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In re Weatherford International Securities Litigation

United States District Court, Second Circuit

May 28, 2013

IN RE WEATHERFORD INTERNATIONAL SECURITIES LITIGATION.

MEMORANDUM AND ORDER

JAMES C. FRANCIS, IV, Magistrate Judge.

The plaintiffs in this putative class action are investors who contend that Weatherford International Ltd. ("Weatherford" or the "Company") and certain of its officers made false and misleading statements in violation of the federal securities laws. The plaintiffs now move for an order compelling testimony from Weatherford pursuant to Rule 30(b)(6) of the Federal Rules of Civil Procedure. The motion is granted.

Background[1]

Weatherford is an oilfield service company. (Amended Complaint ("Am. Compl."), ¶ 5). Prior to 2007, the Company's effective income tax rate had been on the rise, from 22% in 2004, to 25% in 2005, to 26% in 2006. (Am. Compl., ¶ 7). Beginning in 2007 and continuing until 2011, however, Weatherford reported a sharply lower effective tax rate, which resulted in apparently higher earnings per share throughout this period. (Am. Compl., ¶ 7). According to the Amended Complaint, market analysts and investors were particularly interested in these reported tax rates. (Am. Compl., ¶¶ 73-76). The plaintiffs bought stock in Weatherford between April 25, 2007, and March 1, 2011 (the "Class Period"). (Am. Comp., ¶ 1).

On March 1, 2011, the Company announced that it would restate its earnings for 2007 through the third quarter of 2010 because it had identified "a material weakness in internal control over financial reporting for income taxes." (Am. Compl., ¶ 134 (quoting Weatherford Form 8-K)). Ultimately, Weatherford concluded that it had understated its tax expense for the period 2007-2010 by $500 million. (Am. Compl., ¶ 136). According to the plaintiffs, the Company's stock price fell 11% the day after the announcement.

The plaintiffs then brought suit, alleging that Weatherford, certain of its officers, and its auditors, Ernst & Young LLP ("Ernst & Young") had knowingly issued false statements concerning Weatherford's tax accounting and failed to state facts necessary to make the statements they made not misleading, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t, and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. The plaintiffs subsequently amended their complaint, and the defendants moved to dismiss the Amended Complaint on the ground, among others, that the plaintiffs had failed to allege scienter properly. The plaintiffs cross-moved for leave to supplement their pleadings to add information regarding Weatherford's March 2012 restatement of earnings in which it again revised its tax expenses upward throughout the Class Period.

The Honorable Lewis A. Kaplan, U.S.D.J. granted the motion to dismiss in part and denied it in part. He dismissed all claims against Ernst & Young. Dobina, 2012 WL 5458148, at *16. With respect to the Weatherford defendants, Judge Kaplan noted that the "plaintiff[s] allege[] two different kinds of false statements...: (1) those relating to the quality of Weatherford's internal controls and (2) those relating to the understated tax expense." Id. at *6 (footnote omitted). He dismissed the claims based on understatement of the tax expense, reasoning as follows:

The Court is required to consider "plausible, nonculpable explanations for the defendant's conduct" and, in order to sustain the complaint, must conclude that the inference of scienter is "at least as compelling as any opposing inference one could draw from the facts alleged." Here, the allegations of the [Amended Complaint] support the plausible inference that the Company made an error in its tax accounting treatment in 2007 that persisted on its books, compounding over time, and leading to incorrect financial reporting that propagated up to management. That is, it is a plausible inference that management's statements about the Company's tax expense were "the result of merely careless mistakes at the management level based on false information fed it from below." In the absence of any allegations of suspicious circumstances or of knowledge of facts that made the risk of such error obvious, the Court concludes that this nonculpable inference is more compelling than the inference proffered by [the plaintiffs]. Thus, the [Amended Complaint] fails adequately to allege scienter with regard to the understatement of tax expense.

Id. at *11 (footnotes omitted).

By contrast, Judge Kaplan sustained the allegations relating to statements made by Weatherford's chief executive officer, president, and chairman, Bernard Duroc-Danner, and its chief financial officer, Andrew Becnel, attesting to the quality of the Company's internal controls. As Judge Kaplan noted:

In every Form 10-Q and 10-K filed during the class period, certain defendants made statements regarding the effectiveness of Weatherford's internal controls. In particular, Duroc-Danner and Becnel individually certified that they were "responsible for establishing and maintaining disclosure controls and procedures... and internal control for financial reporting'" for Weatherford and have, among other things, "[d]esigned such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles'" and "disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors... [a]ll significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information.'" These attestations continued quarterly as late as November 1, 2010, in Weatherford's 10-Q for the third quarter of 2010.

Id. at *6 (alterations in original) (footnotes omitted) (Am. Compl. ¶¶ 141-145). Yet, the March 2011 restatement found material weakness in the internal controls, caused by "1) inadequate staffing and technical expertise within the company related to taxes, 2) ineffective review and approval practices relating to taxes, 3) inadequate processes to effectively reconcile income tax accounts and 4) inadequate controls over the preparation of quarterly tax provisions." Id. at *7 (internal quotation marks and footnote omitted). The Court went on to conclude that the plaintiffs had adequately alleged scienter as to this claim, based on the role of the individual defendants in establishing and maintaining the controls, the stark discrepancies between the 2011 restatement and the defendants' prior certifications, Mr. Becnel's alleged awareness during the Class Period of specific accounting deficiencies, and the importance of the tax expense issue to Weatherford's financial performance. Id. at *7-8.

At the conclusion of his opinion, Judge Kaplan denied the plaintiffs' motion to supplement their pleadings. In particular, he found that "the 2012 restatement appears to have increased the size of the losses, but changes nothing of substance with regard to the claims in this case." Id. at *16.

In March 2013, the plaintiffs served notice of a Rule 30(b)(6) deposition on Weatherford. (Lead Plaintiff's Notice of Deposition of Defendant Weatherford International Ltd. Pursuant to Fed.R.Civ.P. 30(b)(6), attached as Exh. 1 to Plaintiffs' Motion to Compel Testimony Pursuant to Federal Rule of Civil procedure 30(b)(6) ("Pl. Mot.")). Counsel conferred and exchanged correspondence in which it became clear that Weatherford intended to limit its testimony regarding any restatement of earnings to the March 2011 restatement, while the plaintiffs insisted that they be permitted to take testimony regarding the March 2012 restatement that Judge Kaplan referred to in his decision, as well as a ...


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