United States District Court, District of Columbia
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
Herbert Michael Semler, Securities & Exchange Commission, Washington, DC, for Plaintiff.
Gregory T. Lawrence, Hannah W. Kon, Conti Fenn & Lawrence, LLC, Baltimore, MD, for Defendants.
JAMES E. BOASBERG, District Judge.
Though little remembered now, InPhonic was once the largest online retailer of cell phones and related services in the United States. In this civil-enforcement action, the Securities and Exchange Commission alleges that a senior vice president of InPhonic, Defendant Len Familant, and the president of an InPhonic supplier, Defendant Paul Greene, ran a scheme to conceal InPhonic's deteriorating financial state: Greene directed his employees to issue unearned memos of credit to InPhonic, which used the sham credits to pad its financial reports, and then, acting through Familant, repaid Greene's company through a stream of hidden disbursements that ranged from inflated contract prices to outlays for fictitious repairs. According to the SEC, Familant and Greene's scheme violated Sections 10(b) and 13 of the Securities Exchange Act of 1934, along with an array of associated SEC regulations. This Court, with Familant's consent, previously entered final judgment against him alone. Greene has now moved to dismiss the Complaint for failure to state a claim or, in the alternative, for pre-discovery summary judgment. Because the Court disagrees with Greene's legal contentions, it will deny his Motion.
Because Greene's Motion is primarily a motion to dismiss, the Court draws the facts from the Complaint, assuming them to be true at this stage.
A. Factual Background
InPhonic, Inc. sold wireless service plans, cell phones, and accessories over the Internet. See Compl., ¶ 11. Its stock was publicly traded on the NASDAQ stock market, and by 2005 its annual revenue topped $300 million. See id.; InPhonic, Inc., Annual Report (Form 10-K) at 30 (June 1, 2007), available at http:// www. sec. gov/ edgar. shtml.
Len Familant served as InPhonic's Senior Vice President of Procurement and InPhonic's Senior Vice President of Supply Chain. See Compl., ¶ 9. He reported to InPhonic's CEO and other senior executives. See id. As his titles suggest, Familant oversaw purchasing decisions and maintained relationships with vendors. See id.
One such vendor was America's Premiere Corp., which was wholly owned and controlled by President Paul Greene. See id., ¶¶ 10, 12. APC repaired cell phones and distributed cell phones and equipment. See id., ¶ 12. APC's largest customer was InPhonic. See id., ¶ 13. In that customer relationship, Greene dealt with Familant. See id., ¶ 14.
According to the Complaint, Familant and Greene carried out their alleged scheme between October 2005 and November 2007. In broad strokes, APC (through Greene) would award credit to InPhonic based on an invented reason, and then InPhonic (through Familant) would gradually repay APC by sending small payments for similarly bogus reasons. InPhonic accountants, in the dark as to the arrangement, would record the credits as reductions to expenses, thus inflating the company's performance. Now filling in the details of this sketch:
Familant would first ask APC to give InPhonic a particular amount of credit.
See id., ¶¶ 15, 19, 21, 23. An APC employee, at Greene's direction, would comply, sending Familant a memo stating that APC owed InPhonic the requested amount of credit. See id., ¶¶ 16, 19, 26. The credit memo would give a fake reason for the credit, such as defective components, repairs, or billing errors. See id., ¶¶ 16, 21, 28. For example, the first October 2005 credit memo (backdated to September 2005) declared that InPhonic had $400,525 in credit with APC in connection with defective batteries, housings, LCDs, and chargers. See id., ¶ 28.
Familant would then find ways for InPhonic to repay the credit. For example, APC would send (and InPhonic would pay) invoices for repairs that had never happened. See id., ¶¶ 23, 30, 33. Or InPhonic would buy goods and services from APC at marked-up prices. See id., ¶¶ 15, 19, 25, 30, 32-33, 35. Or InPhonic would send APC functioning phones, characterize them as beyond repair, and allow APC to resell the phones to other customers. See id., ¶ 25.
