The opinion of the court was delivered by: Gladys Kessler United States District Judge
Plaintiff Securities and Exchange Commission ("SEC") brings this action against four individual Defendants (John Tuli, Kent Wakeford, Christopher Benyo, and Michael Kennedy, collectively "Defendants") alleging a fraudulent scheme to materially and improperly inflate the announced and reported revenues of PurchasePro.com, Inc. ("PurchasePro"). This matter is before the Court on Defendant Benyo's Motion for Summary Judgment [Dkt. No. 178]. Upon consideration of the Motion, Opposition, Reply, and the entire record herein, and for the reasons stated below, Defendant Benyo's Motion for Summary Judgment is denied.
A. The Defendants' Alleged Scheme
The Defendants in this case are former executives of both PurchasePro, a publicly traded Internet company that provided a business-to-business internet marketplace, and America Online, Inc. ("AOL").
Starting in December 2000, PurchasePro, AOL, and a third company, AuctioNet, which provided Internet auction services, entered into a series of agreements that required integration of AuctioNet into the websites of PurchasePro and AOL NetBusiness. According to the SEC, the agreements required a complex series of payments amongst the three companies. AOL was to receive $5 million from AuctioNet, keep $1 million for itself, and then pay the remainder (less a 20% commission) to PurchasePro after AOL received the funds. The SEC claims that AOL would begin to pay the net amount of $3.2 million to PurchasePro in quarterly installments beginning April 1, 2001.
The SEC alleges that the Defendants developed a scheme to recognize the revenue from these agreements in the First Quarter of 2001. At the heart of the scheme was an allegedly sham Statement of Work between PurchasePro and AOL ("SOW") that would supposedly reflect that the integration work had occurred in the First Quarter, when it fact it had not. The SOW would be used to convince PurchasePro's auditors, Arthur Andersen, that PurchasePro could recognize $3.65 million in revenue in the First Quarter of 2001.*fn2
It is undisputed that the SOW was not finalized until after the First Quarter had ended. It is also undisputed that PurchasePro Executive Vice President Geoff Layne and his assistant, James Sholeff, forged the signature of AOL officer Eric Keller on the SOW and that at some point, the SOW was also backdated to a date in the First Quarter. However, the parties fiercely dispute the actual meaning of the SOW's terms. The Defendants contend that sufficient integration work occurred in the First Quarter to meet the requirements set forth in the SOW. The SEC responds that the SOW required integration work that was not completed in the First Quarter.
PurchasePro's outside auditor, Arthur Andersen, began to review PurchasePro's First Quarter revenue shortly after the end of the quarter. The forged and backdated SOW was eventually provided to Arthur Andersen, which placed the document in its files and allegedly relied on it during the course of its audit. Several of the Defendants, as well as Matthew Sorensen, a PurchasePro employee, allegedly made additional deceptive and misleading statements to the auditors regarding the recognition of revenue from the AuctioNet transaction.
On April 26, 2001, PurchasePro executives conducted a conference call with Wall Street analysts, PurchasePro shareholders, and others regarding its First Quarter revenues. The $3.65 million from the AuctioNet transaction was included in the revenues announced during the call. Jim Clough, PurchasePro's interim Chief Financial Officer, announced on the call that "[i]t's important to note that a full two-thirds of our revenue for the quarter was AOL-related. It includes . . . $3.7 million in integration services . . . . We apply a heightened degree of scrutiny to this revenue given the unique multi-element relationship we have with them." Pl.'s Statement of Facts, Ex. 27 (PurchasePro.com First Quarter Conference Call Transcript, Apr. 26, 2001) at 3. The $3.65 million from the AuctioNet transaction represented 12% of PurchasePro's reported First Quarter revenue.
PurchasePro also released a press release on April 26, 2001 announcing earnings, which included the $3.65 million in revenue from the AuctioNet transaction. Arthur Andersen did not review this press release prior to its release.
