. 75).
81
During the May 14, 1999 annual Investor's Conference hosted
by Xerox, Romeril tied the deterioration in DSOs and receivables
to the CBO Reorganization:
But 1998 cash generation was clearly unsatisfactory. And
it was principally caused by a deterioration in
receivables, in days sales outstanding and our inventory
performance.
The growth in accounts receivable is
primarily
the result
of the
reorganization and
restructuring of our U.S. administrative support
activities. . . .
Barry Romeril, Xerox Corporation Investor Conference 122:23 123:5 (May 14, 1999) (Goldstein Decl. Ex. 45).
Romeril made a
similar link during his comments at the Prudential Imaging
Technology Conference on June 3, 1999 where he stated: "The
growth in accounts receivable is primarily the result of the
reorganization and restructuring of our U.S. administrative
support activities . . . ."
Barry Romeril, Xerox Vice Chairman &
CFO, Remarks at Prudential Imaging Technology Conference IRXPROD-0027213 (June 3, 1999) (Goldstein Decl. Ex. 49).
Analyst reports disclosing a link between the CBO
Reorganization and operational difficulties continued to be
issued during the period from May to July of 1999.
See Steven
Weber, SG Cowen, Xerox Corporation: The Tenets of This Growth
Story Very Much Intact IRX-PROD-0012720 (May 6, 1999) (Goldstein
Decl. Ex. 44) (referring to “organizational dislocations” in the
U.S. and Europe); Rebecca Runkle, Morgan Stanley Dean Witter,
Xerox (XRX): Annualy Investor’s Meeting Review MS00107 (May 26,
82
1999) (Goldstein Decl. Ex. 47) ("[T]he US and Europe each fell
short by about $75-80 million due to low sales productivity and
the consolidation of Xerox's administration efforts."); Benjamin
Reitzes, PaineWebber, Xerox Corporation: Meeting with CFO Eases
Many of Our Concerns 2 (June 9, 1999) (Goldstein Decl. Ex. 53)
(“It appears that Xerox’s restructuring program in the U.S. had
quite an adverse effect on the company’s receivables . . . [t]he
company reduced the number of its U.S. administrative centers to
three from four. . . .”); B. Alex Henderson, Prudential
Securities, Xerox Delivers Upbeat Presentation At Prudential
Securities’ 2nd Annual Imaging Technology Conference AS- PROD00309 (June 28, 1999) (Goldstein Decl. Ex. 54) (reporting remarks
by Romeril that “on the receivables side, we cut back too fast
and too many in the administrative side as we restructured in the
United States”); and B. Alex Henderson, Prudential Securities,
XRX: We Expect XRX to Report at Least the First Call Consensus
and Believe a Strong 2Q Could Lift Shares Higher IRX-PROD-0011190
(July 1, 1999) (Goldstein Decl. Ex. 55) (reporting Xerox's belief
that "stabilization of back-office operations" would contribute
to "a fairly sharp rebound in the top line").
Then, on July 22, 1999, Romeril stated during an earnings
release teleconference that "With receivables, we have had to
work through the bow wave of U.S. customer administration
dislocation, and we are now looking forward to substantial
83
improvements in the coming months in the United States."
Barry
Romeril, Xerox Corporation Second Quarter Earnings Release
Teleconference 15:5-11 (July 22, 1999) (Levine Decl. Ex. 72).
Also, on August 13, 1999, Salomon Smith Barney released an
analyst report that stated that Xerox was "adding over 100 people
back to its customer admin centers, in part to help bolster
collections efforts, which were damaged by headcount reductions
during the restructuring.
This will be an important issue to
monitor for improvement in Q3 and Q4."
Rosenzweig & Kalinowski,
Salomon Smith Barney, XRX: Comments on the 10Q IRX-PROD-0010522
(Aug. 13, 1999) (Goldstein Decl. Ex. 56).
On August 16, 1999
Salomon Smith Barney also reported:
Accounts receivable rose dramatically in the second
quarter, largely due to the U.S. operations. DSOs, which
were up by 20% year-over-year in Q2, should start coming
down sequentially in the third quarter, as new hires in
collections begin to take hold. By the end of 1999, DSOs
actually could be even or down versus last year, and by
2000, the average could approximate 1997 levels.
Rosenzweig & Kalinowski, Salomon Smith Barney, XRX: Upbeat
Conversation with Management IRX-PROD-0000175 (Aug. 16, 1999)
(Goldstein Decl. Ex. 57).
Thus, the court concludes that information as to the
negative impact of the CBO Reorganization on Xerox's operations
in the areas of order processing, billing and collections was
disclosed to the market both by the defendants and by market
analysts prior to September 16, 1999.