Realizing the goal of this arrangement, InPhonic accountants would record the APC credits as reductions to expenses. See id., ¶¶ 22, 41. InPhonic's financial statements filed with the SEC reflected this false accounting. See id., ¶¶ 42-46. Credit from APC, however, did not in fact reduce actual or expected cash outlays by InPhonic because each credit would have to be repaid; every $1 in credit from APC was offset by a new $1 in obligation to APC, so overall InPhonic was in the same position. See id., ¶ 41. In other words, while present expenses may have appeared rosier to Wall Street, the bill would eventually come due. For the time being at least, InPhonic accountants— indeed, everyone at InPhonic besides Familant— seem to have been unaware that the credits were fabrications, offset by other obligations.
All told, APC issued 11 such credit memos to InPhonic between October 2005 and February 2007 for a total of $9.99 million. See id., ¶ 28. Those credits were recorded in the third quarter of 2005 and each quarter of 2006, inflating financial performance in each of those quarters. See id. Because of the APC credits, InPhonic released twenty-three erroneous reports or documents: six Forms 10-Q, six amended Forms 10-Q, two Forms 10-K, one amended Form 10-K, two Forms 8-K, and six EBITDA (earnings before interest, taxes, depreciation, and amortization) releases attached to Forms 8-K. See id., ¶¶ 43, 45-46.
The SEC estimates that the APC credit arrangement allowed InPhonic to understate its originally reported net losses as follows: in 2005 Q3, InPhonic reported a net loss of $5.0 million instead of $5.6 million; in 2006 Q1, $3.9 million instead of $4.4 million; in 2006 Q2, $5.3 million instead of $6.3 million; in 2006 Q3, $4.8 million instead of $6.0 million; and in 2006 Q4, $3.5 million instead of $7.8 million. See id., ¶ 42. Summing those four 2006 quarters, the originally reported net loss for 2006 ($17.5 million) was $7 million smaller than it should been ($24.5 million)— meaning that net losses would have been 40% higher than originally reported. See id. Because of other pervasive accounting errors unrelated to the APC credits, in June 2007 InPhonic restated its 2006 financial results, increasing its reported losses substantially. See id., ¶ 44. The APC arrangement was still hidden, so it continued to buoy InPhonic's reported results. See id. The SEC still estimates that the 2006 net loss reported in the restated results ($63.7 million) was $7 million smaller than it should have been ($70.7 million)— meaning that actual net losses
should have been 11% higher than restated. See id. The APC credits also overstated InPhonic's EBITDA figures. With the APC credits, InPhonic consistently reached its projected EBITDA in Q3 2005 and each quarter of 2006. See id., ¶ 46. Without the credits, InPhonic would have missed its EBITDA projection in each of those quarters. See id.
The allegations make clear that both Familant and Greene knew that their arrangement was illegal. An APC accountant warned Greene that billing for phony services was " fraud." Id., ¶ 24. Greene also told APC employees that the sham credits were the reason for InPhonic's positive results. See id., ¶ 29. An APC employee sent Familant and Greene a tracking sheet that showed, in October 2006, the total credits APC had issued and the total InPhonic had repaid in inflated bills and fake invoices. See id., ¶ 33. Greene told APC employees to vary the amount of the overcharges in the fake invoices and to avoid round numbers so as to evade detection. See id., ¶ 37. Familant told APC employees to send the invoices for fake work directly to him and to never put anything in writing. See id., ¶¶ 37-38.
As foreshadowed by its massive financial restatements, InPhonic was ailing by 2007. In November 2007, it ceased operations and sought bankruptcy protection, bringing the APC credit arrangement to a close. See id., ¶ 50. APC never fully recouped the credits. See id., ¶¶ 47-49.
B. Procedural Background
The SEC brought this civil-enforcement Complaint in January 2012 against Familant and Greene, setting out five causes of action. Familant consented to— and this Court entered— a final judgment that enjoined further violations, prohibited Familant from acting as an officer or director of any issuer of registered securities, and imposed a $50,000 civil penalty. See Final J. as to Def. Len A. Familant, Jan. 26, 2012.
