RULING ON MOTIONS FOR SEVERANCE
JANET ARTERTON, District Judge
Defendants Azikiwe [Doc. # 324] and Azibo [Doc. # 316] Aquart both seek to sever their trials and proceed independently of one another. In addition, Azikiwe moves to sever [Doc. # 321] Count Nine of the Third Superseding Indictment, and Azibo moves to sever [Doc. # 325] Count Ten of the operative Indictment. For the reasons that follow, the motions to sever parties are denied, and the motions to sever counts are granted.
Defendants' motions are directed at the Third Superseding Indictment [Doc. # 255[. The Government has since filed a Fourth Superseding Indictment [Doc. # 361]; there is no material difference for purpose of Defendants' motions, and the Court will therefore refer to the operative Fourth Superseding Indictment.
I. Background
In the Fourth Superseding Indictment (the "Indictment"), Defendants Azikiwe and Azibo Aquart, who are brothers, are charged with conspiracy to murder in aid of racketeering, in violation of 18 U.S.C. § 1959(a)(5) (Count One); the murders of Tina Johnson, James Reid, and Basil Williams in aid of racketeering, in violation of 18 U.S.C. §§ 2 and 1959(a)(1) (Counts Two, Three, and Four); the drug-related murders of Tina Johnson, James Reid, and Basil Williams, in violation of 18 U.S.C. § 2 and 21 U.S.C. § 848(e)(1)(A) (Counts Five, Six, and Seven); and conspiracy to possess with intent to distribute 50 grams or more of cocaine base in violation of 21 U.S.C. §§ 841(a)(1), 841(b)(1)(A)(iii), and 846 (Count Eight). Azikiwe is charged in Count Nine of the Indictment with possession with intent to distribute cocaine base, in violation of 21 U.S.C. §§ 841(a)(1) and 841(b)(1)(C), and Azibo is charged in Count Ten of the Indictment with possession of a firearm by a convicted felon, in violation of 18 U.S.C. §§ 922(g)(1) and 924(e)(1). The Government seeks the death penalty for both Defendants on the death-eligible counts and urges that one trial be held for both Defendants on all counts.
II. Severance of Defendants
A. Legal Standard
Rule 14(a)(1) of the Federal Rules of Criminal Procedure provides that "[i]f the joinder of offenses or defendants in an indictment, an information, or a consolidation for trial appears to prejudice a defendant or the government, the court may order separate trials of counts, sever the defendants' trials, or provide any other relief that justice requires." When co-defendants have been indicted together, "there is a preference in the federal system for joint trials" because they "promote efficiency and serve the interests of justice by avoiding the scandal and inequity of inconsistent verdicts." Zafiro v. United States, 506 U.S. 534, 537 (1993) (internal quotations omitted). Even when a joint trial would cause prejudice, severance is not required; rather, Rule 14 "leaves the tailoring of the relief to be granted, if any, to the district court's sound discretion." Id. at 538. Severance is only appropriate when "there is a serious risk that a joint trial would compromise a specific trial right of one of the defendants, or prevent the jury from making a reliable judgment about guilt or innocence." Id. at 539.
Given the presumption in favor of joinder, the Second Circuit has held that a defendant must establish a risk of prejudice that is "sufficiently severe to outweigh the judicial economy that would be realized by avoiding multiple lengthy trials." United States v. Walker, 142 F.3d 103, 110 (2d Cir. 1998). Among the factors to be weighed to determine prejudice are
(1) the number of defendants and the number of counts; (2) the complexity of the indictment; (3) the estimated length of the trial; (4) disparities in the degrees of involvement by defendants in the overall scheme; (5) possible conflict between various defense theories; and (6) prejudice resulting from evidence admissible as to some defendants, but not others.
United States v. Ramos, 346 F. Supp. 2d 567, 570 (S.D.N.Y. 2004) (citing
United States v. Gallo, 668 F. Supp. 736, 749 (E.D.N.Y. 1987)). While "none of these factors is dispositive, each is intended to provide guidance as to whether a jury will be capable of considering the evidence as to each defendant separately, independent of evidence against co-defendants."
Ramos, 346 F. Supp. 2d at 570 (citing
Gallo, 668 F. Supp. at 749).
There is a heightened need to consider the possibility of prejudice arising from joint trials in capital cases. United States v. Perez, 199 F. Supp. 2d 38, 44 (D. Conn. 2004); see also United States v. Lecco, No. 2:05-00107-01, 2009 U.S. Dist. LEXIS 79799, *8 (S.D. W.Va. Sept. 3, 2009) (noting "special impact presented by the capital nature of this prosecution"); However, the capital nature of a case alone does not compel severance. See, e.g., United States v. Taylor, 293 F. Supp. 2d 884, 891 (N.D. Ind. 2003) (denying severance of guilt-phase trial to defendants facing a joint trial against whom the Government sought death penalty, because those defendants failed to demonstrate the existence of mutually antagonistic defenses or prejudicial spillover that would justify severance of the guilt phase of the trial).
B. Discussion
1. Prejudicial Spillover
Both Defendants argue that the trial should be severed because of the possibility of prejudicial "spillover" of evidence. The "typical spillover claim is that evidence admissible against only one defendant is prejudicial to all defendants" and that individual trials would avoid that prejudice. United States v. DiNome, 954 F.2d 839, 843 (2d Cir. 1992). The only prejudicial evidence either Defendant specifically points to as both potentially admissible in a joint trial and prejudicial is Azibo's criminal history, which Azikiwe would seek to introduce under Federal Rule of Evidence 806 to attack the credibility of Azibo as the declarant of post-arrest statements that Defendants expect the Government to offer. Defendants maintain that Azibo's prior convictions could be offered by Azikiwe to impeach Azibo's credibility as to co-conspirator statements in a separate trial of Azikiwe, but would not be admissible in a separate trial of Azibo, except to prove the felon-in-possession count.
DiNome concluded that there was no prejudicial spillover in the prosecution of seven of nine co-defendants charged with conspiracy and racketeering violations because "the evidence in question is relevant to the RICO charges against all defendants and most probably would have been admitted even if defendants had been accorded individual trials." Id. at 844. However, two co-defendants charged with mail and wire fraud, and not charged with RICO violations, were prejudiced by evidence against their co-defendants "including vicious murders, loansharking, auto theft, pornography, and firearms trafficking," which was "irrelevant" to the charges against them. Id.
Rule 806 provides that "[w]hen a hearsay statement, or a statement defined in [Federal] Rule [of Evidence] 801(d)(2)(C), (D) or (E), has been admitted in evidence, the credibility of the declarant may be attacked, and if attacked, may be supported, by any evidence which would be admissible for those purposes if declarant had testified as a witness."
If Azibo and Azikiwe were tried separately, Azibo would not be a party-opponent in Azikiwe's trial, and the statements at issue would not be admissible under Rule 801(d)(2)(A), nor would they be admissible as statements made in furtherance of a conspiracy, as the Government acknowledges. Therefore, Azibo's criminal history would be inadmissible under Rule 806 in a separate trial for Azikiwe.
