The opinion of the court was delivered by: Nanette K. Laughrey United States District Judge
Plaintiffs class, as holders of various securities of Iridium World Communications, Ltd. (IWCL), sued Defendant Motorola, Inc. (Motorola), the lone-remaining defendant, for securities fraud under Sections 10(b) and 20 of the Securities Act of 1934 and Section 15 of the Securities Act of 1933, as well as SEC Rule 10b-5. The following motions are before the Court: (1) Plaintiffs' Renewed Motion for Partial Summary Judgment under the Doctrine of Collateral Estoppel [Doc. #203]; (2) Motorola's Motion for Summary Judgment on All Claims [Doc. # 204]; (3) Motorola's Motion for Summary Judgment on Claims Directed Against Motorola [Doc. # 205]; (4) Plaintiff Richard Mandelbaum's Motion for Partial Summary Judgment on Section 15 Claim [Doc. # 207]; and (5) Motorola's Motion to Exclude the Damages Testimony of Anthony Saunders [Doc. # 206]. The Court grants, in part, and denies, in part, Motorola's Motion for Summary Judgment on All Claims. The Court denies the remaining motions.
Approximately twenty years ago, Motorola began developing a global wireless communications system called "Iridium" that would connect low-orbiting satellites, earthbound relay stations, and customer handsets, allowing customers to make and receive phone calls anywhere in the world, all with the convenience of one phone number and one bill. The system was designed for customers who needed to make or receive phone calls in areas where cellular phones could not. It was not, however, intended to be a replacement for cellular service; instead, Iridium expected its customers to use satellite services only where cell service was unavailable because the satellite-based system did not work well in urban areas and air-time charges were considerably more expensive. Iridium was originally a subsidiary of Motorola but was later spun off into IWCL, Iridium Operating, and Iridium LLC. Under this structure, IWCL was the vehicle for public investment in Iridium LLC, owning approximately 13% of that company by January 1999. Iridium LLC was formed for the purpose of acquiring, owning and managing the Iridium system itself. Motorola originally had the right to appoint five of the 28 members of the Iridium LLC Board of Directors until early 1999. Both IWCL and Iridium LLC will be referred to collectively as "Iridium" throughout this Order.
The Iridium system as designed had four principal components: (1) the space segment that included 66 low-earth-orbit satellites and related control facilities; (2) ground stations or "gateways" that linked the satellites to terrestrial communications systems; (3) phones, pagers and SIM cards that provided mobile access to the satellite system and terrestrial cellular systems; and (4) the land-based wireless roaming infrastructure that facilitated roaming among the land-based cellular systems and the Iridium system. The gateways were twelve earth stations which provided the call-processing services by connecting calls made through the Iridium system to and from local land lines through an international switching center. Many of Iridium's gateway owners--separate companies controlling gateways in specific geographic regions--were strategic investors in IWCL.
Dr. Edward F. Staiano was Vice-Chairman and Chief Executive Officer of Iridium LLC and Iridium Operating, as well as CEO of IWCL, from before September 8, 1998, until April 22, 1999. Prior to his position at Iridium, he was employed at Motorola for 23 years, where he was part of senior management, holding a position he described as one "of the three operating vice presidents of the corporation" reporting directly to the CEO. Roy T. Grant was Chief Financial Officer and a vice president of Iridium LLC and IWCL until March 29, 1999.
There were contracts between Motorola and Iridium, wherein Motorola assumed responsibility for designing, building and launching the satellite communications system and developing the handset technology. As a result, Motorola was a contract creditor of Iridium. Beginning in 1996, Motorola agreed to guarantee the unsecured portion of Iridium's credit facility up to $750 million. In late 1997, Motorola agreed to allow its guarantee exposure to increase to more than $1 billion. As part of its terms, however, it gained the right to appoint a sixth director on the Iridium LLC board once the guaranteed borrowing by Iridium exceeded $750 million. By March 1999, Motorola designated six of the 29 directors as a result of this agreement. As part of the guaranty's terms, Iridium could not take certain actions without Motorola's consent, including acquisitions and recapitalizations, additional borrowing, and payment of dividends except as expressly authorized. Motorola contends that these terms in connection with guarantees were common, but Plaintiffs assert there is no precedent in which a guarantor receives the right to appoint an additional director.
