FINDINGS OF FACT AND CONCLUSIONS OF LAW
MANUEL L. REAL, District Judge.
On June 24, 2011 the Securities and Exchange Commission's ("SEC" or "Commission") filed a complaint ("Complaint") against Peter L. Jensen ("Jensen") and Thomas C. Tekulve, Jr. ("Tekulve") (collectively "Defendants"). The Court held a nine-day trial starting on October 15, 2013.
Having considered the arguments of the parties and the testimony and exhibits presented at trial, the Court makes the following findings of fact and conclusions of law.
I. Findings of Fact
A. Stipulated Facts
The following facts were agreed to be true by the parties in the Final Pre-Trial Conference Order. Doc. no. 193.
Jensen is the founder of Basin Water, Inc. ("Basin"). He was chief executive officer and chairman of the Board of Directors of Basin from December 1999 until February 19, 2008, when he resigned as CEO. Jensen continued to be a member of the Board of Directors, however, until March 11, 2008. Jensen received a master's degree in Chemical Engineering from the Massachusetts Institute of Technology in 1974.
Tekulve was the chief financial officer of Basin from September 2004 to May 2008 and Vice President of Business Development from June 2008 until he resigned effective October 8, 2008. As CFO, Tekulve had responsibility for, among other things, Basin's financial structure and organization. Prior to his tenure at Basin, Tekulve was an officer of two other public companies: from 1999 to 2004 he was the VP of Finance of Southwest Water, Inc., and from 1994 to 1998 he was the CFO of Safeguard Health Enterprises. Tekulve was licensed by the State of Oregon as a certified public accountant in 1978. During the relevant period, Tekulve's CPA license was on inactive status. Tekulve earned an MBA degree in 1987. Basin was a Delaware corporation headquartered in Rancho Cucamonga, California. During the relevant period, Basin was engaged in the business of designing, manufacturing and servicing groundwater treatment systems. It was founded by Jensen on or about December 1999. Basin became a public company on May 11, 2006, when its stock was initially registered with the Commission pursuant to Section 12(g) of the Exchange Act, Title 15 U.S.C. § 78 l (g). Basin's stock traded on the Nasdaq National Market until July 31, 2006, when its common stock became registered pursuant to Section 12(b) of the Exchange Act, Title 15 U.S.C. § 78 l (b), and began trading on the Nasdaq Global Market. On August 5, 2009, the Nasdaq delisted Basin's stock effective August 17, 2009.
Singer Lewak Greenbaum & Goldstein, LLP ("SingerLewak" or "Singer") was Basin's outside auditor throughout the time period relevant to this case.
Jensen and Tekulve signed various management representation letters that were sent to SingerLewak, as well as quarterly and annual reports (on Forms 10-Q and 10-K) which were filed with the SEC on behalf of Basin. Tekulve also reviewed and caused to be filed with the SEC several earnings releases.
From December 12, 2006 through August 2008 Jensen sold shares of Basin stock that he owned. During that time period, he also donated shares of Basin stock to MIT.
On February 10, 2009, Basin filed a restatement on Form 10- K/A ("Restatement") with the Commission. The Restatement amended the annual report on Form 10-K for the year ended December 31, 2007, filed with the Commission on March 17, 2008. The Restatement also included amended and restated consolidated financial statements and related financial information for the years ended December 31, 2006 and 2007, including the financial results in each of the quarterly periods in 2006 and 2007.
B. Witnesses Called by the Parties
The SEC called the following witnesses: Defendant Thomas Tekulve; Martin Benowitz, with whom Basin negotiated the Opus Trust transaction; James Sabzali, with whom Basin negotiated the Thermax transaction; Lloyd Ward, the managing member of VLC and WSS; Michael Stark, Basin's former CEO; Defendant Peter Jensen; Marc Florin, a stockbroker for Jensen; and Professor Carla Hayn, the SEC's expert on accounting and financial reporting.