The post-arrest statements identified in support of Defendants' spillover claim are Azibo's statements that he had "nothing to do with the murders"; that he knew the residents — including victim Tina Johnson — of the apartment in which the murders were committed; that he was once in that apartment to give Tina five dollars; that he knew the victims were selling drugs from that apartment; and that he was "involved with drugs being sold out of the building at one time in the past." (Gov't's Resp. at 24-25.) Because these statements were not made by Azibo during the course of and in furtherance of the conspiracy, the Government intends to offer Azibo's statements under Rule 801(d)(2)(A) as admissions of a party-opponent.
Although Rule 806 does not explicitly refer to Rule 801(d)(2)(A), the Senate Judiciary Committee report on the proposed rules of evidence stated that "[t]he committee considered it unnecessary to include statements contained in Rule 801(d)(2)(A) and (B) — the statement by the party-opponent himself or the statement of which he has manifested his adoption — because the credibility of the party-opponent is always subject to an attack on his credibility." S. Rep. No. 1277, 93d Cong., 2d Sess. (1974). As such, courts have applied Rule 806 to permit impeachment of party-opponents who make statements admitted under Rule 801(d)(2)(A) even if they do not testify. See, e.g., United States v. Shay, 57 F.3d 126, 128 (1st Cir. 1995) (rejecting the Government's argument that testimony cannot be used to attack reliability of a non-testifying defendant's out-of-court statements admitted under Rule 801(d)(2)(A)); United States v. Botti, No. 3:08cr230 (CSH), 2010 WL 745043, *2 (D. Conn. Feb. 23, 2010) (holding that defendant was permitted to introduce evidence undermining his own credibility by cross examining government witnesses and calling his own witnesses on his propensity "to exaggeration and overstatement" following admission of his statements under Rule 801(d)(2)(A)).
In support of their argument that Azibo's statements warrant severance, Defendants rely on Perez, 299 F. Supp. 2d at 42, in which severance was granted for capital co-defendants who, if tried together, would have faced "an impossible dilemma" because the Government intended to introduce out-of-court statements defendant Gonzalez made in furtherance of a conspiracy that implicated defendant Perez, and Perez then would seek to introduce Gonzalez's otherwise-inadmissible criminal history to impeach Gonzalez's statements. The dilemma in Perez arose because "`either Mr. Gonzalez's right to a fair trial [would be] prejudiced because the jury hears otherwise impermissible and unfairly prejudicial evidence against him, or Mr. Perez's rights [would be] compromised because of his inability to fully challenge the credibility of the declarant.'" Id. at 42.
Although statements made by party-opponents and admitted under Rule 801(d)(2)(A) may be subject to impeachment under Rule 806, the proffered statements by Azibo would not be offered to establish the existence of a conspiracy and may be irrelevant to Azikiwe's liability in the alleged conspiracy. Therefore, based on the record currently before the Court, Azikiwe does not face the dilemma in Perez, since impeachment of Azibo's credibility as to his out-of-court statements by use of his criminal history may have little significance, if any, for Azikiwe's liability, in which case it would be unlikely to survive Rule 403's probative-prejudicial balancing. The Advisory Committee's Note on Rule 806 explains that "[t]he declarant of a hearsay statement which is admitted in evidence is in effect a witness. His credibility should in fairness be subject to impeachment and support as though he had in fact testified. See Rules 608 and 609," see United States v. Friedman, 854 F.2d 535, 569 (2d Cir. 1988), and Rule 609(a)(1) provides that "evidence that an accused has been convicted of such a crime shall be admitted if the court determines that the probative value of admitting this evidence outweighs its prejudicial effect to the accused" under Rule 403. Because whether impeaching the truthfulness of Azibo's post-arrest statements by his felony record is probative of Azikiwe's non-culpability remains unclear at this time, while it would be highly prejudicial to Azibo such that a Rule 403 balancing may not justify its admissibility in a joint trial, at this stage Azikiwe's impeachment interests related to Azibo's post-arrest statements — which neither reference Azikiwe nor establish the existence of the alleged conspiracy — do not justify severance.
The Government also represented at oral argument that one of its witnesses will testify about his discussion with Azibo in Azikiwe's presence, during which "Azibo talks about the fact that a woman in the building is stealing money from him, in other words selling drugs on his territory, and he wants [the witness's] assistance to deal with [that woman]." (Oral Arg. Tr. at 55:19-56:2.) Defendants have expressed no concern about this specific statement in their briefing or at oral argument. Nonetheless, while this alleged statement by Azibo may have implications for Azikiwe's role in the conspiracy, Azibo's criminal history would likely be inadmissible to impeach his credibility as its declarant in a joint trial or in separate trials. Azibo's statement at-issue contains both Azibo's stated belief that a woman was selling crack "on his territory," and his command that the witness "deal with" her. Neither component of Azibo's statement would be offered for the truth of the matter asserted. "Statements offered as evidence of commands or threats or rules directed to the witness" are not offered for the truth of the matter asserted therein and are not hearsay. United States v. Bellomo, 176 F.3d 580, 586 (2d Cir. 1999). Moreover, criminal history is admissible under Rule 609 only insofar as it "bear[s] on [a witness's] propensity to testify truthfully." H.R. Conf. Rep. No. 93-1597, 2d Sess., at 9 (1974), reprinted in 1974 U.S.C.C.A.N. 7098, 7103; see United States v. Estrada, 430 F.3d 606, 616 n. 3 (2d Cir. 2005). Because Azibo's statement is not offered for the truth of the matter asserted and requires no determination as to Azibo's character for truthfulness, any criminal history of Azibo that Azikiwe would seek to offer would likely be irrelevant and inadmissible.
Azibo and Azikiwe also contend that they will suffer "prejudicial spillover" because they are biological brothers who look alike, share similar and uncommon first and last names, are both members of a small Rastafarian sect, and both share a common Jamaican heritage, and therefore, the jury will unavoidably confuse them and conflate evidence of their respective conduct. Specifically, Azikiwe suggests that because jurors will see him and Azibo as different from themselves, yet like each other and "tightly bound to each other by birth, national origin, religion, and appearance, the jurors may infer that the brothers' actions . . . are also similar notwithstanding differences in the proof against them" (Azikiwe Mot. Sev. at 7) and the different roles they allegedly played in the conspiracy.
Although Defendants do share some physical characteristics and a common last name, the liability phase is expected to take three weeks, and so the jurors will have ample opportunity to effectuate the instructions — which the Court will give at the beginning and end of trial — to make separate determinations of what has been proved against each "defendant separately from the evidence presented against other defendants," which should be sufficient to mitigate potential prejudicial spillover. United States v. Diaz, 176 F. 3d 52, 103 (2d Cir. 1999) (citing United States v. Carson, 702 F.2d 351, 367 (2d Cir. 1983) ("a judge's instructions to the jury to assess each defendant separately supports a finding of no spillover prejudice.")). To rectify any confusion, from the outset, Azibo and Azikiwe, as well as all counsel, can each sit behind name placards during trial.