84
2. The Impact on the Sales Force
The plaintiffs contend that the defendants failed to
disclose that implementation of the CBO Reorganization had a
negative impact on the performance of Xerox's sales force. The
record shows, however, that information was disclosed to the
market prior to September 16, 1999 about the negative impact that
the CBO Reorganization had on the sales force.
The plaintiffs contend that the defendants attributed
problems to the Sales Force Realignment rather than to the CBO
Reorganization in an attempt to mask problems with the CBO
Reorganization.
Then, on or around April 27, 1999, when Thoman
was talking to Investor's Business Daily about Xerox's strategy
for a focus on industry selling, Thoman attributed Xerox's drop
in revenue for the preceding quarter to both "Xerox’s ongoing
restructuring and the realignment of its sales force."
Lyster, Digital Copiers:
Michael
Xerox Ticket to Networking Service
Plans, Investor’s Bus. Daily, Apr. 27, 1999, at A6, IRX-PROD0050433 (quoting Rick Thoman) (Goldstein Decl. Ex. 43).
Also, Buehler's May 3, 1999 memorandum sent to Thomas Dolan
(with copies to Romeril and Thoman) reviewing issues related to
the CBO Reorganization mentioned "Sales Coverage/Productivity,"
Memorandum from William F. Buehler to T. Dolan on 3+9 Direction
IRX-PROD 0252096 (May 3, 1999)(Levine Decl. Ex. 52), and an
internal Xerox document prepared in May 1999 made a reference to
85
the CBRs in Chicago being a problem.
Then, at Xerox's annual
Investor Conference on May 14, 1999, Romeril spoke about problems
with the CBO Reorganization.
Romeril disclosed that Xerox had
reduced the headcount at too fast a rate and that it was "too
much change, too fast."
Barry Romeril, Xerox Corporation
Investor Conference 122:23-123:15 (May 14, 1999) (Goldstein Decl.
Ex. 45). At the same conference he stated: "[T]here was no
question that we had, as we rolled out our G&A program,
individual areas where we caused some lack of focus on our sales
force because of our G&A activities.
about our Chicago center."
For example, we talked
Id. at 136:24-137:4.
This is a
concern highlighted by Kenneth Baugher in his September 1999
analysis of the problems that had arisen with the CBO
Reorganization.
Many of the statements about the diversion of the sales
force for training and low sales productivity are or appear to be
linked to the Sales Force Realignment.
But the record shows that
although the Sales Force Realignment announced on January 6, 1999
was described by Thoman at that time as something that would
evolve over the next couple of years, Xerox began the planning
and implementation of some aspects of the Sales Force Realignment
during the first quarter of 1999.
During that quarter, the sales
force spent more time than usual out of the field attending
training sessions associated with the new focus on industry
86
selling.
On April 16, 1999, Thomas Dolan sent an internal
memorandum to Romeril concerning Xerox's "poor sale activity
level" in the first quarter and observed that:
In support of our industry focus and solutions delivery,
we made significant investment in training key sales
force and management early in order to realize a full
year return and improve critical skills.
Growth in
training year-over-year ranged [from] 40% to 60%
resulting in time out of the field.
Memorandum from Thomas J. Dolan to Barry D. Romeril on Second
Quarter/Second Half IRX-PROD 0124539 (April 16, 1999)(Goldstein
Decl. Ex. 18).
Thus, the court concludes that information as to the
negative impact of the CBO Reorganization on the performance of
Xerox's sales force was disclosed to the market prior to
September 16, 1999.
3.
Ongoing Nature of the Problems
The plaintiffs contend that the defendants disguised the
ongoing nature of the problems associated with the CBO
Reorganization.
The plaintiffs have failed to create a genuine
issue of material fact as to this contention.
First, as reflected in the discussion of the two prior
contentions, there was a series of disclosures about problems
associated with the CBO Reorganization from at the latest
November 10, 1998 to at least August 16, 1999.
These continuing
disclosures conveyed that the problems were ongoing in nature.
87
Second, while the defendants' initial statements about the
problems associated with the CBO Reorganization characterized the
problems as temporary, the market was informed well before
September 16, 1999 that it would take through the end of 1999 to
remedy the problems.
On March 15, 1999, a Morgan Stanley report
stated that:
receivables ballooned as Xerox attempted to restructure
several operations in the U.S. The reorganization and
reorientation of business units (from geographical to
customer-focused) led to the disruption in billing cycle
productivity. Once again, management remains committed
to reducing receivable levels back to those found in 1997
by year-end 1999.