On November 1, 1998, Iridium launched "full" commercial service, over a month after its originally scheduled September launch. Iridium delayed the commercial launch in an effort to "refine system performance and quality" and "improve operational stability of the network." On December 23, 1998, Iridium closed on "new bank credit facilities providing for an aggregate amount of up to approximately $1.55 billion of borrowings." This included a senior secured credit facility for $800 million. As part of this secured bank facility, Iridium newly covenanted that it would satisfy certain minimum revenue and subscriber levels, including:
(a) by March 31, 1999, it would have at least 27,000 Iridium World Satellite Service subscribers and at least 52,000 total subscribers;
(b) by ten business days after March 31, 1999, it would have cumulative cash revenues of at least $4 million and cumulative accrued revenues of at least $30 million;
(c) by June 30, 1999, it would have at least 88,000 Iridium World Satellite Service subscribers and at least 213,000 total subscribers;
(d) by July 15, 1999, it would have cumulative cash revenues of at least $50 4 million and cumulative accrued revenues of at least $150 million;
(e) by September 30, 1999, it would have at least 173,000 Iridium World Satellite Service subscribers and at least 454,000 total subscribers; and
(f) by October 14, 1999, it would have cumulative cash revenues of at least $220 million and cumulative accrued revenues of at least $470 million.
Between September 8, 1998 and May 13, 1999 (the class period), Iridium and Motorola made a number of statements regarding the status of the Iridium service and technology, as well as their expectations about the market and the number of customers they would attract. These statements include press releases issued by Iridium and Motorola; an SEC registration statement filed on October 13, 1998, by IWCL, made in connection with a planned secondary offering (an amended registration statement was filed November 13); a January 21, 1999, prospectus by IWCL; as well as statements reported by various third-party publishers, such as newspapers and analysts. Many of these statements related to whether Iridium would be able to satisfy the bank covenants regarding minimum number of subscribers and revenues. Iridium and Motorola's statements were often positive, suggesting that they expected to meet the bank covenants, although many of the statements carried cautionary language indicating that these were based on certain assumptions. Plaintiffs contend that internal records and memoranda reveal that at the time these statements were made, both Iridium and Motorola knew that it would actually be almost impossible for Iridium to meet the required covenants. Motorola disputes this and responds that, in any event, the cautionary language, or "forward-looking statements," make their knowledge of whether Iridium would meet the bank covenants irrelevant.
On February 19, 1999, analysts and news sources started reporting that Iridium would not be able to satisfy the bank covenants and that Iridium would not project where it would be at the end of the quarter. On March 1, 1999, Iridium issued a press release stating that "with current projections showing that initial delays with Iridium's global service roll-out will likely cause the company to fall short of the first quarter target numbers, we do expect that we will be working with our banks to modify these milestones going forward." On March 29, 1999, Iridium issued another press release stating that it had "received a 60-day waiver from its lenders" of "the financial covenants relating to customers and revenues" and that Iridium had "notified its bank lenders that it is in the process of revising its revenue and customer estimates" and that "it intends to request a modification of the minimum revenue and customer level covenants in the secured bank facility once this revision is complete." On May 13, 1999, Iridium issued a press release stating that it would not satisfy its covenants and had hired counsel to provide restructuring advice.
Plaintiffs maintain that Iridium and Motorola knew well before February 19, 1999, that the Iridium system did not function up to commercial expectations and that Iridium was not going to meet the customer and revenue requirements established by the bank covenants. Plaintiffs present evidence that Alpha testing did not involve performance in real world user environments. Beta testing began even before the Alpha trials ended and was shortened from seven weeks to five. While in public, Iridium and Motorola continued to claim that call connection rates and call quality were improving, and that dropped call rates were falling, Plaintiffs contend that those tests were conducted in a "rigorously controlled" environment, while other data showed that the system performed dramatically poorer under "real world" condition tests.