Given that an instructed jury will have ample means and opportunity to distinguish between Defendants and that Defendants point to no specific evidence that would be admissible in a joint trial against only one Defendant but prejudicial to the other, potential prejudicial spillover does not appear to warrant severance. 2. Mutually Antagonistic Defenses
i. Guilt phase
Azibo and Azikiwe also each contend that severance is necessary because they will employ mutually antagonistic defenses at trial, in effect implicating one another, by focusing respectively on Azikiwe being the older brother and Azibo's role as the head of the alleged Aquart criminal organization, the "Aquart Enterprise." At oral argument, counsel for Azikiwe characterized his client's (moral) dilemma as being "put in the position at a joint trial of either helping the government try to kill his brother or letting himself risk being killed by not defending the case the best way possible because the fact is the best way possible for him to defend this case is to accuse his brother . . . through the totality of the evidence." (Tr. at 36:19-37:1.) To defend Azikiwe most effectively, his counsel will have to cross-examine witnesses familiar with the Aquart Enterprise about Azibo Aquart's leadership role in the organization; "on the fact, if it turns out to be true, that he planned these murders"; and "on the fact that he has a record of beating people and striking people." (Tr. at 37:15-22.) Azibo's counsel maintains that the potential for their respective defenses to be antagonistic is exacerbated by the current absence of any potential witness who is "going to testify as to what happened inside" the room in which the murders were committed ( id. at 30:19-21), in light of which the role that DNA evidence plays becomes more critical. Five DNA samples were recovered from Tina Johnson's apartment; four samples could implicate either brother, and one strongly implicates Azibo but excludes Azikiwe. Each Defendant predicts that his co-Defendant will try to discredit the Government's DNA evidence as to him by arguing that his brother is the source, thus requiring the other brother to mount a similar defense in rebuttal. Azibo expects that Azikiwe will emphasize the DNA sample that heavily implicates Azibo and excludes him.
The Government's DNA evidence includes (1) swabbings containing DNA mixtures from duct tape recovered from the hands of victim Tina Johnson, which exclude neither Azibo nor Azikiwe as potential contributors (within the African-American population, one in 140 is estimated to fit within this potential pool); (2) two separate swabbings containing DNA mixtures from latex gloves that were found in the southwest bedroom in close proximity to two of the victims' bodies, which included Azibo and Azikiwe as potential contributors (within the African-American population, one in 400 is estimated to fit within this potential pool); (3) a swabbing containing DNA mixtures from a nylon stocking found in one of the bedrooms, which included Azikiwe as a potential contributor (within the African-American population, one in 1,000 is estimated to fit within this potential pool) and Azibo is not excluded as a potential contributor (within the African-American population, one in 220 is estimated to fit within this potential pool); (4) a swabbing containing a DNA mixture from a latex glove found in another bedroom where one victim's body was recovered, where Azibo and Azikiwe cannot be eliminated as minor contributors (within the African-American population, one in 180 is estimated to fit with Azibo and one in 80 is estimated to fit with Azikiwe); and (5) a DNA mixture from a swabbing of a fragment of a latex glove found in the living room of the apartment, which include Azibo as a potential contributor (within the African-American population, one in 79 million is estimated to fit within this potential pool).
While the Defendants' potentially competing strategies — emphasizing one another's respective familial roles and roles in the alleged criminal organization and focusing on indicia that the other Defendant is the source of DNA — may contradict and cast blame on one another, those defenses do not amount to mutually antagonistic defenses, as that concept has been defined by the Second Circuit. Defenses are only sufficiently "mutually antagonistic" to justify severance when "accepting one defense `requires that the jury must of necessity convict a second defendant.'" United States v. Yousef, 327 F.3d 56, 151 (2d Cir. 2003) (quoting United States v. Cardascia, 951 F.2d 474, 484 (2d Cir. 2003)) (emphasis in Yousef); see also Zafiro, 506 U.S. at 538 (describing mutually antagonistic defenses as being "irreconcilable").
In United States v. Salameh, the Second Circuit determined that defendants did not employ mutually antagonist defenses when, during summation, defendant Salameh's counsel abandoned his trial strategy of disputing that a bomb had caused the explosion at issue and instead argued that Salameh was "nothing more than an unwitting dupe of [defendant] Yousef, who had masterminded the bombing," even though the other defendants, including Abouhalima, continued to maintain that the bomb was not responsible for the explosion. 152 F.3d 88, 116 (2d Cir. 1998). Because "Salameh and Abouhalima both claimed to be innocent of the charges and neither's claim of innocence required the jury to find the other guilty," the defenses were not mutually antagonistic. Id. In In re Terrorist Bombings of United States Embassies in East Africa, 552 F.3d 93, 132 (2d Cir. 2008), the Second Circuit determined that defenses were not mutually antagonistic and did not require severance, where death-eligible defendants otherwise unaffiliated with al Qaeda attempted at trial to rationalize the targeting of the American embassies and elicited evidence about the violent nature of al Qaeda's aims in an effort to emphasize their lesser culpability, in contrast to non-death-eligible defendant El-Hage, who testified that bombing the embassies was "unjustifiable on any ground" but also explained that he had associated with al Qaeda members without being aware of al Qaeda's "violent and/or anti-American agenda." These defenses were not mutually antagonistic because there was "no conflict between El-Hage's rejection of the objective of the embassy bombings and his codefendants' attempts to justify the bombings, or between El-Hage's claim of ignorance about al Qaeda's activities and his co-defendants' emphasis that al Qaeda "did not hesitate to engage in conduct that would kill the maximum number of victims, regardless of the civilian casualties suffered as a result." Id.
By contrast, in United States v. Serpoosh, 919 F.2d 835 (2d Cir. 1990), defenses were deemed mutually antagonistic where an undercover buy of narcotics was arranged, and the two defendants in a black Buick in which the buy took place each testified with highly contradictory stories at trial, each claiming to be an "unknowing dupe" of the other and accusing the other of being the heroin-trafficker, such that "at least one of the two men in the black Buick must have been participating in a conspiracy to sell heroin." Id. at 837. Similarly, in United States v. Green, 324 F. Supp. 2d 311, 324-25 (D. Mass. 2004), severance was granted in a death-penalty case for co-defendants charged with murdering a victim who died from a single gunshot wound. The court reasoned that each defendant would attempt to lay the blame on the other for the single fatal bullet, creating a "zero sum game," in which the jury could not rationally acquit both. What may distinguish Salameh and In re Terrorist Bombings from Serpoosh and Green is that in the former two cases, the jury could have acquitted any number of defendants despite their contradictory defenses, while in the latter, the defenses mounted required the conviction of at least one defendant.