In their case in chief, Defendants called the following witnesses: Keith Solar, former Chairman of Basin's Board of Directors; Pat Kelly, Basin's former General Manager; Defendant Thomas Tekulve; Victor Fryling, former Chairman of Basin's Audit Committee; Divakar Gupta of Latham & Watkins, Basin's former outside securities counsel; Leslie Ward-Cline, Basin's former Controller; and Professor William Holder, Defendants' expert on accounting and financial reporting.
The Court makes the following findings regarding the credibility of the witnesses:
Sabzali's testimony suffered from a lack of credibility in general. He admitted at trial that he had pled guilty to a felony and that he had committed the act to which he had pled guilty (Sabzali, Trial Tr. at 482:17-483:5.) He was impeached with testimony from his deposition where he denied that he had engaged in the conduct to which he pled guilty. ( Id. at 482:17-484:6.) Assessing these facts, along with Sabzali's demeanor and attitude during his testimony, the Court places little weight on the substance of his testimony.
Lloyd Ward testified on direct examination that he is a lawyer in private practice in Dallas, Texas (Ward, Trial Tr. at 489:21-490:7.) On cross-examination, however, he admitted that in [July] 2013, his license to practice law was suspended for eleven months. Ward was placed on two months of active suspension and nine months of probation. The basis of his suspension was an ethical violation as a member of the Texas bar. ( Id. at 533:9-534:5.) Ward also admitted that he is subject to a 2011 Cease and Desist Order by the Connecticut [Banking Commission] for providing illegal debt relief services to over 50 Connecticut residents. The Connecticut [Banking Commission] enjoined Ward from further violations of law and ordered him to pay a $500, 000 fine ( Id. at 534:9-536:6.) Ward further admitted that he is subject to a final judgment in Kansas for providing illegal debt relief services in that state. The Kansas court enjoined Ward and ordered him to pay a $100, 000 fine ( Id. at 539:12-540:5.) Considering these facts, as well as Ward's demeanor and attitude during his testimony, the Court places little weight on the substance of his testimony.
Michael Stark testified that he did not have a close personal relationship with Charles Litt, and that he had never done a deal with Litt before VLC (Stark, Trial Tr. at 603:19-604:19.) He testified that he played a marginal role in the VLC transaction, merely introducing Litt to Tekulve and, in substance, leaving the two of them to determine whether and how to pursue a third-party financed sale ( Id. at 605:23-606:6, 634:5-636:6). The Court finds Stark to have been impeached on each of these points.
At the time he began work at Basin, Stark had just returned from a three-week vacation in Italy with Litt and his wife, who was Stark's wife's cousin ( Id. at 638:4-7.) Email correspondence between Litt and Stark included exchanges of holiday greetings and terms of endearment such as "We love you and miss you all." ( Id. at 635:10-21.) Stark testified in his deposition that he considered Litt a member of the family and that they, in fact, had a close personal relationship ( Id. at 639:12-21.)
Stark testified at trial that he had never done a deal with Litt before VLC ( Id. at 604:2-9.) He was confronted on cross-examination with a May 12, 2007 email to a business colleague in which he stated, "I have a financial guy who does all my deals.... His name is Charlie Litt." ( Id. at 644:9-18.) Stark testified that the email, rather than his trial testimony, was false ( Id. at 645:1-6.) At trial, Stark had a motive to disassociate himself from prior dealings with Litt; therefore the Court believes that the email likely more closely portrays the truth of Stark's prior business relationship with Litt. Either way, the Court finds Stark's credibility to have been impeached.
Stark's characterization of his role in the VLC transaction was contradicted by a series of email exchanges and transcripts of analyst calls from 2007 (Exs. 812, 813, 815, and 816 emails with Litt.) Based on those documents, it was clear to the Court that Stark not only knew the terms of the VLC transaction but was the principal driving force behind it.