Greene, however, is fighting the charges. He has now moved to dismiss the Complaint for failure to state a claim. In the alternative, and before full discovery, he has also moved for summary judgment. This Court allowed the SEC to respond to the Motion to Dismiss and the Motion for Summary Judgment separately so that it could obtain an expert to counter Greene's expert report. See Minute Order, May 18, 2012. In the interim, the Court stayed discovery. See Minute Order, July 10, 2012. Briefing on both matters having been completed, the issues are now ripe for decision.
II. Legal Standard
A. Motion to Dismiss
Under Federal Rule of Civil Procedure 12(b)(6), a court must dismiss a claim for relief when the complaint " fail[s] to state a claim upon which relief can be granted." In evaluating a motion to dismiss, the Court must " treat the complaint's factual allegations as true and must grant plaintiff the benefit of all inferences that can be derived from the facts alleged." Sparrow v. United Air Lines, Inc., 216 F.3d 1111, 1113 (D.C.Cir.2000) (citation and internal quotation marks omitted); see also Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). A court need not accept as true, however, " a legal conclusion couched as a factual allegation," nor an inference unsupported by the facts set forth in the complaint. Trudeau v. FTC, 456 F.3d 178, 193 (D.C.Cir.2006) (quoting Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986)). Although " detailed factual allegations" are not necessary to withstand a Rule 12(b)(6) motion,
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), " a complaint must contain sufficient factual matter, [if] accepted as true, to state a claim to relief that is plausible on its face." Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (internal quotation omitted). Though a plaintiff may survive a Rule 12(b)(6) motion even if " recovery is very remote and unlikely," the facts alleged in the complaint " must be enough to raise a right to relief above the speculative level." Twombly, 550 U.S. at 555-56, 127 S.Ct. 1955 (quoting Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974)).
A motion to dismiss under Rule 12(b)(6) must rely solely on matters within the pleadings, see Fed.R.Civ.P. 12(d), which includes statements adopted by reference as well as copies of written instruments joined as exhibits. See Fed.R.Civ.P. 10(c). Where the Court must consider " matters outside the pleadings" to reach its conclusion, a motion to dismiss " must be treated as one for summary judgment under Rule 56." Fed.R.Civ.P. 12(d); see also Yates v. District of Columbia, 324 F.3d 724, 725 (D.C.Cir.2003).
B. Motion for Summary Judgment
Summary judgment may be granted if " the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Holcomb v. Powell, 433 F.3d 889, 895 (D.C.Cir.2006). A fact is " material" if it is capable of affecting the substantive outcome of the litigation. See Liberty Lobby, 477 U.S. at 248, 106 S.Ct. 2505; Holcomb, 433 F.3d at 895. A dispute is " genuine" if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. See Scott v. Harris, 550 U.S. 372, 380, 127 S.Ct. 1769, 167 L.Ed.2d 686 (2007); Liberty Lobby, 477 U.S. at 248, 106 S.Ct. 2505; Holcomb, 433 F.3d at 895. " A party asserting that a fact cannot be or is genuinely disputed must support the assertion" by " citing to particular parts of materials in the record" or " showing that the materials cited do not establish the absence or presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact." Fed.R.Civ.P. 56(c)(1).
When a motion for summary judgment is under consideration, " [t]he evidence of the non-movant[s] is to be believed, and all justifiable inferences are to be drawn in [their] favor." Liberty Lobby, 477 U.S. at 255, 106 S.Ct. 2505; see also Mastro v. PEPCO, 447 F.3d 843, 850 (D.C.Cir.2006); Aka v. Wash. Hosp. Ctr., 156 F.3d 1284, 1288 (D.C.Cir.1998) ( en banc ). On a motion for summary judgment, the Court must " eschew making credibility determinations or weighing the evidence." Czekalski v. Peters, 475 F.3d 360, 363 (D.C.Cir.2007).
The nonmoving party's opposition, however, must consist of more than mere unsupported allegations or denials and must be supported by affidavits, declarations, or other competent evidence, setting forth specific facts showing that there is a genuine issue for trial. See Fed.R.Civ.P. 56(e); Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The nonmovant is required to provide evidence that would permit a reasonable jury to find in its favor. Laningham v. Navy, 813 F.2d 1236, 1242 (D.C.Cir.1987). If the nonmovant's ...