Even if Azibo and Azikiwe emphasize the other's culpability, highlighting DNA evidence, familial relations, or roles in the Aquart Enterprise, those anticipated defenses do not require the jury to acquit one and convict the other. A jury could determine that the crime-scene DNA implicates either, neither, or both defendants. Azikiwe's evidence that Azibo was the leader of the Aquart Enterprise, was more involved in its criminal operations, and had violent tendencies does not necessarily require Azibo's conviction if Azikiwe is acquitted. The brothers believe that as of now, no witness will testify definitively as to what happened in the room where the victims were found, so unlike Serpoosh, neither Defendant will testify as to having witnessed the other commit the crimes charged; they will both plead innocence and seek to generate doubt, including by advancing other explanations as to what may have happened. And unlike in Green — in which ballistics evidence implied there was only one shooter, and each defendant was expected to testify that the other defendant was that shooter — in this case there could have been more than one murderer because there were three victims, and they were beaten to death. In fact, the Government represents that it intends to introduce other evidence that implicates both brothers at the crime scene, so that despite the depiction of Azibo as the leader and mastermind of the criminal enterprise, Azikiwe could still be convicted as a criminal participant.
In sum, Azibo and Azikiwe anticipate engaging in blame-shifting and fingerpointing, which does not constitute mutually antagonistic defenses. United States v. Casamento, 887 F. 2d 1141, 1153-54 (2d Cir. 1989), cert. denied, 493 U.S. 1081 (1990) ("Mere `fingerpointing' does not require severance."); see also United States v. Villegas, 899 F.2d 1324, 1346 (2d Cir. 1990) ("The mere fact that codefendants seek to place the blame on each other is not the sort of antagonism that requires a severance.") (citing Casamento, 887 F.2d at 1154). Therefore, their motions to sever liability will be denied.
ii. Penalty phase
Defendants also argue that conflicting mitigation defenses will arise if there is a penalty phase, which will deprive each of the individualized determination to which he is entitled. Azibo fears that Azikiwe will argue as mitigation that he is less culpable than Azibo. Under 18 U.S.C. § 3592(a)(3) it is a mitigating factor if "[t]he defendant is punishable as a principal in the offense, which was committed by another, but the defendant's participation was relatively minor, regardless of whether the participation was so minor as to constitute a defense to the charge." Azibo reasons that "[i]f the jury were to find that Azikiwe is a minor participant and therefore not deserving of death, then the opposite must be true for Azibo Aquart: he is a major participant and therefore more deserving of death." (Azibo Mot. Sev. at 11.)
Under the Eighth Amendment, a capital defendant is entitled to an " individualized determination" of his penalty, based on his character "and the circumstances of the crime" Zant v. Stephens, 462 U.S. 862, 879 (1983) (emphasis in original, internal citations omitted), because "[i]n assuring that only those most deserving of a capital sentence actually receive it, society benefits from allowing a defendant to make the best case in mitigation possible to a fact finder who has under consideration that defendant alone." Lecco, 2009 U.S. Dist. LEXIS 79799 at *11. In Green, 324 F. Supp. 2d at 326, the court, granting severance, observed the potential for each defendant to "argue for mitigation by shifting blame to the other, or by arguing that they are not as worthy of death as their codefendant," where one defendant could blame his youthful criminal conduct on the older and more mature co-defendant.
However, even if severance is not required for the liability trial, the individualized determination objective can be largely achieved by holding sequential, separate penalty trials for each defendant. In United States v. Catalan-Roman, 376 F. Supp. 2d 96, 107 (D. P.R. 2005), the court denied severance for the guilt phase of the trial but granted severance for the penalty phase because one defendant's mitigation defense consisted of substantial evidence of his remorse and religiousness, while the Government intended to press the other defendant's lack of remorse as an aggravator. The court explained that "[t]he risk that the `loser' in the jury's final equation received a death sentence while the other was spared, was unacceptable." Id. at 108.
Here, if a joint penalty trial were held, Azibo could be at risk that the jury's conclusion of Azikiwe's lesser culpability, based on his not being the leader of the Aquart Enterprise, could support a jury's conclusion that Azibo is comparatively more deserving of the death penalty. Further, since both Defendants plan to call family members to describe each brother's respective but different positive traits, they worry that as a result the jury may discredit all such testimony, or may conclude that the absence of similar testimony for the other means that those positive attributes are missing in him. All counsel agreed at oral argument that Azibo is at greater risk of being deemed deserving of death from unfavorable comparisons between the two co-Defendants. This risk will be largely mitigated by holding separate penalty trials, with Azibo's to be held first. He then will receive a fully individualized penalty trial without comparison to Azikiwe. While Azikiwe's attorneys worry that Azibo's penalty trial will set a course over which they have no control, to their client's detriment, this is amorphous speculation and the Court is satisfied that sequential penalty trials — to which the Government has no objection — will adequately protect each Defendant's interests in individualized determinations. Azikiwe is not prejudiced by his second-in-time position: if the jury imposes the death penalty on Azibo, the more culpable, sparing the less culpable would seem more likely. If the death penalty was not imposed on Azibo, the likelihood of a similar outcome for Azikiwe would seem high.
Azikiwe's counsel expressed concern at oral argument that overlapping mitigation witnesses may be unavailable or unwilling to testify a second time or that as repeat witnesses, they may not be credited the second time. However, the logistical problem of witness unavailability would exist even if there were two separate trials. Given that those witnesses presumably will be describing different aspects of a different person, and with repeated instructions on the required individualized consideration, a wholly separate trial does not seem warranted.
Defense counsel alternatively proposes a two-jury trial in which the guilt-phase evidence is jointly presented but the guilt and penalty determinations are made by entirely separate juries. While an inviting proposal, the practicalities of courtroom size and configuration preclude it as a viable alternative.
III. Severance of Count Nine
Azikiwe moves to sever Count Nine of the Indictment, in which he is charged with possession with intent to distribute cocaine base. Azikiwe argues that introduction of evidence of drugs seized from him nine months after the charged conspiracy ended will cause him "extreme" prejudice because this is the only evidence of drugs that would be introduced against him, and "the [G]overnment's pursuit of the death penalty against Defendant [Azikiwe] Aquart is based on his alleged participation in the drug conspiracy." (Azikiwe's Mot. Sever Count Nine [Doc. # 321] at 2.) The Government responds that joinder of Count Nine was proper under Federal Rule of Criminal Procedure 8(a) and the admission of the drugs seized on May 24, 2006 to prove Count Nine would not be unduly prejudicial because it would be admissible as Federal Rule of Evidence 404(b) bad-acts evidence, even if Count Nine were severed.
Federal Rule of Criminal Procedure 8(a) provides that
The indictment or information may charge a defendant in separate counts with 2 or more offenses if the offenses charged — whether felonies or misdemeanors or both — are of the same or similar character, or are based on the same act or transaction, or are connected with or constitute parts of a common scheme or plan.
"Even though distinct offenses have been properly joined under Rule 8, the court may order separate trials or grant a severance under Rule 14 if it appears that the defendant is prejudiced by the joinder." United States v. Sampson, 385 F.3d 183, 190 (2d Cir. 2004) (quoting United States v. Werner, 620 F.2d 922, 928 (2d Cir. 1980)). However, "[i]n order to prevail, the defendant must show not simply some prejudice but substantial prejudice." Id. (quoting Werner, 620 F.2d at 928, emphasis in Sampson).