Considering these facts, as well as Stark's demeanor and attitude while testifying, the Court finds that Stark was lacking in credibility and assigns little weight to the substance of his testimony.
Professor Hayn and Professor Holder testified, respectively, as the SEC's and Defendants' expert accountant. While both are highly qualified academics who are extremely knowledgeable in their field, the Court found Professor Holder's testimony more persuasive.
The Court finds that the methodology used by Professor Hayn to arrive at her opinions was unreliable. In the Court's view, Professor Hayn's opinion did not sufficiently take into consideration the role of professional judgment in accounting for transactions and relied excessively on hindsight in evaluating the accounting issues in this case, rather than viewing the facts as they existed at the time. The Court considers Professor Holder's opinion to reflect a more real world view of the events and accounting issues in this case.
The Court finds all of the other witnesses who testified in this case to be credible.
C. Facts Established at the Trial
1. General Characteristics of the Company, Including its Products, Practices and Personnel
Jensen is a chemical engineer who developed a technology to provide municipalities with drinking water by using an ion-exchange method to remove contaminants such as nitrate and perchlorate. (Solar, Trial Transcript ("Trial Tr.") at 1143:4-22.) In 1999, Jensen started Basin with the help of his wife Lorna Jensen. ( Id. at 1146:10-17, 1145:4-7; Exhibit 1645 (First Actions of Basin Board of Directors) at 1645-1.)
Jensen's application of ion-exchange technology differed from existing methods of treating water. (Solar, Trial Tr. at 1143:4-22.) Before Basin, water treatment facilities were large and capital-intensive. ( Id. at 1143:4-22.) Conventional facilities used miles of pipe to carry contaminated water from wellheads to a central facility to clean the water and then transport the cleaned water to consumers. ( Id. ) Basin changed this model. It constructed relatively small ionexchange units and installed these units directly atop well-heads, obviating the need for a central treatment facility and the attendant infrastructure. ( Id. )
In Basin's early years, Jensen was responsible for operations of the company, customer service, attracting investors, and development of Basin's business strategy. (Fryling, Trial Tr. At 1385:16-25; Solar, Trial Tr. at 1147:19-23.)
Just a few years after its founding, Basin had contracts with several large municipalities in California and was purifying millions of gallons of drinking water each day. (See Solar, Trial Tr. at 1150:23-1151:7 (Basin demonstrated that its technology worked by getting units out in the field); Tekulve, Trial Tr. at 1284:18-20 (Basin's customers were principally municipalities).)
Jensen was neither an accountant nor known for his accounting acumen. (Fryling, Trial Tr. at 1386:8-16; Solar, Trial Tr. at 1156:24-1157:10 (Board "didn't expect Peter [Jensen] to review financial statements").) For the first few years of its existence, Basin relied on a single part-time accountant to manage its books. (Tekulve, Trial Tr. at 109:11-18; Jensen, Trial Tr. at 989:20-24; Solar, Trial Tr. at 1149:17-1150:1.) As Basin grew, Jensen saw the need for a larger and more sophisticated accounting department. (Jensen, Trial Tr. at 988:13-18; Tekulve, Trial Tr. at 109:3 18 (responsibility for Basin's financial structure and organization); Solar, Trial Tr. at 1157:3-13 (Jensen's responsibility was "to hire and staff an accounting group.").)
After conducting a national search, Jensen hired Thomas Tekulve in 2004 as Chief Financial Officer to establish financial controls to support Basin. (Jensen, Trial Tr. at 988:19-23.). Prior to Basin, Tekulve had been Vice President of Finance and Treasurer of Southwest Water, a large water utility that operated in the same market as Basin. (Tekulve, Trial Tr. at 108:7-15; Jensen, Trial Tr. at 988:24-989:7; Final Pretrial Conf. Order (Doc. No. 193), ¶5(b) at 4.)