For example, Motorola claims that call setup success rates rose from just over 40% as of September 25, 1998, to 80% as of October 23, 1998; KPI ("key performance indicator") testing showed that call establishment rose from 10% on September 16, 1998, to 72% as of October 27, 1998; and dropped call rates declined from 50% to 28% in that same timeframe. Motorola's testing at its Chandler, Arizona, plant showed even better improvements: 90% call establishment and only 15% dropped calls on October 27, 1998. Results for the first week of commercial operations (November 1-7, 1998) showed an average call establishment rate of 85%, a dropped call rate of 13% and a good voice quality rate of 89%. From January 15 to 18, 1999, the average call establishment rate was 94%, the dropped call rate was 5% and the good voice quality rate was 91%. Motorola contends that even though its service was improving throughout this time, it tempered this optimism with forward-looking statements.
Plaintiffs dispute these tests, citing much evidence that the system did not perform that well in reality, including testimony that KPI tests reflect "controlled circumstances which typically don't obtain in the real world." They cite the fact that the KPI tests made just before and after commercial activation used phones mounted on racks at the gateway locations, and that their antennas were disconnected, instead hooked up to cable connected to a mast located on rooftops. Further, Plaintiffs cite evidence that on October 27, 1998, Alpha testers established only 54% of their calls. An internal report stated that "[p]erformance in the hands of trial coordinators gave call success rate less than 70%, drop rates above 35% until Dec. '98." Additionally, a monthly review in April 1999 showed actual call date records from subscribers indicating only an 83% establishment rate and 20% drop rate. Voice quality was also questionable, depending highly on the user's location and sometimes being described as "slurred, drunken-sounding." Anecdotal testimony also reveals customers, including the wife of an Iridium executive and NATO personnel, had extensive trouble with the system in real world conditions. Plaintiffs cite a number of internal documents and testimony that call establishment rates were lower than the reported ideal condition numbers reported by Motorola and Iridium.
The parties also dispute whether Iridium and Motorola accurately stated the number of handsets that would (or could) be produced. From the outset, there appears to have been problems with the Kyocera handsets, but by late October 1998, Iridium released a statement that substantial progress had been made by Kyocera and that it expected 4,800 satellite-only and 9,400 multi-mode handsets to be available in November. Iridium also stated on November 1, 1998, that Motorola and Kyocera together would produce a total of 100,000 phones by the end of that year. Motorola contends that by December 17, 1998, it had shipped 23,000 handset units and its production levels were at 1,000 handsets a day. By the end of 1998, Motorola had produced and shipped over 35,000 handset units and was shipping at a rate of 1,000 units a day.
Plaintiffs respond that by November 29, 1998, only 6,200 commercial handsets had been shipped by Motorola; that by December 7, 1998, 14,381 commercial units were manufactured and 11,158 were shipped; and that in early December, production levels reached approximately 1,000 units per day. Plaintiffs cite testimony, though, that the production level did not "stay at that level for very long because we were producing beyond what we had orders for fairly quickly after we achieved that level." Plaintiffs also refer to a December 17, 1998, internal memorandum circulated among Motorola executives that stated: "Production levels have reached 1,000 per day, 23,000 units have shipped, 11,000 are still with Brightpoint, and 12,000 units have gone on to the gateways, or service providers. There is suspicion that only 1,000 are in actual service." An internal Motorola memo dated June 29, 1999, stated that "prior to January 1, 1999, we had delivered 29,000 portable phones."
Finally, both sides dispute the number of Iridium subscribers and revenue projections. On October 22, 1998, it was reported to Iridium's board of directors that there were 10,000 reservations and that Iridium had over 97,000 qualified leads (defined as potential subscribers "who thoroughly understand the product and price and request a follow-up call"). Iridium's "Target Plan" projections for subscribers and revenue for the first quarter of 1999 were 151,000 satellite subscribers, $56 million in cumulative accrued revenue and $9 million in cumulative cash revenue. The gateway forecasts for the first quarter were 54,000 satellite subscribers, $4 million in cumulative cash revenue and $23 million in cumulative accrued revenue. Iridium managers and directors, however, believed that the gateway forecasts were inconsistent with Iridium's own forecasts and did not take into account important programs designed to help Iridium meet its Target Plan. Motorola maintains that Iridium and Motorola management believed that Iridium would meet its first quarter 1999 bank covenants.
