Dobina v. Weatherford International Ltd. et al
Filing
138
MEMORANDUM AND ORDER granting 129 Motion to Compel. For the reasons discussed above, the plaintiffs' motion to compel testimony (Docket no. 129) is granted. (Signed by Magistrate Judge James C. Francis on 5/28/2013) Copies Mailed By Chambers. (lmb)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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IN RE WEATHERFORD INTERNATIONAL
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SECURITIES LITIGATION
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JAMES C. FRANCIS IV
UNITED STATES MAGISTRATE JUDGE
(ECF)
11 Civ. 1646 (LAK) (JCF)
MEMORANDUM
AND ORDER
The plaintiffs in this putative class action are investors who
contend that Weatherford International Ltd. (“Weatherford” or the
“Company”) and certain of its officers made false and misleading
statements in violation of the federal securities laws.
plaintiffs
now
move
for
an
order
compelling
testimony
The
from
Weatherford pursuant to Rule 30(b)(6) of the Federal Rules of Civil
Procedure.
The motion is granted.
Background1
Weatherford
is
an
oilfield
Complaint (“Am. Compl.”), ¶ 5).
service
company.
(Amended
Prior to 2007, the Company’s
effective income tax rate had been on the rise, from 22% in 2004,
1
A complete discussion of the factual background of this
litigation is set forth in the Court’s decision on the defendants’
motion
to
dismiss
the
complaint,
Dobina
v.
Weatherford
International, Ltd., __ F. Supp. 2d __, 2012 WL 5458148 (S.D.N.Y.
Nov. 7, 2012).
I will describe here only as much of that
background as is pertinent to the instant motion.
1
to 25% in 2005, to 26% in 2006.
(Am. Compl., ¶ 7).
Beginning in
2007 and continuing until 2011, however, Weatherford reported a
sharply lower effective tax rate, which resulted in apparently
higher earnings per share throughout this period.
7).
(Am. Compl., ¶
According to the Amended Complaint, market analysts and
investors were particularly interested in these reported tax rates.
(Am. Compl., ¶¶ 73-76). The plaintiffs bought stock in Weatherford
between April 25, 2007, and March 1, 2011 (the “Class Period”).
(Am. Comp., ¶ 1).
On March 1, 2011, the Company announced that it would restate
its earnings for 2007 through the third quarter of 2010 because it
had identified “a material weakness in internal control over
financial reporting for income taxes.” (Am. Compl., ¶ 134 (quoting
Weatherford Form 8-K)).
Ultimately, Weatherford concluded that it
had understated its tax expense for the period 2007-2010 by $500
million.
(Am. Compl., ¶ 136).
According to the plaintiffs, the
Company’s stock price fell 11% the day after the announcement.
The plaintiffs then brought suit, alleging that Weatherford,
certain of its officers, and its auditors, Ernst & Young LLP
(“Ernst & Young”) had knowingly issued false statements concerning
Weatherford’s tax accounting and failed to state facts necessary to
make the statements they made not misleading, in violation of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15
2
U.S.C. §§ 78j(b), 78t, and Rule 10b-5 thereunder, 17 C.F.R. §
240.10b-5.
The plaintiffs subsequently amended their complaint,
and the defendants moved to dismiss the Amended Complaint on the
ground, among others, that the plaintiffs had failed to allege
scienter
properly.
supplement
their
The
plaintiffs
pleadings
to
cross-moved
add
for
information
leave
to
regarding
Weatherford’s March 2012 restatement of earnings in which it again
revised its tax expenses upward throughout the Class Period.
The Honorable Lewis A. Kaplan, U.S.D.J. granted the motion to
dismiss in part and denied it in part.
against Ernst & Young.
He dismissed all claims
Dobina, 2012 WL 5458148, at *16.
With
respect to the Weatherford defendants, Judge Kaplan noted that the
“plaintiff[s]
allege[]
two
different kinds of false statements
. . . : (1) those relating to the quality of Weatherford’s internal
controls and (2) those relating to the understated tax expense.”
Id. at *6 (footnote omitted).
He dismissed the claims based on
understatement of the tax expense, reasoning as follows:
The Court is required to consider “plausible, nonculpable
explanations for the defendant's conduct” and, in order
to sustain the complaint, must conclude that the
inference of scienter is “at least as compelling as any
opposing inference one could draw from the facts
alleged.”