Joinder here appears appropriate under Rule 8(a), because Azikiwe's alleged possession of the drugs seized on May 24, 2006 was "of the same or similar character" to the underlying conspiracy to possess with intent to distribute 50 grams or more of cocaine base, charged in Count Eight. See, e.g., United States v. Smith, 348 Fed. App'x 636, 638 (2d Cir. 2009) (affirming joinder and denial of severance of drug possession and distribution conspiracy and substantive counts from 2005 with drug possession and distribution conspiracy and related murder counts from 2002). However, because the May 24, 2006 drugs are outside the conspiracy time-frame and are the only physical evidence of narcotics linked to Azikiwe that the Government intends to introduce, there is substantial potential that a jury will improperly conclude a connection between those drugs and the charged drug conspiracy, and further that this improperly-concluded connection may not be completely cured by instructions to consider the charges separately.
The Government argues that even if Count Nine were severed, the evidence of the May 24th seizure of drugs would be admissible under Rule 404(b) to show "proof of motive, opportunity, intent, preparation, plan, knowledge, identity, or absence of mistake or accident," such that joinder of Count Nine would not be substantially prejudicial, and severance would not be warranted.
Rule 404(b) "generally prohibits the introduction of evidence of extrinsic acts that might adversely reflect on the actor's character, unless that evidence bears upon a relevant issue in the case such as motive, opportunity, or knowledge." Huddleston v. United States, 485 U.S. 681, 685 (1988). The trial court must ensure that the evidence is: (1) advanced for a proper purpose; (2) relevant to the crime for which the defendant is on trial; (3) more probative than prejudicial; and (4) if requested, admitted with a limiting instruction to the jury. E.g., United States v. McCallum, 484 F.3d 471, 475 (2d Cir. 2009). The Second Circuit has adopted an "inclusionary approach" to Rule 404(b), allowing evidence "for any purpose other than to show a defendant's criminal propensity," United States v. Brand, 467 F.3d 179, 196 (2d Cir. 2006) (quoting United States v. Garcia, 291 F.3d 127, 136 (2d Cir. 2002)), so long as the evidence is "relevant and satisfies the probative-prejudice balancing test of Rule 403," United States v. Inserra, 34 F.3d 83, 89 (2d Cir. 1994).
The Government maintains that the May 24, 2006 drug evidence would be probative of Azikiwe's "intent and knowledge" in the earlier-in-time charged conspiracy, but does not explain how this subsequent conduct could be probative Azikiwe's earlier state of mind. In fact, at this stage, it is not known whether Azikiwe's intent and knowledge will actually be a specifically disputed issue at trial, and "[o]ther crimes evidence is inadmissible to prove intent when that issue is not really in dispute." United States v. Manafzadeh, 592 F.2d 81, 87 (2d Cir. 1979). Given inadequate explanation of the probative value of this drug evidence, and how it would outweigh its obvious prejudicial impact, its admissibility under Rule 404(b) remains in doubt and Azikiwe's Motion to Sever Count Nine will be granted.
The summary order in Smith, relied on by the Government, is inapposite here because the issue of whether "proof relating to earlier drug conspiracies may be admissible to show knowledge and intent" (Gov't's Resp. [Doc. # 375] at 29) was not addressed in Smith. Rather, the Second Circuit determined that the 2005 conduct at issue was of the same or similar character and therefore properly joined to charges of 2002 conduct, and severance was not required because "the jury was instructed to consider the charges separately, and the evidence was such that the jury could easily do so." Smith, 348 F. App'x at 638.
IV. Severance of Count Ten
Azibo moves to sever Count Ten, which charges him with possession of a firearm by a convicted felon based on firearms traced back to him. He argues that joinder of this count is unduly prejudicial because the jury would not otherwise learn of his prior felony convictions.
In United States v. Jones, 16 F.3d 487 (2d Cir. 1994), the Second Circuit vacated the conviction on the felon-in-possession count and remanded the case with direction to dismiss that count of the indictment on remand because of the "inevitable spillover effect occasioned by proof of Jones's tawdry record," which had been aggravated by the judge's repeated reference to the prior felony conviction during the jury instructions. The Second Circuit was explicitly concerned that proof of the defendant's criminal past had unfairly prejudiced him on counts as to which it was inadmissible. Id. at 492. Jones has been cited for the proposition that evidence of prior felony convictions can be unfairly prejudicial and for its recognition that "[c]ourts have held that joinder of an ex felon count with other charges requires either severance, bifurcation, or some other effective ameliorative measure." Id. at 492; see, e.g., United States v. Gonzalez, No. 08cr363 (BSJ), 2009 WL 1834317, *4 (S.D.N.Y. June 24, 2009) (severing felon-in-possession count "in order to avoid any prejudice that would attach to the admission of [the defendants'] prior convictions" and absent objection by the Government); United States v. Brown, No. 94cr631 (AGS), 1995 WL 236718, *10 (S.D.N.Y. Apr. 24, 2005) (same); United States v. Boone, No. 02cr1185 (RPP), 2003 WL 21488021, *3 (S.D.N.Y. June 27, 2003) (same).
Because of the substantial potential for prejudice that exists in admitting evidence that a defendant has committed a prior felony, even in "sanitized" form, or even using a sequenced special verdict on existence of a prior felony conviction to follow the general liability trial, particularly in a capital case, Azibo's motion to sever Count Ten is granted.
V. Conclusion
For the reasons given above, Defendants' [Doc. ## 316, 324] Motions to Sever from one another are DENIED but any penalty phases will be individualized sequential proceedings; Azikiwe's Motion to Sever Count Nine [Doc. # 321] is GRANTED; and Azibo'sMotion to Sever Count Ten [Doc. # 325] is GRANTED.
IT IS SO ORDERED.
dismissing complaint under the PSLRA regarding where declarations failed to set forth facts "that strongly imply that [corporate officer] made the statement in deliberate or
conscious disregard of information that the transaction would not immediately add earnings per share to [company's] results"). The Court accordingly grants summary judgment for Defendants on this claim.
D. April 18, 2001 Guidance
On April 18, 2001, Tellabs revised its full year 2001 guidance downward. Plaintiffs conclusorily assert that, "[t]here is also much proof from which a jury could find Notebaert and the others knew, by April 18, 2001, even 9% to 12% growth could not be achieved." (R. 329-1, Defs.' Opp'n, p. 49). Although Defendants addressed the April 18, 2001 guidance in their opening memorandum, Plaintiffs fail to cite to any evidence in the record or develop any arguments regarding the April 18, 2001 guidance in their response in opposition to the motion for summary judgment. (R. 329-1, Pls.' Opp'n, pp. 49-52.) Plaintiffs have accordingly waived this argument and the Court grants summary judgment for Defendants on this claim. See Bryant v. Gardner, 587 F. Supp. 2d 951, 965 (N.D. Ill. 2008) (citing De La Rama v. Ill. Dep't of Human Servs., 541 F.3d 681, 688 (7th Cir 2008) ("[u]nsupported and undeveloped arguments are waived")).