Tekulve's first order of business was to create a finance and accounting department by hiring the necessary personnel and developing the necessary systems and processes. (Jensen, Trial Tr. at 989:25-990:12; Tekulve, Trial Tr. at 109:11-18; Ward-Cline, Trial Tr. at 1257:16-1258:11.) For personnel, Tekulve drew heavily on his colleagues from Southwest Water, hiring Doug Hansen as his Director of Finance and Leslie Ward-Cline as his Controller. (Tekulve, Trial Tr. at 109:11-20, 1286:4-9.)
Tekulve and his colleagues in the finance department put in place accounting processes and procedures that would allow Basin to issue a public offering. (Tekulve, Trial Tr. at 1285:25 1286:20; Ward-Cline, Trial Tr. at 1258:12- 1259:20.) This work included creating policies and procedures to ensure accountability within the accounting department, to ensure that Basin's financial statements would comply with Generally Accepted Accounting Principles ("GAAP"), and to enable the company to satisfy Sarbanes-Oxley reporting requirements. (Tekulve, Trial Tr. at 1285:XX-XXXX-X; Ward-Cline, Trial Tr. at 1258:12-1259:20.) Tekulve and Leslie Ward-Cline both stated that the policies and procedures put in place were effective in ensuring compliance with GAAP and Sarbanes-Oxley. (Tekulve, Trial Tr. at 1286:21-22; Ward-Cline, Trial Tr. at 1261:7-20.)
In 2005, Tekulve began searching for an outside auditor with public company experience to support Basin's goal of going public. (Tekulve, Trial Tr. at 1288:15-24.) After interviewing several audit firms, Tekulve recommended that Basin's Audit Committee hire Singer. (Tekulve, Trial Tr. at 1288:22-1289:6, 1290:8-13.)
Tekulve recommended Singer because he was impressed with the engagement partner Gale Moore's background with two Big Four accounting firms and years of audit experience. Also important to Tekulve's choice was Moore's willingness to consult with Basin on an ongoing basis, which Tekulve considered to be critical given Basin's small size and relative inexperience. (Tekulve, Trial Tr. at 1289:20-1290:1, 1290:14-22.)
After Basin went public in May 2006, Singer began performing quarterly reviews and annual audits at Basin's headquarters. (Tekulve, Trial Tr. at 1304:2-10, 1304:23-1305:1; Ward Cline, Trial Tr. at 1267:1-7, 1270:16-24; Ex. 630 at SEC-LA3478-01646017 (Singer Audit Report for 2006); Ex. 236 at SECLA3478- 00003247 (Singer Audit Report for 2007).) Because Basin typically conducted only a few transactions each quarter, Singer's quarterly reviews generally included 100% of the significant transactions for the quarter. (Tekulve, Trial Tr. at 1304:12-22; Ward-Cline, Trial Tr. at 1270:25-1271:5.) Singer had complete, open, and unfettered access to all of Basin's financial records. (Tekulve, Trial Tr. at 1305:2-8; Ward-Cline, Trial Tr. at 1273:10-20.) Singer was also provided with all of the information it requested from Basin's finance department. (Tekulve Trial Tr. at 387:2-6, 1304:23-1305:8; Ward-Cline, Trial Tr. at 1271:6-10; Fryling, Trial Tr. at 1374:3-1375:5; Gupta, Trial Tr. at 1405:11-15.) Even apart from the quarterly reviews and annual audits, Tekulve and his finance team often consulted with Moore and her team at Singer regarding the proper accounting for specific transactions. (Ex. 913 (2/23/2006 e-mail string between Gale Moore and Doug Hansen regarding review of Benowitz transaction); Tekulve, Trial Tr. at 1302:2-1303:2; Ward-Cline, Trial Tr. at 1264:8-1265:17.)