Here, the allegations of the [Amended
Complaint] support the plausible inference that the
Company made an error in its tax accounting treatment in
2007 that persisted on its books, compounding over time,
and leading to incorrect financial reporting that
propagated up to management. That is, it is a plausible
3
inference that management’s statements about the
Company’s tax expense were “the result of merely careless
mistakes at the management level based on false
information fed it from below.” In the absence of any
allegations of suspicious circumstances or of knowledge
of facts that made the risk of such error obvious, the
Court concludes that this nonculpable inference is more
compelling than the inference proffered by [the
plaintiffs]. Thus, the [Amended Complaint] fails
adequately to allege scienter with regard to the
understatement of tax expense.
Id. at *11 (footnotes omitted).
By contrast, Judge Kaplan sustained the allegations relating
to
statements
president,
and
made
by
Weatherford’s
chairman,
Bernard
chief
executive
Duroc-Danner,
and
officer,
its
chief
financial officer, Andrew Becnel, attesting to the quality of the
Company’s internal controls.
As Judge Kaplan noted:
In every Form 10–Q and 10–K filed during the class
period, certain defendants made statements regarding the
effectiveness of Weatherford’s internal controls. In
particular,
Duroc–Danner
and
Becnel
individually
certified that they were “ ‘responsible for establishing
and maintaining disclosure controls and procedures . . .
and internal control for financial reporting’” for
Weatherford and have, among other things, “‘[d]esigned
such internal control over financial reporting, or caused
such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles’” and “‘disclosed, based on our
most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit
committee of the registrant’s board of directors . . .
[a]ll significant deficiencies and material weaknesses in
the design or operation of internal control over
financial reporting which are reasonably likely to
4
adversely affect the registrant’s ability to record,
process, summarize and report financial information.’”
These attestations continued quarterly as late as
November 1, 2010, in Weatherford's 10–Q for the third
quarter of 2010.
Id. at *6 (alterations in original) (footnotes omitted) (Am. Compl.
¶¶ 141-145).
weakness
in
Yet, the March 2011 restatement found material
the
internal
controls,
caused
by
“1)
inadequate
staffing and technical expertise within the company related to
taxes, 2) ineffective review and approval practices relating to
taxes, 3) inadequate processes to effectively reconcile income tax
accounts
and
4)
inadequate
controls
over
the
preparation
of
quarterly tax provisions.” Id. at *7 (internal quotation marks and
footnote
omitted).
The
Court
went
on
to
conclude
that
the
plaintiffs had adequately alleged scienter as to this claim, based
on the role of the individual defendants in establishing and
maintaining the controls, the stark discrepancies between the 2011
restatement and the defendants’ prior certifications, Mr. Becnel’s
alleged awareness during the Class Period of specific accounting
deficiencies, and the importance of the tax expense issue to
Weatherford’s financial performance.
Id. at *7-8.
At the conclusion of his opinion, Judge Kaplan denied the
plaintiffs’ motion to supplement their pleadings.
In particular,
he found that “the 2012 restatement appears to have increased the
size of the losses, but changes nothing of substance with regard to
5
the claims in this case.”
Id. at *16.
In March 2013, the plaintiffs served notice of a Rule 30(b)(6)
deposition on Weatherford.
(Lead Plaintiff’s Notice of Deposition
of Defendant Weatherford International Ltd. Pursuant to Fed. R.
Civ. P. 30(b)(6), attached as Exh. 1 to Plaintiffs’ Motion to
Compel Testimony Pursuant to Federal Rule of Civil procedure
30(b)(6)
(“Pl.
Mot.”)).
Counsel
conferred
and
exchanged
correspondence in which it became clear that Weatherford intended
to limit its testimony regarding any restatement of earnings to the
March 2011 restatement, while the plaintiffs insisted that they be
permitted to take testimony regarding the March 2012 restatement
that Judge Kaplan referred to in his decision, as well as a
subsequent December 2012 restatement. (Letter of Jennifer L. Joost
dated April 25, 2013, attached as Exh. 13 to Pl. Mot., at 2-3; Pl.
