The opinion of the court was delivered by: John D. Bates United States District Judge
This is a civil action brought by the Securities and Exchange Commission ("SEC") against Richard May alleging that he violated various securities laws while an executive at Centerpulse Limited. The SEC's complaint also contains counts against two of May's Centerpulse colleagues, Urs Kamber and Stephan Husi, both of whom have since consented to final judgment in favor of the SEC. Now before the Court is May's motion for summary judgment. For the reasons described below, the motion will be granted in part and denied in part.
At all times relevant to the complaint, May was a group vice president of the U.S. subsidiary of Centerpulse Limited, a Swiss medical technology company. May SOF ¶¶ 1, 9 and SEC Resp. at 1, 4.*fn1 May functioned as the chief financial officer of Centerpulse's U.S. group of companies. SEC Stat. of Add. Mat. Facts ¶ 1. Centerpulse manufactured, among other things, hip and knee implants used in reconstructive surgeries. In the late 1990s or early in 2000, Centerpulse learned that some of its implants were defective and attempted to fix (or "reprocess") them. But by late 2000, it began recalling the defective implants. May SOF ¶¶ 16-17 and SEC Resp. at 6. Patients who had received the original defective implants were forced to undergo "revision surgeries," and patients who had received reprocessed implants were forced to undergo "reprocessed revision surgeries." May SOF ¶ 18 and SEC Resp. at 6.
Lawsuits against Centerpulse were soon commenced as a result of the defects. A class action filed by affected patients was consolidated in the District Court for the Northern District of Ohio, and a settlement agreement was approved by the court on May 8, 2002. May SOF ¶ 26 and SEC Resp. at 9. The settlement agreement established a trust, which provided compensation for up to 4000 plaintiffs who had undergone revision surgeries and 64 plaintiffs who had undergone reprocessed revision surgeries. May SOF ¶ 27 and SEC Resp. at 9. Centerpulse was required to pay 50 percent of the cost of any revision surgeries in excess of 4000 and 100 percent for any reprocessed revision surgeries in excess of 64. May SOF ¶¶ 28-29 and SEC Resp. at 9-10.
Centerpulse was represented by an attorney named Richard Scruggs to settle the class action. May SOF ¶ 91 and SEC Resp. at 25. The company agreed to pay Scruggs a $5 million fee, plus $20 million (in Centerpulse stock) should he achieve a satisfactory result. May SOF ¶ 92 and SEC Resp. at 25. By the time the settlement agreement was finalized, Centerpulse's stock price had soared and Scruggs claimed he was entitled to a payment of substantially more than $20 million. May SOF ¶ 94 and SEC Resp. at 25. In late summer or early fall 2002, Kamber, Centerpulse's chief financial officer, told May that Scruggs would receive two additional payments of $10 million and $15 million on October 1, 2002 and November 4, 2002, respectively. May SOF ¶ 100 and SEC Resp. at 27. The parties dispute whether those payments were subject to any contingencies. See id. May executed the payments as scheduled, and Centerpulse accrued the additional payments in 4Q02.*fn2 The SEC alleges that failure to accrue the $25 million in 3Q02 violated the securities laws. See Compl. ¶¶ 98(a), (h); 100; 108; 110-12; 114-15.
Centerpulse created a "recall reserve" to account for its potential liability related to the revision and reprocessed revision surgeries. May SOF ¶ 19 and SEC Resp. at 7. In mid-2002, the recall reserve was $873 million, which Centerpulse's auditors -- PricewaterhouseCoopers ("PwC") -- determined was reasonable. May SOF ¶ 35 and SEC Resp. at 11. On February 18, 2003, May, along with other Centerpulse executives, signed a representation letter to PwC. The letter stated that the $873 million reserve remained adequate to cover liabilities related to the recall. May Mem. App. Tab 9 at 4-5.*fn3 On April 25, 2003, Centerpulse filed its Form 20-F for 2002. Id. Tab 16. The company again did not revise the recall reserve. See id. Tab 16 at 6, 69-70. The SEC alleges that the failure to revise the recall reserve in the representation letter and the Form 20-F violated Generally Accepted Accounting Principles ("GAAP") and hence violated certain provisions of the U.S. securities laws. According to the SEC, the recall reserve was understated for three reasons.