Moreover, even if the Court were to reach the merits of this claim, Plaintiffs have not created a genuine issue of material fact with respect to the April 18, 2001 guidance. The uncontroverted evidence shows that Tellabs's downward revised April 18, 2001 guidance was the result of an in-depth, "bottoms-up" review of its forecasts. Internal documents subsequent to the March 7, 2001 announcement demonstrate that, as in prior quarters, Tellabs continued to track its sales and revenue. The record also shows that Tellabs was aware of the slowing economy and that revenue was not developing as Tellabs expected during this time period. Indeed, while overall sales for the Optical Networking Group increased in first quarter 2001, demand for the TITAN 5500 remained low. In fact, while sales forecasts in mid-March 2001 demonstrated that Tellabs could potentially meet the first quarter forecast, there was some evidence in early 2001 that customer demand was decreasing. Moreover, at the end of the quarter, customers requested that Tellabs push out the shipping dates of approximately $83 million in firm or expected orders for the TITAN 5500 that were originally scheduled to ship in the quarter. The record shows that as first quarter 2001 closed, it became apparent to Tellabs that although revenue had increased significantly year-over-year from first quarter 2000, Tellabs would not meet the March 7, 2001 revised guidance.
Once again, however, prior to issuing revised guidance, Pfefferle and other members of the forecasting organization assembled an updated revenue plan. The uncontroverted evidence shows that the team based the updated revenue plan on information gathered from the sales team, product houses, and other operating units, all of which provided the most up-to-date information on expected demand based on what they were hearing from Tellabs's customers. As a result of this updated forecast review, and subsequent to approval from each of the officers who were direct reports to the CEO, the finance department recommended to Notebaert that Tellabs revise its public guidance to a range of $3.6 to $3.7 billion for 2001. Plaintiffs have not identified any evidence to contradict Notebaert's testimony that, during the time leading up to April 18, 2001, no one expressed any doubts to him that Tellabs would not achieve its revised guidance or that the revised guidance was based on incorrect or faulty information.
In short, even if the Court were to reach the merits of Plaintiffs' claim with respect to Tellabs's April 18, 2001 guidance, Plaintiffs have failed to present any evidence that Notebaert had any actual knowledge that the downward revised guidance was false or misleading. See In re Bristol-Myers Squibb Sec. Litig., 2005 WL 2007004, 2005 U.S. Dist. LEXIS 18448, *60. Once again, Plaintiffs have pointed to no evidence in the record to indicate that Notebaert knew that his reliance on the "bottoms-up" forecasting would lead to misleading or false guidance. Indeed, unlike Weiss, 1999 WL 985141, 1999 U.S. Dist. LEXIS 17026, Defendants have presented significant evidence regarding Notebaert's consideration of available and relevant information prior to the issuance of the April 18, 2001 guidance. Given that Plaintiffs have not demonstrated that the information on which Notebaert based his projections was false or unreliable, Plaintiffs have not presented sufficient evidence from which a reasonable jury could conclude that Notebaert knew that the April 18, 2001 guidance was false. This is an independent reason to grant summary judgment regarding Plaintiffs' claim in this respect.
III. TITAN 5500 Statements
Defendants also seek summary judgment on Plaintiffs' claims that Defendants made three false or misleading statements regarding the TITAN 5500 during the Class Period. "In a typical § 10(b) private action, a plaintiff must prove (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Pugh, 521 F.3d at 693. In Makor II, the Seventh Circuit explained:
Rule 10b-5 forbids a company or an individual "to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading."
17 C.F.R. § 240.10b-5(b). But liability requires proof of the defendant's "scienter," which is to say proof that he either
knew the statement was false or was reckless in disregarding a substantial risk that it was false. A popular
definition of recklessness in this context is "an extreme departure from the standards of ordinary care . . . to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it." This looks like two criteria — knowledge of the risk and how big the risk is — but as a practical matter it is only one because knowledge is inferable from gravity ("the danger was either known to the defendant or so obvious that the defendant must have been aware of it"). When the facts known to a person place him on notice of a risk, he cannot ignore the facts and plead ignorance of the risk.
Makor II, 513 F.3d at 704 (internal citations omitted).
Pursuant to the Seventh Circuit's ruling in Makor I, 437 F.3d 597, 603, the following three statements remain at issue:
1. Brian Jackman's March 7, 2001 response to an analyst's question about whether Tellabs was seeing "any weakness" with the TITAN 5500: "We are not. We are still seeing the product continue to maintain its growth rate and is still experiencing strong acceptance. We are in the process of turning [up] a large number of frames we shipped in the fourth quarter and this is continuing to grow as usual. I think that is pretty much on plan." (R. 336-1, ¶ 84.)
2. Notebaert and Birck's March 14, 2010 response in Tellabs's Annual Report to a question about whether the TITAN 5500 "had peaked": "No . . . it's still going strong." (R. 324-1, ¶ 43.)
3. Notebaert's statement on the April 6, 2001 conference call: "[E]verything we hear from the customers indicates that our end user demand for services continues to grow."
Id.
Defendants argue that the first statement is not actionable and further that none of the three statements were false or misleading or made with the requisite scienter. The Court will address the disputed elements of Plaintiffs' § 10(b) claims with respect to each of the three statements in turn.
A. March 7, 2001 Statement that the TITAN 5550 Was Not Experiencing Any Weakness
Plaintiffs first challenge Jackman's response during a March 7, 2001 teleconference to an analyst's question about whether Tellabs was seeing "any weakness" with the TITAN 5500 that: "We are not. We are still seeing the product continue to maintain its growth rate and is still experiencing strong acceptance." (R. 336-1, ¶ 84.) In their briefs, the parties dispute whether this statement is actionable. In their Complaint, Plaintiffs inaccurately attributed this statement to Notebaert. After the appeal of the Court's ruling on the initial motion to dismiss, the Seventh Circuit held that Plaintiffs had sufficiently pled their § 10(b) claim in this context because Plaintiffs had sufficiently alleged that Notebaert acted with the requisite scienter. Makor II, 513 F.3d at 711. Plaintiffs now assert that they can proceed with their claim based on this statement by Jackman because: (i) the statement is attributable to Notebaert as a primary violator because the teleconference was a "joint official presentation on behalf of Tellabs by Notebaert, Jackman, and Ryan," and/or (ii) Tellabs is liable for official statements made by Jackman. (R. 329-1, Pls. Opp'n, p. 42.) Plaintiffs, however, cannot proceed with this claim as attributable to Notebaert because the Supreme Court has made clear that aiding and abetting is not actionable under Rule 10b-5. As Defendants concede, however, Plaintiffs can proceed against Tellabs for official statements made by Jackman. The Court will address Plaintiffs' arguments regarding liability for the March 7, 2001 statement in turn.
1. Notebaert's Liability for Jackman's March 7, 2001 Statement
With regard to the claim against Notebaert based on Jackman's statement, the Third Circuit's recent opinion in Schiff is persuasive. In that ruling, the Third Circuit highlighted that numerous courts have concluded that in order for an officer to be liable for an official statement, the statement must have been actually made by that officer:
[T]he plain language of § 10(b) and corresponding Rule 10b-5 do not contemplate the general failure to rectify misstatements of others.