As part of its engagement, Singer met with Basin's Audit Committee prior to the release of Basin's Form 10-Q. (Tekulve, Trial Tr. at 1299:9-24; Fryling, Trial Tr. at 1373:17-1375:14; Gupta, Trial Tr. at 1405:7-10.) The Basin Audit Committee was comprised of members who, in the words of one Basin Director, had the expertise to serve as Basin's CFO. (Solar, Trial Tr. at 1152:22- 1153:3.) The Audit Committee met at least quarterly and reviewed material transactions. (Fryling, Trial Tr. at 1371:4-13, 1397:25-1398:2.) As Singer concluded in a 2007 audit work paper, "the potential risk of material misstatement due to fraud... is low because the audit committee pays close and detail[ed] attention to operations and transactions." (Ex. 887 (3/15/08 Singer Discussion).)
Basin's Audit Committee was chaired by Victor Fryling, who had previously served as the CFO of Fortune 500 company. (Fryling, Trial Tr. at 1365:11-20.) Usually, Fryling held a "pre meeting" with Tekulve to discuss the quarterly results and the Audit Committee presentation. (Fryling, Trial Tr. at 1370:18-1371:13; Tekulve, Trial Tr. at 1295:12-1296:15, 1297:2-23.) Tekulve circulated a draft 10-Q to members of the Audit Committee before the meetings. (Ex. 679 (8/7/2007 e-mail from Tekuvle to Audit Committee with draft 10-Q for Second Quarter 2007); Tekulve, Trial Tr. at 1298:22-1299:8.) Fryling and the other members of Basin's Audit Committee provided a "robust" examination of the proposed financial statements submitted by Tekulve. (Fryling Trial Tr. at 1366:8-1370:2, 1371:14-20.)
At every Audit Committee meeting, the Committee would have discussions with Singer, usually without management present. (Fryling, Trial Tr. at 1373:17-1375:15; Tekulve, Trial Tr. at 1299:25-1300:18.) During each of these discussions, the Audit Committee members asked Singer if it had any disputes with management and if management had cooperated fully with Singer's review. (Fryling, Trial Tr. at 1374:3-1375:15; Gupta, Trial Tr. at 1405:11-15.) Singer never reported any disputes with management or impediments in auditing Basin's financial statements. (Fryling, Trial Tr. at 1374:3-1375:3; Gupta, Trial Tr. at 1405:11-15.) The Audit Committee also asked if there were any issues related to Basin's accounting that they should know about; Singer reported none. (Fryling, Trial Tr. at 1374:3-1375:3; Gupta, Trial Tr. at 1405:11-15.)
Following each quarter Singer issued clean reviews and at each year end, Singer issued clean audit opinions. (Fryling, Trial Tr. at 1373:17-1375:3; Holder, Trial Tr. at 1459:9-14; Ex. 630 at SEC-LA3478-01646017 (Singer Audit Report for 2006); Ex. 236 at SEC-LA3478-00003247 (Singer Audit Report for 2007).)
There were other levels of review for transactions at Basin in addition to Singer. The terms of material transactions were also reviewed by the Board of Directors. ( See, e.g., Tekulve, Trial Tr. at 363:1-7 (reviewing basic structure and economics of transaction for VLC at Board meeting); Solar, Trial Tr. at 1159:1-1160:10 (reviewing Opus transaction).) Given Basin's relatively small size, nearly all transactions in each quarter were material. (Solar, Trial Tr. at 1179:5-16 (General Counsel Scott Hamilton determined that all transactions were material).)
Significant transactions - including the SPE transactions at issue in this litigation - were reviewed by Basin's legal counsel as well. Before the IPO, Solar, one of the original directors and a lawyer with expertise in the water industry, reviewed agreements and provided draft templates to Tekulve. (Solar, Trial Tr. at 1135:3-21, 1136:22-1137:6, 1138:7-16, 1138:24-1139:8.) In connection with its IPO, Basin retained Latham & Watkins ("Latham") as outside counsel. Going forward, Latham served as Basin's securities counsel, drafting and reviewing its filings with the SEC and drafting the documentation for several significant transactions. (Gupta, Trial Tr. at 1400:12-1401:24, 1402:7-24; Solar, Trial Tr. at 1139:13-21.) Both Jensen and Tekulve sought and received counsel from Latham on securities law issues. (Gupta, Trial Tr. at 1410:14-24, 1412:23-1414:11.)
