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Securities and Exchange Commission v. Mark Leslie

January 13, 2012


The opinion of the court was delivered by: Jeremy Fogel United States District Judge

E-Filed 1/13/2012


Defendant Kenneth E. Lonchar ("Lonchar") seeks partial summary judgment with respect to Claims One, Two, and Five asserted against him by Plaintiff Securities and Exchange Commission 21 ("the SEC").*fn1 Lonchar contends that to the extent that those claims are based upon his alleged 22 "smoothing" of revenue and earnings, the SEC cannot prove the requisite element of legal 23 materiality. The Court has considered the briefing and admissible evidence, as well as the oral 24 argument presented at the hearing on December 9, 2011. For the reasons discussed below, the 25 motion will be denied.

July 29, 2010 ("July 29 Order") and need not be set forth in full here. In brief, the SEC brought this 4 action against several former officers, directors, and executives of Veritas Software Corporation 5 Securities Act of 1933 ("Securities Act") and the Securities Exchange Act of 1934 ("Exchange 7

Act"). Lonchar, the sole remaining defendant, served as Veritas's chief financial officer ("CFO") 8 from April 1997 until he resigned in October 2002. 9 CFO. First, the SEC accuses Lonchar and others of artificially inflating the company's revenue with respect to a September 2000 transaction in which Veritas agreed to increase the licensing fee it had quoted to America Online, Inc. ("AOL") by $20 million while simultaneously contracting to 13 purchase $20 million worth of advertising from AOL. In 2003, Veritas announced that it would 14 restate its financials relating to the AOL transaction. Second, the SEC accuses Lonchar of engaging 15 in accounting manipulation in order to "smooth" revenue and earnings between 2000 and 2002.

Lonchar allegedly: (1) manipulated the company's deferred revenue balances to make it appear that 17 deferred revenue increased quarter-over-quarter; (2) directed that a portion of the company's earned 18 professional service revenue go unrecognized so that license revenue appeared to be a larger 19 percentage of total revenue; and (3) maintained excess quarterly accrued loss balances in order to 20 establish a "cookie jar" reserve that could be released when needed to bump up the company's net 21 income and earnings per share. In 2004, Veritas announced that it would restate its financials for 22 the years 2001 and 2002, including the corresponding interim periods, and for the first three quarters 23 of 2003 ("the 2004 Restatement"). The company's stock dropped significantly on this news. 24

In its July 29 Order, the Court granted in part and denied in part Lonchar's motion for partial 25 summary judgment with respect to claims based upon the AOL transaction. Lonchar now seeks 26 partial summary judgment with respect to certain claims based upon the "smoothing" allegations, in 27 particular, claims under § 10(b) of the Exchange Act, § 17(a) of the Securities Act, and Rule 13b2-2 28 promulgated under the Exchange Act (Claims One, Two, and Five).


The circumstances underlying this lawsuit are described in detail in this Court's order of ("Veritas" or "the company") in 2007, alleging fraud and record keeping violations under the 6

The claims against Lonchar are grounded in two distinct courses of conduct he undertook as standard applied to a motion seeking summary judgment with respect to the entire case. Urantia 4 Foundation v. Maaherra, 895 F. Supp. 1335, 1335 (D. Ariz. 1995). "Summary judgment is proper 5 where no genuine issue of material fact exists and the moving party is entitled to judgment as a 6 matter of law." Samuels v. Holland American Line-USA Inc., 656 F.3d 948, 952 (9th Cir. 2011) 7


The standard applied to a motion seeking partial summary judgment is identical to the (citing Fed. R. Civ. P. 56(a)). "In considering a motion for summary judgment, we must draw all 8 reasonable inferences in favor of the nonmoving party." Id. "The central issue is 'whether the 9 evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-10 sided that one party must prevail as a matter of law.'" Id. (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251--52 (1986)).

must prove that the misstatements in question were material. SEC v. Leslie, No. C 07-3444, 2010 15 reasonable investor would assign to the withheld or misrepresented information." United States v. 17 (1988)). "To be material, 'there must be a substantial likelihood that the disclosure of the omitted 19 fact would have been viewed by the reasonable investor as having altered the 'total mix' of 20 information made available.'" Id. (quoting Basic, 485 U.S. at 231-32). In a securities fraud action, 21 materiality is a "fact-specific issue[]" that "should ordinarily be left to the trier of fact," although 22

Cir. 1994) (internal quotation marks and citation omitted). 24

Before turning to the merits, the Court will address Lonchar's evidentiary objections. First, Lonchar objects to the SEC's reliance upon deposition transcripts and investigative testimony 27 transcripts on the basis that the SEC ...

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