See, e.g., SEC v. Tambone, 597 F.3d 436, [445] (1st Cir. 2010) (en banc) ("Reading `make' to include the use of a false statement by one other than the maker would extend primary liability beyond
the scope of conduct prohibited by the text of Rule 10b-5(b).");
Wright v. Ernst Young LLP, 152 F.3d 169, 175 (2d Cir. 1998) ("[A] secondary actor cannot incur primary liability under [§ 10(b)] for a statement not attributed to that actor at the time of its dissemination.");
Shapiro, 123 F.3d at 720, 123 F.3d at 720 ("[A] defendant must actually make a false or misleading statement in order to be held liable under Section 10(b). Anything short of such conduct is merely aiding and abetting, and no matter how substantial that aid may be, it is not enough to trigger liability under Section 10(b).");
see also In re Rent-Way Sec. Litig., 209 F. Supp. 2d 493, 504 (W.D. Pa. 2002) (relying on the text of Rule 10b-5(b) to conclude that a defendant that "was not the maker of the . . . statements . . . cannot be responsible for omissions in statements that it itself did not make");
Wafra Leasing Corp. v. Prime Capital Corp., 192 F. Supp. 2d 852, 867 (N.D. Ill. 2002) (explaining that 10b-5(b)'s text "demonstrates that a defendant is liable only for those omissions that make his own statements misleading") (emphasis in original)). Moreover, in
Central Bank, the Supreme Court determined that the scope of § 10(b) does not encompass aiding and abetting liability because the statute "prohibits only the making of a material misstatement (or omission) or the commission of a manipulative act."
Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 177, 114 S.ct 1439,
128 L. Ed. 2d 119 (1994). Consequently, incorporating into the statute an obligation to rectify others' misstatements (though lacking even the aiding and abetting
mens rea requirement of the initial statement made) would be illogical in light of the Supreme Court's holding.
U.S. v. Schiff, 602 F.3d 152, 167 (3rd Cir. 2010).
The First Circuit's opinion in S.E.C. v. Tambone, 597 F.3d 436, 447 (1st Cir. 2010), is also instructive and consistent with the Supreme Court's holding in Central Bank, 511 U.S. 164. In Tambone, the plaintiff SEC argued that individual defendants "made" false statements of material fact within the meaning of Rule 10b-5 by using prospectuses to sell mutual funds, allowing the prospectuses to be disseminated, and referring clients to them for information. Id. at 440. The First Circuit, however, found that the SEC's interpretation of the word "make" was in tension with the Supreme Court's holding in Central Bank and that a securities professional cannot be said to "make" a statement in violation of Rule 10b-5 by using statements to sell securities. The court noted that its ruling comported with the "the distinction between primary and secondary violators" made in Central Bank and that "[r]eading `make' to include the use of a
false statement by one other than the maker would extend primary liability beyond the scope of conduct prohibited by the text of Rule 10b-5(b)." Id. at 445-46. Specifically, the court held that, "[i]f Central Bank is to have any real meaning, a defendant must actually make a false or misleading statement in order to be held liable [as a primary violator] under section 10(b). Anything short of such conduct is merely aiding and abetting." Id. at 447 (citing Shapiro v. Cantor, 123 F.3d 717, 720 (2d Cir. 1997)); see also Boim v. Quranic Literacy Inst., 291 F.3d 1000, 1018 (7th Cir. 2002) (noting that the Supreme Court in Central Bank "found that the statute prohibited only the making of a material misstatement (or omission) or the commission of a manipulative act" and "[b]ecause the statute did not proscribe giving aid to a person who commits a manipulation or deceptive act, the Court declined to extend liability to aiders and abettors").
Conversely, Plaintiffs rely on In re SmarTalk Teleservices, Inc. Sec. Litig., 124 F.Supp.2d 527 (S.D. Ohio 2000). In that case, the plaintiffs alleged in their complaint that the four defendants "made numerous false statements in press releases and in conference calls with analysts during the relevant time frame." Id. at 543. The defendants argued that the plaintiffs did not allege which of the four defendants made the statements. Id. The court, however, concluded that "the [p]laintiffs' allegations are sufficient to put the alleged speakers on notice of the statements attributed to them." Id. The court also stated, in dicta and without citation to legal authority that, "[i]n any case, a high ranking company official cannot sit quietly at a conference with analysts, knowing that another official is making false statements and hope to escape liability for those statements. If nothing else, the former official is at fault for a material omission in failing to correct such statements in that context." Id. Plaintiffs also rely on Barrie v. Intervoice-Brite, Inc., in which the Fifth Circuit cited to the reasoning of In re SmarTalk and held:
Where it is pled that one defendant knowingly uttered a false statement and the other defendant knowingly failed to correct it, even if it is not alleged which defendant made the statement and which defendant did not correct it, the fraud is sufficiently pleaded as to each defendant. This is not inconsistent with the plain language of subsection (1) of
15 U.S.C. § 78u-4(b), and accords with common sense and the policy considerations underlying the heightened pleading requirements.
409 F.3d 653, 656 (5th Cir. 2005).
The First Circuit's detailed analysis in Tambone, 597 F.3d at 447, is more persuasive than the cases relied on by Plaintiffs for several reasons. First, the decisions in In re SmarTalk and Barrie held that the plaintiffs sufficiently pled their § 10(b) claims notwithstanding that the plaintiffs failed to attribute the relevant statements to a particular defendant. Indeed, neither court addressed the viability of such a claim past the pleading stage. As the Third Circuit recently recognized, Barrie and In re SmarTalk "dealt only with the heightened notice pleading standard for fraud in a civil case under the [PSLRA]" and concluded "that sufficient facts were pled with particularity in the complaint `to put the alleged speakers on notice of the statements attributed to them.'" Schiff, 602 F.3d at 163. More significantly, as the court in Tambone concluded, permitting Plaintiffs to proceed on a claim against Notebaert for a statement made by Jackman would be in tension with the Supreme Court's holding in Central Bank, 511 U.S. 164, and the plain language of § 10(b). Accordingly, Plaintiffs cannot proceed on their Section 10(b) claim that Notebaert is responsible for Jackman's alleged false and misleading statement.
2. Tellabs's Liability for Jackman's March 7, 2001 Statement
Plaintiffs also contend that Tellabs may be liable for the March 7, 2001 official statements that Jackman made on its behalf. At oral argument on the motion for summary judgment, counsel for Defendants withdrew their argument that a § 10(b) claim could not go forward against Tellabs on the basis of Jackman's statement and conceded that, pursuant to principles of agency law, if Jackman made the statement with scienter then Tellabs could be liable for the statement. Indeed, the Seventh Circuit has held that agency law applies in the context of a § 10(b) claim. See Makor I, 437 F.3d at 603 ("Since Notebaert was acting within the scope of his position as CEO, his alleged knowledge of the falsity of his statements can be imputed to the corporate entity Tellabs.") Considering the evidence in the light most favorable to Plaintiffs, there is a genuine issue of material fact regarding Jackman's March 7, 2001 statement in response to an analyst's question about whether Tellabs was seeing "any weakness" with the TITAN 5500 that: "We are not. We are still seeing the product continue to maintain its growth rate and is still experiencing strong acceptance." (R. 336-1, ¶ 84.)