Mot. at 1 & Exhs. 4, 5).
The instant motion ensued.
Discussion
The defendants contend that permitting discovery regarding the
March 2012 and December 2012 restatements (1) would be inconsistent
with Judge Kaplan’s ruling on the motion to supplement, (2) would
require disclosure of irrelevant information, and (3) would impose
an undue burden.
None of these arguments is persuasive.
A. The Prior Ruling
Judge
Kaplan’s
prior
determination
6
dealt
with
pleading
requirements, not with discovery.
He decided that the Amended
Complaint adequately pled claims against certain of the defendants.
Having
done
so,
he
then
concluded
that
“the
[March]
2012
restatement . . . changes nothing of substance with regard to the
claims in this case.”
Id. at *16.
This is unsurprising.
Once it
was determined that the plaintiffs had succeeded in pleading
scienter, based in part on the contrast between the defendants’
statements
about
internal
controls
and
the
failure
of
those
controls illustrated by the 2011 restatement, the Amended Complaint
would not be “improved” by pleading additional evidence. That does
not mean, however, that the additional information would not be an
apt subject of discovery if otherwise relevant.
B. Relevance
Generally, “[p]arties may obtain discovery regarding any
nonprivileged matter that is relevant to any party’s claim or
defense[.]”
Fed. R. Civ. P. 26(b)(1).
purposes
of
discovery,
“Although not unlimited,
relevance,
for
is
an
extremely
broad
concept.”
Condit v. Dunne, 225 F.R.D. 100, 105 (S.D.N.Y. 2004);
see also Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351
(1978); Nunez v. City of New York, No. 11 Civ. 5845, 2013 WL
2149869, at *2 (S.D.N.Y. May 17, 2013). “Relevant information need
not be admissible at the trial if the discovery appears reasonably
calculated to lead to the discovery of admissible evidence.”
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Fed.
R. Civ. P. 26(b)(1).
The burden of demonstrating relevance is on
the party seeking discovery.
See, e.g., Trilegiant Corp. v. Sitel
Corp., 272 F.R.D. 360, 363 (2010); Mandell v. Maxon Co., No. 06
Civ. 460, 2007 WL 3022552, at *1 (S.D.N.Y. Oct. 16, 2007).
Here, the plaintiffs have met their burden.
To the extent
that the March 2012 and December 2012 restatements identify control
deficiencies that were present during the Class Period and which
are
inconsistent
robustness
of
with
those
the
defendants’
controls,
these
statements
restatements
about
are
the
plainly
relevant. The defendants argue that “[a]s Weatherford’s March 2012
and December 2012 filings make clear, the tax errors underlying
those restatements, including errors relating to withholding tax
and
foreign
dividend
tax
reserves,
eliminations
error
are
unrelated
announced
corrected in the First Restatement.”
on
to
the
March
intercompany
1,
2011
and
(Defendants’ Opposition to
Plaintiffs’ Motion to Compel Testimony Pursuant to Federal Rule of
Civil Procedure 30(b)(6) at 3-4).
But the alleged falsity of the
defendants’ statements about their internal controls does not turn
on any specific category of errors; the failure of the controls
could result in any number of accounting missteps, each of which
would be relevant and subject to discovery.
That the plaintiffs
first identified the errors revealed in the March 2011 restatement
does not preclude them from discovery with respect to errors
8
revealed in the March 2012 and December 2012 restatements, which
may in turn be attributable to the control failures at issue.
C. Burden
“Once relevance has been shown, it is up to the responding
party to justify curtailing discovery.”
Fireman’s Fund Insurance
Co. v. Great American Insurance Co. of New York, 284 F.R.D. 132,
134 (S.D.N.Y. 2012) (internal quotation marks omitted).
“[T]he
court must limit the frequency or extent of discovery” when:
(i) the discovery sought is unreasonably cumulative or
duplicative, or can be obtained from some other source
that is more convenient, less burdensome, or less
expensive;
(ii) the party seeking discovery has had ample
opportunity to obtain the information by discovery in the
action; or
(iii) the burden or expense of the proposed discovery
outweighs its likely benefit, considering the needs of
the case, the amount in controversy, the parties’
resources, the importance of the issues at stake in the
action, and the importance of the discovery in resolving
the issues.
