Sec. & Exch. Comm'n v. Bardman

• Decision Date: 27 October 2016
• Docket Number: Case No. 16–cv–02023–JST
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Erik K. BARDMAN, et al., Defendants.
• Court: U.S. District Court — Northern District of California

216 F.Supp.3d 1041

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.Erik K. BARDMAN, et al., Defendants.

Case No. 16–cv–02023–JST

United States District Court, N.D. California.

Signed October 27, 2016

Paul W. Kisslinger, Kevin C. Lombardi, Patrick Reinhold Costello, U.S. Securities & Exchange Commission, Washington, DC, for Plaintiff.

Emily Victoria Griffen, Patrick David Robbins, Lisa M. Valenti–Jordan, Shearman & Sterling LLP, San Francisco, CA, William H. Kimball, Kane+Kimball LLP, Berkeley, CA, for Defendants.

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTIONS TO DISMISS

Re: ECF Nos. 16, 18

JON S. TIGAR, United States District Judge

Before the Court are Defendants' motions to dismiss. The Court will grant the motions in part and deny them in part.

I. BACKGROUND

A. Factual Background¹

Logitech International, S.A. is a manufacturer of computer accessories and other electronic equipment. ECF No. 1 ¶ 1. During the time relevant to the complaint, Defendant Erik K. Bardman was Logitech's Senior Vice President of Finance and Chief Financial Officer, and defendant Jennifer F. Wolf was its Acting Controller. Id.

In October 2010, Logitech launched a new product called "Revue." Id. Revue was a television set-top device that provided internet use and video streaming through Google user interface and software. Logitech originally priced Revue at $299, but that price was too high for the features Revue offered compared to competitive devices, and its sales suffered accordingly. Id. at ¶ 2; ECF No. 18 at 5. "Revue was projected to be a significant percentage of Logitech's sales revenue, and represented a new strategic direction for the company," but its "sales were 70 percent lower than internal projections by the fourth quarter of the 2011 fiscal year." ECF No. 1 ¶ 1. The product was a disappointment and led to a large financial loss for Logitech. Id. Plaintiff Securities and Exchange Commission ("SEC") alleges that, "[r]ather than ensure that Logitech accurately account for its problems, as they were required to do, Bardman and Wolf engaged in a scheme to materially inflate the operating income that Logitech reported to its investors in a late April 2011 earnings release, and in its annual report, or Form 10–K, filed with the Commission on May 27, 2011 for the fiscal year ended March 31, 2011." Id.

"Prior to launching Revue ... Logitech recorded the Revue [hundreds of thousands of] Revue units and [millions of dollars' worth of Revue] components as inventory within its financial statements. As a result, [they] were reflected as assets from which Logitech could derive future sales." Id. ¶ 17. But "[b]y late November 2010, sales and finance personnel, including senior executives" were discussing reducing the price of Revue. Id. ¶ 16. "Bardman and Wolf were aware that Logitech would have to record a ‘lower of cost or market’ (LCM) charge if the value of Revue inventory were less than its market value." Id.

In December 2010, "because of high inventory levels and weak sales," Logitech stopped manufacturing and shipping Revue and had on hand "approximately $11 million" worth of excess component parts. Id. ¶ 18. "[A]s early as January 2011, [Logitech] initiated a disposition plan for its Revue inventory and also decided to sell off its inventory of Revue components." ECF No. 19, at 2. Around January 5, 2011, "Logitech's Senior Vice–President of Operations" suggested to several executives that Logitech " ‘make all efforts to dispose of the components' " of Revue. Id. The Senior Vice–President thereafter "instructed the VP of Global Sourcing/Supplier Management to ‘sell all of the components we could.’ " Id. Management at Logitech also "informed the Board of Directors" in the "first half of January 2011" that Revue was selling poorly." Id. Still, "[o]n January 27, 2011, Logitech issued its earnings release for the third quarter of 2011, reporting strong results, increasing its guidance for 2011 annual revenue, and affirming its guidance for annual operating income in a range of $170 million–$180 million." ECF No. 1 ¶ 21. "Bardman and Wolf learned about the disposition plan [for the Revue product and components] in early February and subsequently learned that Revue components were worth a fraction of what Logitech had paid." Id. ¶ 22; ECF No. 19, at 2.

Around March 21, 2011, "Bardman informed the CEO that Logitech could avoid a charge by delaying or not making a decision about cutting the price of Revue." ECF No. 1 ¶ 24. Bardman wrote:

Obviously, these numbers can move around as it [sic] relates to levels of sell through between now and any firm decisions and we also have the option of continuing to run promos on the product and take the "hit" over time. My suggestion is that we use the Ops review discussions to make a firm decision on what we definitely want to decide between now and when we file the 10K at the end of May. Any firm decisions we make to lower price or to definitely not make a V2 before the end of May would pull some of this impact into Q4.