Scott Hamilton, Basin's General Counsel hired in June 2007, served as an additional level of review. (Jensen, Trial Tr. at 905:7-21; Solar, Trial Tr. at 1169:13-22; Ex. 211 (Form 10Q for Q2 2007) at SEC-LA3478-00002975.) Hamilton, a former attorney in the Division of Enforcement of the SEC, had worked with Stark at Veolia and was hired at his recommendation. (Stark, Trial Tr. at 678:10-23; Solar, Trial Tr. at 1169:2-9.) The Basin Board hired Hamilton in part because of his experience as an attorney in the Division of Enforcement at the SEC. (Solar, Trial Tr. at 1169:13-22 (The Board viewed the hiring of a former enforcement attorney as "a good thing" because "[i]t would help to have someone who worked at the SEC so that the Company was doing everything it should in accordance with SEC rules and regulations").) Hamilton was involved in reviewing and documenting the SPE transactions, and Tekulve interacted with him in this review process. (Stark, Trial Tr. at 615:15-25 (Stark, Basin's COO and President, received information "in terms of the contractual agreements" from Scott Hamilton), 679:2-4 (appears that "three attorneys working on reviewing the - this [VLC] transaction"), 685:9-12 ("reassured by this process that the VLC transaction had been appropriately reviewed and approved"); Tekulve, Trial Tr. at 213:1-12 ("we had multiple discussions with Scott Hamilton, our general counsel..."); Ex. 1020 (Tekulve Diary) at TCT 248 ("Calls, e-mails, et cetera with Charlie Litt, Scott Hamilton..."); Ex. 619 (8/9/07 Audit Committee Minutes).)
Jensen himself never participated in decisions on how or when to recognize revenue from transactions. (Jensen, Trial Tr. at 852:19-854:6, 905:7-906:8; Kelly, Trial Tr. at 1240:10-13; Ward-Cline, Trial Tr. at 1275:5-1277:10; Fryling, Trial Tr. at 1387:2-5.)
Neither Jensen or Tekulve ever instructed any Basin employee to withhold information from Singer, or to provide less than full cooperation with the auditors. (Ward-Cline, Trial Tr. at 1272:1-12, 1277:11-20; Jensen, Trial Tr. at 993:25-996:5; Tekulve, Trial Tr. at 1344:6-12, 1349:5-25; Fryling, Trial Tr. at 1373:21-1374:9; Kelly, Trial Tr. at 1240:14-25.) No witness testified that Tekulve or Jensen ever instructed any Basin employee to do an improper act. All witnesses who were asked testified to the absolute integrity, prudence, and honesty of both men. (Kelly, Trial Tr. at 1241:8-19 (did not have any reason to doubt Jensen's integrity or honesty), 1248:2-9; Ward Cline, Trial Tr. at 1278:5-8 (did not have "any occasion to doubt his [Jensen's] integrity or his honesty"), 1274:1-19 (Tekulve "wanted thing[s] to be right and that was the message that he conveyed to his staff"), 1262:12-16 (Tekulve "wanted them [Basin's financial statements] to be right"); Solar, Trial Tr. at 1190:3-1191:4 ("Because I have known Peter [Jensen] more than 20 years, and I know he is not like that. And I was there when the alleged events happened, and they weren't true."), 1210:14-22 ("Tom [Tekulve] is impeccably honest."); Gupta, Trial Tr. at 1405:16-21 (Singer did not question Tekulve's honesty or ethics), 1410:25-1411:1 ("As far as I saw, he was very honest. I always trusted him in the transactions - in the interactions I had with him [Tekulve].").)
