THOMAS DALBERTH, on behalf of himself and all others similarly situated, IBEW LOCAL 164 WELFARE FUND, on behalf of itself and all others similarly situated, ROBERT W. ROTEN, on behalf of himself and all others similarly situated, GEORGIA STANLEY, on behalf of herself and all others similarly situated, Plaintiffs - Appellants,
XEROX CORPORATION, BARRY ROMERIL, PAUL A. ALLAIRE, RICHARD THOMAN, Defendants - Appellees. [*]
Argued March 14, 2014
Appeal from a judgment of the United States District Court for the District of Connecticut (Alvin W. Thompson, J.) granting Defendants' motion for summary judgment on Plaintiffs' claims alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § § 78j(b) and 78t(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5 . Because we conclude that Xerox and its executive officers made sufficient disclosures regarding their worldwide restructuring initiative and their U.S.-based Customer Business Organization Reorganization, we affirm.
BRAD N. FRIEDMAN, Millberg LLP, New York, N.Y., Counsel for Plaintiff-Appellant IBEW Local 164 Welfare Fund.
Stanley D. Bernstein, Bernstein Leibhard LLP, New York, N.Y., Class Counsel and Counsel for Plaintiff-Appellant Robert W. Roten.
Mark Levine, Stull, Stull & Brody, New York, N.Y., Class Counsel and Counsel for Plaintiffs-Appellants Thomas Dalberth and Georgia Stanley, on behalf of themselves and all others similarly situated.
SANDRA C. GOLDSTEIN, Cravath, Swaine & Moore LLP, (J. Wesley Earnhardt, on the brief), New York, N.Y., for Defendant-Appellee Xerox Corporation.
Thomas D. Goldberg, Day Pitney LLP, Stamford, CT, for Defendant-Appellee G. Richard Thoman.
John A. Valentine, Wilmer Cutler Pickering Hale and Dorr LLP, Washington, D.C., for Defendants-Appellees Barry D. Romeril and Paul A. Allaire.
Alfred U. Pavlis, Finn Dixon & Herling LLP, Stamford, 13 CT, for Defendants-Appellees Barry D. Romeril and Paul A. 14 Allaire.
Before: JACOBS, POOLER, Circuit Judges, and REISS, District Judge.[**]
POOLER, Circuit Judge :
Named Plaintiffs and class representatives Thomas Dalberth, Robert Roten, Georgia Stanley, and the International Brotherhood of Electrical Workers Local 164 Welfare Fund (collectively, " Plaintiffs" ) appeal from an April 1, 2013 judgment and a March 29, 2013 ruling of the United States District Court for the District of Connecticut (Alvin W. Thompson, J.), granting summary judgment in favor of Xerox Corporation and executive officers Barry D. Romeril, Paul A. Allaire, and G. Richard Thoman (collectively, " Xerox" or " Defendants" ). In re Xerox Corp. Sec. Litig., 935 F.Supp.2d 448 (D. Conn. 2013) (" Xerox " ).
We consider here a situation where a corporation undertakes a large-scale, worldwide restructuring initiative, which was itself comprised of multiple smaller sub-initiatives, and address whether there is a genuine dispute of material fact with respect to the sufficiency of the corporation's disclosures regarding the progress of a single sub-initiative. Plaintiffs filed this class action in 1999 alleging that Xerox and executive officers Romeril, Allaire, and Thoman violated federal securities law by materially misrepresenting that Xerox's worldwide restructuring initiative was financially beneficial to the corporation, when, in fact, one specific component of the restructuring--the " Customer Business Organization Reorganization" --was causing significant and ongoing economic distress to the company. Because we conclude that there is no genuine dispute of material fact with respect to the sufficiency of Xerox's disclosures about the successes and failures of this component of its worldwide restructuring, we affirm the district court's grant of summary judgment in favor of Defendants.
This is a class-action lawsuit brought on behalf of all persons who purchased common stock from Xerox during the period from October 22, 1998 through October 7, 1999, alleging violations of the Securities Exchange Act of 1934 (the " Exchange Act" ). Plaintiffs bring their claims under Sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C. § § 78j(b) and 78t(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated by the Securities and Exchange Commission (" SEC" ) pursuant to Section 10(b) of the Exchange Act.