On May 14, 2001, AOL sent a letter to PurchasePro stating that it could not confirm the existence of the SOW. PurchasePro, with the agreement of Arthur Andersen, subsequently decided that the $3.65 million from the AuctioNet transaction should not have been included in PurchasePro's quarterly revenues. Accordingly, this revenue was not included in the Form 10-Q PurchasePro filed with the SEC on May 29, 2001.
B. Benyo's Alleged Role in the Scheme
Defendant Christopher Benyo was PurchasePro's Senior Vice President for Marketing and Network Development during the relevant period. The SEC alleges that Benyo violated four sections of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78a et seq. Specifically, the SEC alleges that Benyo aided and abetted PurchasePro's violations of Exchange Act Section 10(b), 15 U.S.C. § 78j(b), and Rule 10b-5 (Count III); falsified books and records and circumvented internal controls in violation of Exchange Act Section 13(b)(5), 15 U.S.C. § 78m(b)(5), and Rule 13b2-1 (Count IV); misled an accountant or auditor in violation of Exchange Act Rule 13b2-2 (Count VI); and aided and abetted PurchasePro's falsification of books and records and circumvention of its system of internal controls in violation of Exchange Act Sections 13(b)(2)(A) and (B), 15 U.S.C. § 78m(b)(2)(A) and (B) (Count IX).
Specifically, the SEC alleges that Benyo helped orchestrate the creation of the fraudulent SOW. The SEC claims that the drafting of the SOW was initially the responsibility of an in-house lawyer at PurchasePro, but when he raised questions about the validity of the document, Benyo's "group" of employees in PurchasePro's Marketing Department was given this responsibility. Dale Boeth, PurchasePro's Senior Vice President for Strategic Development, has testified that he instructed Benyo to provide resources to get the SOW completed and that it was necessary for PurchasePro to recognize revenue. Pl.'s Statement of Facts, Ex. 17 (United States v. Benyo Trial Transcript, Nov. 28, 2006) ("Boeth Tr.") at 3187. Boeth discussed "how to best structure the transaction, what it needed to be -- how to document the transaction, and how to recognize the revenue" with a group that included Benyo. Id. at 3189. Boeth personally considered the transaction to be "dirty." Id. at 3198.
The SEC contends that Benyo then instructed two of his subordinates, Barry Joyce and Matthew Sorensen, to put together the SOW at the end of March and the beginning of April, as evidenced by a series of e-mails to and from Benyo. Sorensen e-mailed a copy of the completed SOW to Benyo and Boeth on April 5, 2001. The document was unsigned, but bore a date of February 5, 2001 on its cover page.
The SEC argues that because Benyo knew that the integration work described in the SOW was not yet completed, he had to have been aware of the fraudulent nature of the SOW. For example, an April 1, 2001 e-mail from Joyce to Benyo scheduling a meeting for the next day noted that "[t]here are final integration efforts that will require a team effort . . . to accomplish." Pl.'s Statement of Facts, Ex. 39. Another e-mail from Joyce on April 2, 2001, indicated that integration work with AOL remained ongoing. Pl.'s Statement of Facts, Ex. 42. Benyo responded with an e-mail asking "[h]ow much of this is going to be done now?" Pl.'s Statement of Facts, Ex. 44. Benyo denies any role in creating the fraudulent portions of the SOW.
On April 2, 2001, fifteen to twenty PurchasePro employees met to consider additional AuctioNet integration work. Sorensen, who was present, described the attendees as angry that they were being asked to complete so much work in so little time and characterized the meeting as a "freak-out" session. Pl.'s Statement of Facts, Ex. 12 (Sorensen Dep., June 26, 2007) ("Sorensen Dep.") at 201-206. A smaller meeting followed, attended by Benyo, Sorensen, and Defendant Michael Kennedy, PurchasePro's Chief Technology Officer. Sorensen testified in his deposition that "what I remember best [about the meeting] is the result of that conversation, which was basically Chris Benyo saying we can put up a [hypertext] link and circle back and do the ...