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Freedman v. Weatherford International Ltd.

United States District Court, Second Circuit

September 20, 2013

GLENN FREEDMAN, individually and on behalf of all others similarly situated, Plaintiff,
v.
WEATHERFORD INTERNATIONAL LTD., BERNARD J. DUROC-DANNER, and ANDREW P. BECNEL, Defendants.

Eric J. Belfi, Javier J. Bleichmar, Wilson Meeks, Danielle Stampley, LABATON SUCHAROW LLP, Attorneys for Lead Plaintiffs Anchorage Police & Fire Retirement System and Sacramento City Employees' Retirement System.

Peter A. Wald, Kevin H. Metz, Sarah A. Greenfield, LATHAM & WATKINS, LLP, Attorneys for Defendants.

MEMORANDUM OPINION

LWEIS A. KAPLAN, District Judge.

This is one of two cases pending before this Court regarding a series of earnings restatements issued by defendant Weatherford International, Ltd. ("Weatherford" or the "Company"), in connection with its accounting for tax expense. The first of these cases, Dobina v. Weatherford, [1] concerns allegations that defendants committed securities fraud through statements made from 2007 through 2010, prior to the first earnings restatement that the Company issued in March 2011. This Court granted in part and denied in part a motion to dismiss in that case. It concluded that plaintiffs there had failed to allege a strong inference of scienter with respect to Weatherford's 2007-2010 statements about its tax expense, but that they adequately had alleged scienter with respect to its 2007-2010 statements about the adequacy of its internal controls.

This case picks up where Dobina left off. Subsequent to the March 2011 restatement, the Company announced additional restatements in February and July 2012, respectively. Plaintiffs here allege that the Company falsely and fraudulently represented its tax expense beginning with the March 2011 restatement and continuing until the third restatement in July 2012.

The matter is before the Court on defendants' motion to dismiss. For the reasons set forth below, the motion is denied.

Facts

A. The First Restatement

As this Court discussed in more detail in Dobina, the Company from 2007 to 2010 regularly touted as one of its key competitive advantages its favorable effective tax rates, which it attributed to its refined international tax structure. The purportedly lower rates proved illusory, however. On March 1, 2011, the Company announced that it would file its 2010 Annual Report due on that day late, because it had identified a "material weakness in internal control over financial reporting for income taxes.'"[2] It stated:

"The Company's processes, procedures, and controls related to financial reporting were not effective to ensure that amounts related to current taxes payable, certain deferred tax assets and liabilities, reserves for uncertain tax positions, the current and deferred income tax expense and related footnote disclosures were accurate. Specifically, our processes and procedures were not designed to provide for adequate and timely identification and review of various income tax calculations, reconciliations, and related supporting documentation required to apply our accounting policies for income taxes in accordance with U.S. GAAP. The principal factors contributing to the material weakness were 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."[3]

In light of the identified internal control deficiencies, the March 1 statement asserted that the Company had conducted "additional testing" to identify "any material errors in our accounting for income taxes" and that it had "substantially completed the testing procedures."[4] It concluded that its prior statements had understated the Company's actual tax expense by approximately $500 million from 2007-2010.[5] The statement indicated that the Company expected to finalize its restatement by March 15, 2011.[6] It set forth also a "Remediation Plan, " indicating that the Company planned, inter alia, to redesign the tax accounting processes, hire additional experienced personnel, increase the frequency of reconciliations, and implement a quarterly review process.[7]

In a conference call the next day, Company officers including Duroc-Danner and Becnel added more detail to the March 1 statement. They explained that most of the understated expense derived from improperly reported tax-affecting inter-company transactions and claimed that the company had not erred in its payment of cash taxes, only in its accounting for tax expense.[8] When asked about whether the failure to file a timely 10-K would affect any debt covenants, Becnel stated that it would not but added, "We do need to be sure to file our 10-K before March 15 and at this point, we expect to do so.'"[9] The complaint alleges that, indeed, Weatherford's failure to file the report by March 15 would cause it to default on its debt.[10]

On March 8, 2011, Weatherford filed its Form 10-K, restating its earnings as anticipated and repeating many of the statements previously discussed.[11] On March 11, it provided more detail about the timing of its discovery of the material weakness in response to a Securities and Exchange Commission inquiry. The Company indicated that it first had discovered the material weakness on February 15, identified a $308 million error on February 20, and then identified another $192 million in errors over the ...


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