The actions giving rise to this lawsuit commenced as a result of Xerox taking on several initiatives in 1998 and 1999, when Xerox was attempting to make itself more competitive in the global market. During some or all of this time, Romeril was Xerox's Chief Financial Officer (" CFO" ); Allaire was Xerox's Chief Executive Officer (" CEO" ); and Thoman was Xerox's President and Chief Operating Officer (" COO" ). Thoman also served temporarily as CEO from 1999 to 2000. The three initiatives relevant to this lawsuit are:
1. the Worldwide Restructuring (" WWR" ), announced on April 7, 1998, which included 150 specific projects and was intended to be fully implemented in 2001;
2. the 1998 Customer Business Organization Reorganization (" CBO Reorganization" ), which was one of the 150 WWR initiatives and was focused primarily on improving and centralizing the support to Xerox's U.S.-based sales force, known as the North American Solutions Group (" NASG" ); and
3. the 1999 Sales Force Realignment (" 1999 SFR" ), announced on January 6, 1999, which was distinct from the WWR, and had a goal of realigning sales force territories from geography-based to industry-based selling.
As discussed in greater detail below, Plaintiffs contend that the problems that arose from the CBO Reorganization--which involved the closure of one of Xerox's four Customer Administrative Centers (" CACs" ) and the reorganization of the three remaining centers into Customer Business Centers (" CBCs" )--were insufficiently disclosed to the market.
The district court's opinion sets out in commendable detail the factual background in this case, with which we assume the parties' familiarity. See Xerox, 935 F.Supp.2d at 451-83. We set forth below primarily facts which are pertinent to the question of sufficient disclosure. This evidence is taken from the sizable summary judgment record, and is undisputed unless otherwise noted.
I. The Worldwide Restructuring Program
On April 7, 1998, Xerox announced the WWR, a company-wide restructuring program that had the goal of enhancing its competitive position and lowering costs overall. In Xerox's 1998 Form 10-K submission to the SEC, Xerox identified and described the following three " [k]ey initiatives" of the WWR:
1. Consolidation of 56 European customer support centers into one facility and implementing a shared services organization for order entry, invoicing, and other back-office and sales operations.
2. Streamlining manufacturing logistics, distribution and service operations. This will include centralizing U.S. parts depots and outsourcing storage and distribution.
3. Overhauling our internal processes and associated resources, including closing one of four geographically-organized U.S. customer administrative centers with the remaining three refocused by customer segment, enabling improved customer support at lower cost. [(the " CBO Reorganization" )]
App'x at 2756. The WWR also anticipated the elimination of an estimated 9,000 positions worldwide, to be accomplished through " voluntary reductions and layoffs." App'x at 390. Xerox estimated that once fully implemented, the pre-tax savings from the WWR would amount to approximately $1 billion annually.
The CBO Reorganization, listed as the third " key initiative" above, involved the elimination of approximately 550 positions, and was anticipated to cost about $30 million to implement and ultimately produce $45 million in annual savings. It primarily involved the closure of one of Xerox's four CACs, and the reorganization of the three remaining CACs into CBCs, located in Illinois, Texas, and Florida. As part of the CBO Reorganization, Xerox transferred the order entry function originally performed by Customer Business Representatives
(" CBRs" ) in its regional sales offices around the U.S. to the three CBCs. Employees at the CBCs required substantial training in order to take on these shifted responsibilities.
On October 22, 1998, Xerox issued a release reporting strong third quarter earnings for 1998, attributing the two-digit earnings per share increase in part to the " initial benefits from the worldwide restructuring program." App'x at 2198. Xerox also reported that in connection with the WWR, 1,700 employees had left the company during the third quarter, bringing the total number of positions eliminated thus far to 3,200. The release reminded the public that " [a]pproximately 9,000 jobs will be eliminated under the program, which is designed to enhance the company's competitive position and further align its cost structure with the demands of the digital world." App'x at 2199.
A. 1998 Internal Communications About the CBO Reorganization
As memorialized in Xerox's internal communications, the WWR, and also the CBO Reorganization specifically, contemplated and caused significant changes in staffing levels. To put it in Xerox's terms, " roughly 500 heads were captured" as a result of the CBO Reorganization. App'x at 3584. These shifts in staffing had effects on Xerox's operations throughout the United States.
By way of example, the accounting firm KPMG visited the Texas CAC on October 26 and 27, 1998, and reported several issues with the CBC transition, including that " [s]ales representatives are very unhappy with the lack of face to face interaction with the CBRs." App'x at 5025. Challenges with staffing changes and reductions, " due to the disruption created by the reduction in resources and the restructuring transition changes," App'x at 2295, were further described in an internal memorandum prepared by KPMG on the subject of billing quality dated November 6, 1998.