2. Transactions at Issue in this Case
With the exception of certain circumstances regarding the insider trading allegations against Jensen, the alleged misconduct in this case centers around six transactions. The SEC alleges that Defendants improperly recognized revenue on these transactions - or otherwise misrepresented the character of those transactions - and in doing so misled the investing public, Singer, and the SEC.
a. Opus Trust Transaction
In 2005, Jensen approached potential investors about acquiring water treatment systems from Basin to use in possible conjunction with BION, a new, proprietary technology Jensen helped to develop along with internationally-known experts in the field of water treatment. (Jensen, Trial Tr. at 815:17-816:10.)
In the Fall of 2005, Jensen spoke with attorney Martin Benowitz about Opus acquiring two water treatment systems and an interest in the BION technology from Basin. (Jensen, Trial Tr. at 817:9-818:22; Benowitz, Trial Tr. at 405:1-20.) Benowitz was a shareholder of Basin. Further, Jensen had a long business relationship with Benowitz and understood him to represent foreign investors. (Jensen, Trial Tr. at 815:14-16, 958:6-959:17; Benowitz, Trial Tr. at 442:2-7; Solar, Trial Tr. at 1159:1-1160:2.) Benowitz also represented a group of foreign investors who did business through an entity known as Opus Trust ("Opus"). Benowitz was enthusiastic about the BION technology. (Benowitz, Trial Tr. at 407:22-408:2 ("[T]he motivation for us to get an interest here was that the thought was that this was something that could not only be used by Basin, but would be a product that could be used by any other water company that needed to dispose of that which would make it a much substantial market."), 434:21-435:4 ("It was all about the stock... it was all about the five percent stock ownership."); Jensen, Trial Tr. At 959:1-10 ("[H]e [Benowitz] was very excited about the technology"). Benowitz agreed that Opus would buy two Basin systems if the deal included BION shares. (Benowitz, Trial Tr. at 408:11-14 ("We were getting two units and five percent of the stock of BION"), 434:21-435:4; Ex. 12 (3/30/06 Formal Agreement); Ex. 514 (Letter Agreement).) Once Jensen and Benowitz reached a basic agreement in December 2005, the Basin Board of Directors reviewed the deal terms and approved it on December 20, 2005. (Solar, Trial Tr. at 1159:4-1160:4.)
On December 29, 2005, Benowitz, on behalf of Opus, executed an "Agreement for purchase of two Basin ion exchange units" ("Letter Agreement"). (Benowitz, Trial Tr. at 409:25-410:12; Ex. 514 (Letter Agreement). The Letter Agreement stated a purchase price of $1.5 million, with 10% (or $150, 000) to be paid upon execution, and the remainder to be paid over two years. (Ex. 514 (Letter Agreement), ¶ 1a. at SEC-LA3478-00842086.) In exchange, Opus would receive 5% of the shares of the subsidiary that would own the BION technology. Opus immediately paid Basin $150, 000. (Ex. 4 (12/29/05 Checks).) Benowitz testified that the Letter Agreement was binding. (Benowitz, Trial Tr. at 435:24-436:20 ("it was your full intention that it [Ex. 514] be binding on the Opus Trust, correct? A: Correct").) The Letter Agreement also explicitly states that it is "binding" on both parties. (Ex. 514 (Letter Agreement), ¶ 5 at SEC-LA3478-00842088.)
The Letter Agreement contained the key economic terms of the sale, and committed the parties to enter into a more detailed contract containing customary terms and conditions at a later date. (Ex. 514 (Letter Agreement), ¶ 1 at SEC-LA3478-00542087.) Basin had a practice of establishing the key terms of a transaction in a letter agreement, followed by a more detailed contract that would include more customary terms and conditions. (Tekulve, Trial Tr. at 1295:25-1296:10.)