Rebecca Runkle, Morgan Stanley Dean Witter, Xerox (XRX):
Preliminary Update on Year-End Balance Sheet and Cash Flow Items
MS00054, MS00055 (Mar. 15, 1999) (Goldstein Decl. Ex. 39).
On
April 23, 1999, Lehman Brothers reported that “it may be another
quarter or two before there is meaningful improvement in DSOs and
inventories.”
Lehman Bros., Xerox: Renewed Focus on Top Line; We
Regard 1Q Slip As Temporary IRX-PROD-0000454 (Apr. 23, 1999)
(Goldstein Decl. Ex. 42).
Also, in June 1999, a Prudential
Securities Analyst Report was issued based on statements made by
Romeril earlier that month.
The report recited that Romeril
acknowledged Xerox's disappointing performance with respect to
inventory and accounts receivable in 1998, stated that there had
been no progress in the first quarter of 1999 and that little if
any progress should be expected in the second quarter, and
88
expressed an expectation that cash flow should improve by the end
of the year.
See B. Alex Henderson, Prudential Securities, Xerox
Delivers Upbeat Presentation At Prudential Securities’ 2nd Annual
Imaging Technology Conference AS- PROD-00309 (June 28, 1999)
(Goldstein Decl. Ex. 54).
Moreover, as discussed above, the
August 13, 1999, Salomon Smith Barney report reflected that by
the end of 1999 DSOs could be even with or down versus the prior
year.
C. Loss Causation
Loss causation "is the causal link between the alleged
misconduct and the economic harm ultimately suffered by the
plaintiff.”
Emergent Capital, 343 F.3d at 197.
“The burden of
establishing loss causation rests on the plaintiff.”
In re
Omnicom Grp., Inc. Sec. Litig., 541 F. Supp. 2d 546, 551
(S.D.N.Y. 2008) (citing 15 U.S.C. § 78u-4(b)(4)).
[L]oss causation has to do with the relationship between
the plaintiff’s investment loss and the information
misstated or concealed by the defendant.
If that
relationship is sufficiently direct, loss causation is
established . . . ; but if the connection is attenuated,
or if the plaintiff fails to demonstrate a causal
connection
between
the
content
of
the
alleged
misstatements or omissions and the harm actually
suffered, a fraud claim will not lie.
Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161, 174 (2d Cir.
2005) (internal citations omitted) (quoting Emergent Capital, 343
F.3d at 199) (internal quotation marks omitted).
“Loss
causation can be established either where (1) the market reacted
89
negatively to a corrective disclosure or (2) the materialization
of the risks that were concealed by the alleged
misrepresentations or omissions proximately caused plaintiffs’
loss.”
In re Omnicom Grp., 541 F. Supp. 2d at 551.
Where the alleged misstatement conceals a condition or
event which then occurs and causes the plaintiff’s loss,
it is the materialization of the undisclosed condition or
event that causes the loss.
By contrast, where the
alleged misstatement is an intentionally false opinion,
the market will not respond to the truth until the
falsity is revealed - i.e. a corrective disclosure.
In re Initial Public Offering Sec. Litig., 399 F. Supp. 2d 298,
307 (S.D.N.Y. 2005).
"[T]o establish loss causation, 'a
plaintiff must allege . . . that the subject of the fraudulent
statement or omission was the cause of the actual loss suffered',
i.e., that the misstatement or omission concealed something from
the market that, when disclosed, negatively affected the value of
the security.
Otherwise, the loss in question was not
foreseeable."
Lentell, 396 F.3d at 173.
To be “corrective” a disclosure must “reveal the falsity of
the alleged misstatements.”
at 552.
In re Omnicom Grp., 541 F. Supp. 2d
However, there is no requirement that the corrective
disclosure “‘take a particular form or be of a particular quality
. . . . It is the exposure of the falsity of the fraudulent
representation that is the critical component of loss causation.”
Id. at 551 (quoting In re Windstar Comm’ns, No. 01 Civ. 3014
(GBD), 2006 WL 473885, at *14 (S.D.N.Y. Feb. 27, 2006))
90
(alteration in original).
“While a disclosure need not reflect
every detail of an alleged fraud, it must reveal some aspect of
it.”
Id.
“Moreover, the disclosed fact must be new to the
market,” and therefore “[a] recharacterization of previously
disclosed facts cannot qualify as a corrective disclosure.”
Id.
at 551-52.
The plaintiffs contend there are two corrective disclosure
dates, September 16, 1999 and October 8, 1999.