Plaintiffs argue that, in reality, Iridium was not attracting the number of customers necessary to meet its obligations under the bank covenants. For example, by January 14, 1999, Motorola estimated there were between 4,000 and 8,000 actual subscribers. An internal memo dated January 22, 1999, states there were 3,393 paying subscribers by January 20, 1999. Another memo dated February 16, 1999, distributed among Motorola executives, stated there were 6,272 subscribers as of February 15, 1999. On March 2, 1999, Staiano, in a presentation to the Iridium board of directors, explained that as of February 26, 1999, there were only 6,400 subscribers, and admitted that cumulative revenue was falling short of the March 31, 1999, targets and covenants.
Iridium ultimately failed to meet its covenants. Internal memos show that by the summer of 1999, Iridium admitted that "[t]he decision to begin commercial service without sufficient beta testing was driven by financial and not marketing urgency" and that "[t]he premature launch was a mistake." The failure of Iridium to adequately test its system "damaged Iridium's credibility in the marketplace and poisoned relations with several key service partners who felt that they were given a poorly functioning service for sale in a highly discriminating market." Thus, Plaintiffs have provided evidence that even Iridium believed that the system did not, at the very least, live up to its customers' expectations.
A. Summary Judgment Standard
A moving party is entitled to summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). A party who moves for summary judgment bears the burden of showing that there is no genuine issue of material fact. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986). "The inquiry performed is the threshold inquiry of determining whether . . . there are any genuine factual issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Wiley v. Glassman, 511 F.3d 151, 155 (D.C. Cir. 2007) (quoting Anderson, 477 U.S. at 250).
When considering a motion for summary judgment, a court must scrutinize the evidence in the light most favorable to the nonmoving party, drawing "all reasonable inferences in favor of the nonmoving party." Id.But, to establish a genuine issue of fact sufficient to warrant trial, the nonmoving party "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). Instead, the nonmoving party bears the burden of setting forth specific facts showing there is a genuine issue for trial. Anderson, 477 U.S. at 248.
B. Plaintiffs' Partial Summary Judgment Based on Collateral Estoppel
For the third time, Plaintiffs request that Motorola be precluded from challenging certain facts based on collateral estoppel. The facts Plaintiffs wish to preclude Motorola from relitigating were found in Chase Manhattan Bank v. Motorola, Inc., 184 F. Supp. 2d 384 (S.D.N.Y. 2002), and include:
1. "The projections of the Iridium Gateway companies showed clearly that Iridium inevitably would be in Default under the Credit Agreement." Id. at 390, ¶ 33(a).
2. "Iridium had no basis as of the date it issued the Certificate to believe that it would achieve Cumulative Adjusted Accrued Revenues by February 28, 1999 of $25 million, or that it would be able to satisfy the Financial Covenants as of March 31, 1999." Id., ¶ 31.
3. "Although Iridium proposed a 'Gateway Rev-Up Project' to boost sales and the Gateways' projections, Iridium knew that actual revenue and subscriber results as of February 10, 1999 were far below the targets provided by the Credit Agreement and that the Rev-Up Project could not make up for the deficiency in time." Id., ¶ 33 (b).
4. "When Iridium issued its Certificate on February 11, 1999, it had only 17 days before it was required to achieve, as of February 28, 1999, Cumulative Adjusted Revenues of $25 million. As previously discussed, Iridium knew, at the time of its Certificate, that it could not achieve those revenues. Similarly, at the time it issued the Certificate, Iridium knew that it could not achieve the March 31, 1999 Financial Covenants." Id. at 392-93, ¶ 40 (citations to record omitted).
5. "[A]t the time it issued the Certificate [on February 11, 1999], Iridium knew that it had not maintained, and could not maintain, the Iridium System consistent with the Financial Projections set for March 31, 1999." Id. at 393, ¶ 41.
6. "Iridium failed to generate sufficient revenue to satisfy either the Financial Targets set for February 28, 1999 or the Financial Covenants set for March 31, 1999." Id., ¶ 43.
7. "Iridium launched its commercial service on November 1, 1998, before all components of the system had been proved and before it was ready for full commercial launch." Id. at 386, ¶ 6.
8. "The lack of roaming partners rendered the land-based roaming infrastructure of the Iridium System ...