Id. The SEC alleges that "[a]s an experienced CFO, Bardman knew, was reckless in not knowing, or should have known that GAAP does not allow management to decide when it will take a charge—or to delay making a ‘decision ... to decide’ to achieve an accounting result." Id. ¶ 25. Around March 23, 2011, "a Logitech Finance employee sent Wolf a summary" highlighting "a total potential excess inventory of $19.4 million for Revue units and components that ‘should be reserved.’ " Id. ¶ 28. For reasons assertedly unrelated to Revue, Logitech announced on March 31, 2011 that it had "lowered its forecast of operating income to $140–150 million, causing an immediate 16 percent drop in the company's price share." Id. ¶¶ 1, 29. Due to that shortfall, "senior management, including Bardman and Wolf, were under substantial pressure to meet the lowered guidance," id. ¶ 1, i.e., to report income of at least $140–150 million. "Logitech's then-CEO characterized the guidance miss as a ‘disaster’ and informed Bardman and other senior executives that management had lost its credibility with the market." Id. ¶ 29.

The SEC alleges that while Logitech internally kept an "exposure list" to keep track of, as relevant here, potential exposures or charges, "Bardman and Wolf did not provide the exposure list to Logitech's independent auditor [or] discuss with the auditor the potential exposure for Revue," even though that list included "millions of dollars of ‘potential exposure’ related to Revue" in April 2011. Id. ¶ 30. Bardman and Wolf were aware of the list because they "met regularly to discuss the matters on [it]." Id. That same month, "during its fiscal year 2011 year-end financial close process, Logitech initially prepared an analysis indicating that no LCM charge was required for Revue finished goods inventory" and "failed to accurately address the value of the component inventory." Id. ¶ 31. "The audit team did not believe the analysis to be reasonable and spoke separately with Bardman and Wolf to discuss the importance of the assumptions in the analysis." Id.

Around "April 13, 2011, the audit team met with Bardman and Wolf. They told Bardman and Wolf that their LCM analysis must consider management's plans for future pricing." Id. ¶ 32. "Bardman and Wolf were aware at the time that the company was required to write down the value of its Revue inventory," and that same day, "Wolf emailed an ‘exposure list’ to Bardman." Id. ¶ 33. That list "included a $2.2 million ‘[e]stimated LCM adjustment’ for finished Revue units [,] a $10.8 million ‘[e]stimated inventory exposure with suppliers' for Revue component parts," and "a $1.4 million potential Revue exposure ‘for second price drop." Id. Everything but the estimated adjustment for the finished Revue units "had not yet been discussed with or flagged for Logitech's independent auditors." Id.

The next day, "Logitech sent a revised LCM analysis to the independent auditor" reflecting a planned price cut to $249, but not "the second planned price cut to $199, which was scheduled for the third quarter of 2012," nor "any write-down of the value of the excess component parts." Id. ¶ 34. The SEC alleges "Bardman and Wolf were not flagging items from the exposure list for the consideration of Logitech's independent auditors even though they had created or received the list only one day earlier." Id. An audit team member "informed Wolf" that "Logitech was also required to evaluate and ... record a write-down of that inventory." Id. ¶ 35. "Logitech's Regional Finance accountant contacted Wolf" and the VP–Global Sourcing about the excess components inventory, flagging the " ‘heated discussion’ with the independent auditor about Revue" and "asking [the VP] to determine the number or Revue units that could be built from the component inventory." Id. ¶ 36.

By "mid-April," Bardman and Wolf were forwarded a message from "the VP–Global Sourcing" that Logitech was "attempting to sell whatever could be sold," but " ‘[i]f we need to scrap [work-in-progress] and components, we should assume a recoverable value of zero.’ " Id. ¶ 27. "On April 17, 2011, the VP–Global Sourcing, informed ... Wolf that production of Revue had been stopped for months, and that ‘[a]s for components, I don't see a chance that we are ever going to build them into units, this is a far[-]fetched scenario that has never been formulated." Id. ¶ 37. He also explained that there had only been modest progress on reselling the component parts, and " ‘the easiest stuff to resell ... is moving at 40–50 cts on the dollar maximum. For the rest ... we should assume 25 cts on the dollar of recovery, the rest will be a hard loss.’ " Id. (emphasis in original). That same day, Wolf and Bardman are alleged to have engaged in an email exchange "about the potential exposure for Revue inventory if the VP–Global Sourcing was correct." Id. ¶ 38. While she "had no reasonable basis for assuming that the component parts would be...