The court
concludes that the plaintiffs have not created a genuine issue of
material fact as to loss causation with respect to either date,
and thus the defendants are entitled to summary judgment.
1. September 16, 1999
On September 16, 1999, a report by a Prudential Securities
analyst stated that Xerox would be conducting “another round of
salesforce account realignment similar to the program which
disrupted the first half 1999 revenue performance.”
A.
Henderson, Prudential Securities, XRX: Another Salesforce
Realignment Slated for 1Q00 At Xerox IRX-PROD-0000292-93 (Sept.
16, 1999) (Goldstein Decl. Ex. 30).
On the same day, Dow Jones
News reported that “the second phase of a sales-force realignment
will pressure earnings in the first half of 2000.”
Dow Jones
Business News, Xerox Shares Tumble on Word of Plan to Further
Realign Sales Force 1 (Sept. 16, 1999) (Levine Decl. Ex. 81).
91
During a teleconference with analysts on September 22, 1999,
Romeril explained that Xerox was not planning a second
realignment of the sales force:
Now regarding the direct sales force, there seems to have
been some misconception that we announced a new
restructuring of the sales organization, last week. . .
. In fact, we simply took another step implementing the
direction we announced last January. In January, we said
we were migrating our direct sales force to an industry
and solutions focus over several years . . . .
Barry Romeril, Xerox Corporation Tektronix Announcement 5:16-6:2
(Sept. 22, 1999) (Goldstein Decl. Ex. 58).
Romeril also explained
that the time lost by the sales force in connection with training
and communications related to the Sales Force Realignment had been
in addition to problems related to the CBO Reorganization:
It
is
also
very
clear
that
we
significantly
underestimated the revenue impact in the first quarter of
this year of all the customer administration changes we
made in the USA last year. The amount of customer face
time our sales representatives had was substantially
curtailed as they dealt with administrative rather than
sales issues.
(Id. at 7:18-7:25).
Although the reports on September 16, 1999 made no
connection between the disruption of sales efforts and the CBO
Reorganization, the plaintiffs argue that "[o]n September 16,
1999, the market learned for the first time that sales
disruptions were an ongoing issue that would persist into the
future, a fact which Xerox knew as early as 1998 and failed to
disclose, and which Xerox deliberately concealed from the market
92
in the first quarter of 1999."
(Pl's Mem. in Opp. at 25.)
The
plaintiffs point out that under their theory it is immaterial
that the market did not learn until September 22, 1999 that the
real reason for the ongoing sales disruptions, which would
persist into the future, was the CBO Reorganization.
The
plaintiffs' position is that, while the market did not recognize
the connection to the CBO Reorganization, the market did
recognize the only critical fact, namely that contrary to the
defendants' representations the sales disruptions were ongoing
and would persist into the future.
See In re Parmalat Sec.
Litig., 375 F. Supp. 2d 278, 307 (S.D.N.Y. 2005) ("That the true
extent of the fraud was not revealed to the public until February
- after Parmalat shares were worthless and after the close of the
Class Period - is immaterial where, as here, the risk allegedly
concealed by defendants materialized during that time and
arguably caused the decline in shareholder and bondholder
value.")
Thus the plaintiffs' ability to prove loss causation with
respect to a September 16, 1999 corrective disclosure date hinges
on their ability to prove that the defendants "led the market to
believe that it was the sales realignment - not the CBO
Reorganization - that had caused Xerox to miss its revenue growth
targets for the first quarter of 1999."
25.)
(Pl's. Mem. in Opp. at
However, as discussed above, the disclosures by the
93
defendants and market analysts explicitly attributed Xerox's
first quarter 1999 sales disruptions to both the Sales Force
Realignment and the CBO Reorganization.
Moreover, there were
repeated disclosures throughout 1999 as to the ongoing effects of
the CBO Reorganization, which included disclosures with respect
to the negative impact of the CBO Reorganization on the
performance of Xerox's sales force.
Therefore, the court concludes that the plaintiffs have not
created a genuine issue of material fact as to whether September
16, 1999 can be a corrective disclosure date.
2. October 8, 1999
On October 8, 1999, Xerox announced that it expected to
report “essentially flat revenue for the third quarter and about
a 10-12 percent decline in diluted earnings per share from 53
cents in the 1998 third quarter.”
Press Release, Xerox Corp.,
Xerox Announces Preliminary Third Quarter Results, Business Wire
IRX-PROD-0095847 (Oct. 8, 1999) (Goldstein Decl. Ex. 31).
Xerox
attributed its poor performance to “a combination of weaker
revenues together with unfavorable product mix and increased
competitive pressures, which significantly impacted operating
margins.