The November 6, 1998 KPMG memorandum specifically described the effects of the CBO Reorganization on bill processing, which included moving eighty percent of Xerox's accounts to new support locations: " [c]oincident with the closing and reorganization, . . . . very few tenured . . . order processing administrators relocated to the new CBCs, and . . . experienced CAC/CBC collection and billing administrators were re-assigned to order entry positions." App'x at 2296. The result of all of these shifts was that aproximately twenty percent of the billing support staff was comprised of completely new hires. The memorandum projected further deterioration in billing and invoicing prior to any significant improvements in those areas. App'x at 2295. In another internal memorandum sent to the Operations Committee on the same day, accounts receivable fund usage was described as " worse" than the prior year, with the " deterioration . . . largely driven by the reorganization of the customer administration centers in the U.S." App'x at 5032.
B. 1999 Internal Communications About the CBO Reorganization
In its internal communications throughout 1999, Xerox attempted to deal with the CBO Reorganization and its effects on operations. In April 1999, the president of the NASG, Thomas J. Dolan, submitted a memorandum to Romeril on the subject of " Second Quarter/Second Half" in response to Romeril's request for " key messages to the investment community." App'x at 705. Dolan noted that the profit plan shortfall " was attributable to poor sale activity level, a sale gross margin shortfall, weaker than expected Post Sale, and above plan
Service/Admin costs." App'x at 705. He also noted that " [w]e are currently addressing several cost related issues including . . . Admin resource add-back and bad debt flow through impact on our aging receivable." App'x at 706.
On July 1, 1999, an internal memorandum from Patrick J. Fulford, the vice president of the NASG Finance, described a " [s]tate of [e]mergency" for the NASG. App'x at 3376. This correspondence did not reference or identify the CBO Reorganization specifically, although the attached chart revealed low sales productivity and " Bad Debt." App'x at 3378. A July 22, 1999 internal presentation on the CBO Reorganization noted the " massive backlog" related to aged accounts receivable and billing errors, and noted that it was " [t]oo far too fast." App'x at 3397. A subsequent slide stated that " [w]e have a five alarm fire," and noted " major impact on customers and sales productivity." App'x at 3398. The presentation also cited problems with customer satisfaction; billing accuracy and timeliness; as well as employees under " severe duress." App'x at 3398.
An internal memorandum dated July 26, 1999 sent from a newly hired senior vice president of the NASG to CBO employees, acknowledged that there were some " serious issues" with which to contend. The memorandum stated that " we obviously have gone through a massive change in the last 12 months. We took a significant reduction in resources and lost substantial experience and tenure. . . . Senior management has acknowledged we went 'too far, too fast.'" App'x at 3488.
In a document titled " CBO Background Summary" created for a meeting in September 1999, the CBO Reorganization was described as having caused problems at the service level " immediately." Id. at 3584. Specifically, it identified Accounts Receivable (" A/R" ) and Days Sale Outstanding (" DSO" ) numbers as having increased, which meant that Xerox was not collecting on its bills as rapidly as it had in the past. See Xerox, 935 F.Supp. at 452-53. The " [r]oot [c]auses" of the problems were described as " lack of resources, loss of skills, and disruption," as well as the fact that Xerox had " lost hundreds of man-years of experience when we redeployed the highly experienced [CBRs] into other assignments . . . and hired many completely new people in the [CBCs]." App'x at 3584.
Later in 1999, Thoman and Romeril grappled with the effects of the CBO Reorganization within the larger context of the WWR. For example, a September 27, 1999 internal memorandum from Thoman to operations committee members, with the subject " Headcount Approval," warned that the company must be better in " control of manpower" given the company's expenditures, and he noted that " [a]s a result of our failure to strictly control resources, we have, in essence, spent much of the benefit of the restructuring action." App'x at 3608. On October 6, 1999, Romeril sent Thoman an internal memorandum with talking points in preparation for the phone-in meeting for preliminary 1999 third quarter results, and at point (10) of the memorandum Romeril asked: " [w]hat happened to restructuring benefits? If 1 they were real, they must have been spent, delayed or offset by deterioration elsewhere." App'x at 3612.
II. Xerox's Public Disclosures During the Class Period: October 22, 1998 through October 7, 1999
While Xerox's officers were drafting internal memoranda, presentations, and emails discussing how to fix the billing issues and the increased A/R and DSO numbers as a result of the CBO ...