In March 2006, Benowitz obtained a home equity loan of $250, 000 to pay for an option to extend the Letter Agreement. (Benowitz, Trial Tr. at 429:13-18, 439:21-23; Ex. 529 (3/20/06 E-mail).) During this time, however, Jensen and Tekulve were preparing for Basin's IPO, which occurred in May 2006. (Jensen, Trial Tr. at 829:17-25; Final Pretrial Conf. Order (Doc. No. 193), ¶5(c) at 4.) Hence, Tekulve and Benowitz did not exchange drafts of more formal documentation of the agreement ("Unit Purchase Agreement" or "UPA") until June 2006. The Unit Purchase Agreement ("UPA") was executed by Benowitz sometime after March 30, 2006, (Benowitz, Trial Tr. at 437:8-20; Ex. 12 (UPA)), and by Jensen some time before September 2006, (Jensen, Trial Tr. at 844:15-845:9).
The UPA stated that it was "effective as of" March 30, 2006. (Ex. 12 (UPA) at SEC-LA3478-1919.) Benowitz testified that, in his experience as a transactional attorney, parties use the phrase "effective as of" to indicate they entered the agreement prior to executing it. Used this way, "effective as of" does constitute "backdating." The UPA, on its face, clearly indicates that it is effective "as of" March 30, 2006; it does not purport to have been signed on March 30, 2006. (Benowitz, Trial Tr. at 437:21-438:14.) Contrary to the SEC's allegations, it is thus not a back-dated document. ( Id. ) Benowitz testified that on April 1, 2006, he began receiving lease payments due under both the Letter Agreement and the Unit Purchase Agreement. Benowitz's receipt of these payments as owner of the water treatment units supports that the sale was "effective as of" March 30, 2006. (Ex. 5 (Payments to Western Water); Benowitz, Trial Tr. at 432:12-19.)
The UPA modified certain terms of the Letter Agreement. The Letter Agreement did not specifically identify the two units being sold to Opus, whereas the UPA identified them by unit numbers. The parties to the Letter Agreement were Basin and Opus, whereas the parties to the UPA were BionBasin, Inc., a wholly-owned subsidiary of Basin, and Opus. (Ex. 514 (Letter Agreement); Ex. 12 (UPA); Tekulve, Trial Tr. at 346:19-347:5.) The term of the UPA was three years, whereas the term of the Letter Agreement was two years. (Ex. 12 (UPA), ¶2.1 at SEC-LA3478-1920; Ex. 514 (Letter Agreement), ¶2(b)(ii) at SEC-LA3478-09530986.)
The UPA also included a liquidated damages clause. (Hayn, Trial Tr. at 1009:17-1010:7.) Under the liquidated damages clause, if Opus breached the agreement, Basin's damages were limited to retaining any sums Opus had paid prior to breach, and the return of the two units. (Ex. 12 (UPA), ¶18 at SECLA3478-1927.) Benowitz testified that he did not request the liquidated damages clause. (Benowitz, Trial Tr. at 438:19-439:1.) Tekulve testified that he believed the clause may have been a vestige of a contractual template he relied on in preparing a draft of the UPA. (Tekulve, Trial Tr. at 1310:11-21, 1311:2-5; see also Solar, Trial Tr. at 1160:17-1161:12.)
Regardless of the liquidated damages clause, Benowitz testified that Opus had a significant economic incentive to perform its obligations. "The whole purpose" of the agreement with Basin, as far as Benowitz was concerned, was to obtain the 5% share of BionBasin, Inc. (Benowitz, Trial Tr. at 425:17-23 ("really, our big concern was about the five percent interest in the stock"), 434:21-435:4 ("It was all about the stock... It was all about that five percent stock ownership"), and 439:2-12 ("This was all about getting that five percent stock").) If Opus did not pay for the two units in full, it would not receive the shares in BionBasin, Inc. (Benowitz, Trial Tr. at 439:13 17.) Thus Opus fully intended to perform, had in fact obtained funding (through ...