Sales productivity was affected by the continued
realignment to an industry-oriented approach and in the U.S. by
the ongoing impact of the customer administration restructuring.
. .” (Id.)
94
The plaintiffs argue that the facts defendants have admitted
establish loss causation with respect to the October 8, 1999
press release.
The plaintiffs point to the fact that the
defendants "concede that the press release identifies the
'ongoing impact of customer administration [CBO] restructuring'
as one of the factors responsible for the disappointing earnings.
And they do not dispute that the announcement of this decline in
earnings caused the price of Xerox's stock to drop 24.9%, or
$10.65 per share, on October 8."
(Pl's. Mem. in Opp. at 37.)
This argument is in substance that loss causation is established
simply because the announcement of the declining earnings caused
the price of Xerox's stock to drop.
It is undisputed that during
the September 22, 1999 teleconference Romeril stated that Xerox
had significantly underestimated the revenue impact in the first
quarter of 1999 of the negative impact of the CBO Reorganization
on the sales force.
The plaintiffs fail to identify what new
fraud-related information was included in the press release.
"While a disclosure need not reflect every detail of an alleged
fraud, it must reveal some aspect of it."
In re Omnicom Grp.,
Inc. Sec. Litig., 541 F. Supp. 2d at 551. Thus, this argument is
unavailing.
The plaintiffs also contend that the October 8 press release
was corrective because it revealed the materialization of a risk
that was previously undisclosed.
95
They maintain that the
defendants "concealed from investors the magnitude of the problem
and its likely ultimate effects," (Pl's. Mem. in Opp. at 39), and
"that Xerox's October 8 press release concerning the expected
earnings miss reveal[ed] the seriousness and magnitude of the
problems caused by the CBO Reorganization, resulting in a 24.9%
drop in the price of Xerox's stock." Id.
In addition, the
plaintiffs maintain, the defendants "intentionally misled
investors by reiterating expectations of mid- to high-teens
earnings per share growth, despite internal documents showing
this was not possible."
Id. at 40.
In support of this argument, the plaintiffs rely on Steiner
v. Medquist, Inc., Civil No. 04-5487(JBS), 2006 WL 2827740
(D.N.J. Sept. 29, 2006).
However in Steiner, the relevant
disclosure revealed that the defendants' fraud had caused the
company to be delisted from NASDAQ.
Here, the plaintiffs have
pointed to no new fraud-related information that was in the
October 8 press release. "[I]t is not enough to argue that [a
statement] concealed the risk that [the defendants] would be
unable to meet future revenue projections, because the mere
failure to meet earnings forecasts is insufficient to establish
loss causation."
In re AOL Time Warner, Inc. Sec. Litig., 503 F.
Supp. 2d 666, 678-79 (S.D.N.Y. 2007); see also In re IPO Sec.
Litig., 399 F. Supp. 2d 261, 266 (S.D.N.Y. 2005) ("[A] failure to
meet earnings forecasts has a negative effect on stock prices,
96
but not a corrective effect.")
Thus, this argument is also
unavailing.
Finally, the plaintiffs assert that the defendants cannot
meet their burden at the summary judgment stage of demonstrating
there is no genuine issue of material fact as to a truth on the
market defense.
However, the plaintiffs rely on Freedland v.
Iridium World Commc'ns, Ltd., 545 F. Supp. 2d 59 (D.D.C. 2008),
where the court treated loss causation as an affirmative defense,
which it is not.
See In re Omnicom Corp., 541 F. Supp. 2d at 551
(citing 15 U.S.C. § 78u-4(b)(4)).
Thus, this argument is also
unavailing.
Therefore, the court concludes that the plaintiffs have not
created a genuine issue of material fact as to whether October 8,
1999 can be a corrective disclosure date.
D.
Control Person Liability
"Section 20(a) of the Exchange Act provides for control
person liability 'to the same extent as' the controlled entity
that committed the violation."
In re Omnicom Grp., Inc. Sec.
Litig., 541 F. Supp. 2d 546, 554 (S.D.N.Y. 2008).
Because the
plaintiffs have failed to establish an underlying violation of
federal securities law by Xerox, the motion for summary judgment
is being granted as to the § 20(a) claims.
97
IV.
CONCLUSION
For the foregoing reasons, the Defendants' Motion for
Summary Judgment (Doc. No. 436) is hereby GRANTED.
The Clerk shall enter judgment accordingly and close this
case.
It is so ordered.
Dated this 29th day of March, 2012, at Hartford, Connecticut.
/s/AWT
Alvin W. Thompson
United States District Judge
98
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