Fed. R. Civ. P. 26(b)(2)(C). “General and conclusory objections as
to relevance, overbreadth, or burden are insufficient to exclude
discovery of requested information.”
Melendez v. Greiner, No. 01
Civ. 7888, 2003 WL 22434101, at *1 (S.D.N.Y. Oct. 23, 2003).
Rather, “[a] party resisting discovery has the burden of showing
‘specifically how, despite the broad and liberal construction
afforded the federal discovery rules, each interrogatory is not
9
relevant or how each question is overly broad, burdensome or
oppressive, . . . submitting affidavits or offering evidence
revealing the nature of the burden.’”
Vidal v. Metro–North
Commuter Railroad Co., No. 3:12CV248, 2013 WL 1310504, at *1 (D.
Conn. March 28, 2013) (alteration in original) (quoting Compagnie
Francaise
d'Assurance
Pour
le
Commerce
Exterieur
v.
Phillips
Petroleum Co., 105 F.R.D. 16, 42 (S.D.N.Y. 1984)).
The
defendants’
burden
argument
consists
exclusively
of
demonstrating how much discovery material they have produced and
contending that the information now sought by the plaintiffs is
irrelevant.
The relevance argument has been dealt with, and what
the defendants have already produced says nothing about the cost or
effort
involved
in
additional
discovery.
A
proportionality
analysis requires the court to balance the value of the requested
discovery against the cost of its production.
LLP, 279 F.R.D. 245, 256 (S.D.N.Y. 2012).
See Pippins v. KPMG
Here, the defendants
have not shown that the information sought is not sufficiently
germane, nor, on the other side of the scale, have they provided
any specific evidence of burden.
Accordingly, they shall produce
a Rule 30(b)(6) witness who can testify about the March 2012 and
December 2012 restatements.
Conclusion
For the reasons discussed above, the plaintiffs’ motion to
10
compel testimony (Docket no. 129) is granted.
SO ORDERED.
~ c~ ·2:::tr~r
~~~~D
STATES MAGISTRATE JUDGE
Dated: New York, New York
May 28, 2013
Copies mailed this date to:
Jala Amsellen, Esq.
Lionel Z. Glancy, Esq.
Michael Goldberg, Esq.
Robert V. Prongay, Esq.
Glancy Binkow & Goldberg LLP
1801 Avenue of the Stars, Suite 311
Los Angeles, CA 90067
Howard G. Smith, Esq.
Smith & Smith
3070 Bristol pike, Suite 112
Bensalem, PA 19020
Curtis V. Trinko, Esq.
Law Offices of Curtis V. Trinko, LLP
16 west 46th Street, Seventh Floor
New York, New York 10036
Eli R. Greenstein, Esq.
Erik D. Peterson, Esq.
Ramzi Abadou, Esq.
Stacey M. Kaplan, Esq.
Jennifer L. Joost, Esq.
Kessler Topaz Meltzer & Check, LLP
One Sansome St., Suite 1850
San Francisco, CA 94104
Darren J. Check, Esq.
Kessler Topaz Meltzer & Check, LLP
280 King of Prussia Road
Radnor, PA 19087
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David R. Scott, Esq.
Scott & Scott LLC
156 South Main Street
P.O. Box 192
Colchester, Ct 06415
Mary K. Blasy, Esq.
Scott & Scott LLC
707 Broadway, Suite 1000
San Diego, CA 92101
Darren J. Robbins, Esq.
Robbins Geller Rudman & Dowd LLP
655 West Broadway, Suite 1900
San Diego, CA 92101
David A. Rosenfeld, Esq.
Evan J. Kaufman, Esq.
Robbins Geller Rudman & Dowd, LLP
58 South Service Road, Suite 200
Melville, New York 11747
Robert J. Malionek, Esq.
Sarah A. Greenf ld, Esq.
Latham & Watkins LLP
885 Third Avenue, Suite 1000
New York, New York 10022
Kevin H. Metz, Esq
Latham & Watkins LLP
555 Eleventh Street, NW, Suite 1000
Washington, DC 20004
Peter A. Wald, Esq.
Latham & Watkins LLP
505 Montgomery Street, Suite 2000
San Francisco, CA 94111
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