In July 2002, Centerpulse discovered that one of its internal databases, which the company relied upon to estimate the expected number of revision surgeries, erroneously did not include 125 surgeries. May SOF ¶ 36 and SEC Resp. at 12. The precise impact of the error is disputed, but in October 2002 Centerpulse and plaintiffs' class action counsel agreed that the company would pay an additional $10 million into the settlement trust to account for the miscounts. May SOF ¶ 41 and SEC Resp. at 12. The court overseeing the settlement rejected this amount as too low, and instead proposed a $25 million increase. May SOF ¶ 42 and SEC Resp. at 13. Centerpulse's counsel, David Wise, persuaded the court to wait until the number of revision surgeries exceeded 4000 before fixing the amount of the increase. May SOF ¶ 43 and SEC Resp. at 13. May analyzed the potential impact of the miscounts on the recall reserve and proposed increasing it by $10 million, but ultimately elected to exclude any provision regarding the miscounts for year-end 2002. May SOF ¶¶ 44-45 and SEC Resp. at 13-14. The SEC alleges that the recall reserve was understated by $10 million because of the miscounts issue. See Compl. ¶¶ 98(e), (h); 100; 102-03; 108; 110-12; 114-15.
Following the settlement agreement, certain plaintiffs opted out of the class. In mid-2002, potential liability because of those plaintiffs was accounted for in the recall reserve. May SOF ¶ 82 and SEC Resp. at 22. The company then persuaded some of the plaintiffs to opt back into the class. In exchange for a payment of an agreed-upon amount, the plaintiffs would opt back in, seek maximum benefits under the settlement agreement, and pay any benefits received back to Centerpulse. Id. The benefits under the settlement agreement would not only include a $206,000 standard payment, but also payments from an Extraordinary Injury Fund ("EIF"), which was also part of the recall reserve. May SOF ¶¶ 81, 83 and SEC Resp. at 22-23. In January 2003, May calculated that the plaintiffs opting back into the class would pay back $5.4 million to the EIF, and hence credited $5.4 million to the recall reserve. May SOF ¶¶ 88-89 and SEC Resp. at 23-24. According to the SEC, the recall reserve was inflated by $5.4 million because of the EIF credit issue. See Compl. ¶¶ 98(f), (h); 100; 102-03; 108; 110-12; 114-15.
III. Reprocessed Revisions Issue
In February 2003, another medical technology company, Smith & Nephew, considered purchasing Centerpulse. May SOF ¶ 62 and SEC Resp. at 18. Smith & Nephew estimated that the company faced an additional $300 million liability because of the revision and reprocessed revision surgeries. May SOF ¶ 63 and SEC Resp. at 18. To address Smith & Nephew's concerns, Centerpulse made a presentation on February 20, 2003, which estimated that it faced 148 reprocessed revision surgeries. May SOF ¶ 69 and SEC Resp. at 19. May had previously estimated that the company faced only 109 reprocessed revisions in calculating the recall reserve. May informed Kamber, among others, that the recall reserve should be increased by $8.3 million if the company believed that it faced 148 reprocessed revision surgeries. May SOF ¶ 69 and SEC Resp. at 19-20. Despite May's concerns, Centerpulse did not revise the recall reserve for year-end 2002, and the SEC avers that the recall reserve was thereby understated by $8.3 million.*fn4 See Compl. ¶¶ 98(e), (h); 100; 102-03; 108; 110-12; 114-15.
Summary judgment is appropriate when the pleadings and the evidence demonstrate that "there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). The party seeking summary judgment bears the initial responsibility of demonstrating the absence of a genuine dispute of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The moving party may successfully support its motion by identifying those portions of "the pleadings, the discovery and disclosure materials on file, and any affidavits" which it believes demonstrate the absence of a genuine issue of material fact. Fed. R. Civ. P. 56(c); see Celotex, 477 U.S. at 323.
In determining whether there exists a genuine issue of material fact sufficient to preclude summary judgment, the court must regard the non-movant's statements as true and accept all evidence and make all inferences in the non-movant's favor. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). A non-moving party, however, must establish more than the "mere existence of a scintilla of evidence" in support of its position. Id. at 252. By pointing to the absence of evidence proffered by the non-moving party, a moving party may succeed on summary judgment. Celotex, 477 U.S. at 322. "If the evidence is merely colorable, or is not significantly probative, summary judgment may be granted." Anderson, 477 U.S. at 249-50 (citations omitted). Summary judgment is appropriate if the non-movant fails to offer "evidence on which the jury could reasonably find for the [non-movant]." Id. at 252.
The SEC claims that May violated three aspects of the U.S. securities laws. First, the SEC claims that May was a primary violator of, and aided and abetted violations of, § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5, 17 C.F.R. § 240.10b-5 (collectively, "Antifraud Provisions"). Next, the SEC contends that May violated, and aided and abetted violations of, § 13(b)(5) of the Exchange Act, 15 U.S.C. § 78m(b)(5), and Rule 13b2-1, 17 C.F.R. § 240.13b2-1 (collectively, ...