The specific statement made by Jackman on March 7, 2001 subject to Plaintiffs' § 10(b) claim is different than the statements contained in Tellabs' March 7, 2001 forward-looking guidance.
Highlighting conflicting internal forecasts, financial summaries and forecast sanity checks, the parties dispute whether Jackman's March 7, 2001 was misleading. Jackman testified that he based the March 7, 2001 statement on the "bottoms-up" sales forecast that he received from the sales organization. At this time, Pfefferle and the forecasting organization were forecasting that Tellabs would achieve 30% growth in TITAN 5500 sales in first quarter 2001. Plaintiffs, however, assert that Jackman's statement was misleading because Jackman knew that demand for the TITAN 5500 was slowing. Indeed, the forecast sanity checks for the period leading up to March 7, 2001, which Jackman testified he regularly reviewed, showed that for eleven weeks in first quarter 2001 the percentage of TITAN 5500 sales yet to be booked for the quarter was greater than Tellabs's historical average. In addition, the monthly executive financial summary distributed in February, which Jackman recalled receiving, reported that monthly January results fell short of forecasts and that there were soft bookings of the TITAN 5500. The monthly executive financial summary also showed that bookings for the TITAN 5500 were at the lowest levels since July of 2000 and that sales had been slow for two periods. While Tellabs's forecasting group was not forecasting a decline in TITAN 5500 sales at this time, viewing the evidence known to Jackman relating to slow sales of the TITAN 5500 in the light most favorable to Plaintiffs, there is genuine question of material fact regarding whether, in light of this information, Jackman's March 7, 2001 statement was misleading. See, e.g, In re Bristol-Myers Squibb Sec. Litig., 2005 WL 2007004, 2005 U.S. Dist. LEXIS 18448, at *109-10 (D.N.J. Aug. 17, 2005) (holding that a jury could infer that defendants' statements identifying commonly reported side-effects associated with a new drug without mentioning a side effect that was the "subject of substantial attention and concern at [defendant]" were materially misleading).
B. March 14, 2010 Statement that the TITAN 5500 Business "Was Still Going Strong"
In Tellabs's Annual report, issued March 14, 2001, one of the questions that Tellabs responded to was: "Your core business is built on the TITAN 5500 — are you worried that this product has peaked?" Notebaert and Birck answered:
No. In 2000, TITAN 5500 revenues grew 56%, its best year so far. Although we introduced this product nearly 10 years ago, it's still going strong because we keep adding new capabilities so it can do more and more for our customers. For example, last year we introduced a new TITAN 5500 system with 50% more capacity — enough to handle 1 million simultaneous Internet sessions. Now customers want an even larger TITAN 5500 system. That's why we believe there are many years of life ahead for this highly successful product.
Id; R. 324-1, ¶ 43. Plaintiffs contend that in light of internal documents showing slow sales early in the quarter as compared to sales predicted by Tellabs's forecasts, the statement that sales were "still going strong" was misleading. Indeed, in a February 19, 2001 report to Birck, Notebaert acknowledged that sales of the TITAN 5550 had been very slow in the quarter. In addition, the monthly executive financial summary circulated on March 15, 2001 showed that bookings for the TITAN 5500 were at the lowest levels since July of 2000, and that sales had been slow for two periods. Moreover, the forecast sanity checks showed that for eleven weeks in first quarter 2001 the percentage of TITAN 5500 sales yet to be booked for the quarter was greater than Tellabs's historical average. Defendants maintain that the statement was not misleading because the question was focused on the TITAN 5500's potential for negative growth rate, and not whether sales were "going strong" relative to Tellabs's forecast. Pfefferle asserts in her affidavit that while sales of the TITAN 5500 were slower than hoped for in January, as of mid-February 2001, no one was forecasting a decline in TITAN 5500 sales in 2001 due to the January results alone.
While the Court agrees that it is important to consider the context of the answer, the fact that the question asked whether the product had "peaked" necessarily implicates both historical and future sales of the TITAN 5500. There is a genuine issue of material fact, however, as to how much information the question called for, and whether Notebaert acted with scienter in responding that the product was "still going strong." In other words, while the answer may have addressed the broader issue of whether the TITAN 5500 would see a negative growth rate, there is a question of material fact as to whether Defendants' failure to disclose recent slow sales of the TITAN 5500 rendered the answer misleading. See Kaufman v. Motorola, Inc., 1999 WL 688780, 1999 U.S. Dist. LEXIS 6303 (N.D. Ill. Apr. 7, 1999) (holding that, with respect to statements that the defendant was experiencing a significant increase in demand for its products, plaintiffs established a genuine issue of material fact because they presented "evidence tending to show that Motorola employees actually knew and were concerned about rising inventory levels at the time the 10-Q Form was submitted").
Indeed, the parties' contrary characterizations of the context of the question reaffirm that resolution of this issue is not proper at the summary judgment stage. Defendants assert that the question implicated "whether the company expected an absolute decline in sales going forward" and that the response "focused on the fact that sales continued to grow despite the product being ten years old." (R. 299-1, Defs.' Mot., p. 46.) Plaintiffs contend that the response was an "assurance[] as to the Company's then-current circumstances." (R. 329-1, Pls.' Opp'n, p. 47.) Indeed, Defendants' assertion that the question concerned "not whether sales of the TITAN 5500 were `going strong' relative to Tellabs' first quarter 2001 forecast, but rather whether they were `going strong' despite the fact that the TITAN 5000 was a ten-year old product" is not supported by the record. (R. 351-1, Defs.' Reply, p. 42.) Instead, given the somewhat ambiguous nature of the question, there is a material question of fact as to the extent of information that the answer to the question required in order not to be misleading.
Defendants' reliance on Backman v. Polaroid Corp., 910 F.2d 10, 16 (1st Cir. 1990), is not persuasive. In Backman, the plaintiffs challenged statements in the defendants' annual report as misleading because although the defendants disclosed that a particular product's effect on earnings was negative, the defendants did not disclose that the product was a "commercial failure." Id. at 16. The court stated that while a voluntary disclosure must be complete and accurate, "[t]his . . . does not mean that by revealing one fact about a product, one must reveal all others that, too, would be interesting, market-wise, but means only such others, if any, that are needed so that what was revealed would not be `so incomplete as to mislead.'" Id. "Disclosing that Polavision was being sold below cost was not misleading by reason of not saying how much below. Nor was it misleading not to report the number of sales, or that they were below expectations." Contrary to the facts in Backman, there were indicators available to Defendants showing that sales of the TITAN 5500 were slow, but Defendants did not disclose that fact in response to a question regarding whether the product had "peaked." As the court in Backman stated, "[w]e could agree that if management knew at the time of the report that Polavision was a commercial failure, to say simply that its earnings were negative might well be found to be a material misrepresentation by half-truth and incompleteness." Id. Plaintiffs have therefore established that there is a question of fact regarding whether TITAN 5500 slow sales were relevant to the question of whether the product had "peaked." The Court therefore denies Defendants' motion for summary judgment with regard to this statement.
C. April 6, 2001 Statement That "End-User" Demand Continued to Grow
On the April 6, 2001 conference call, Notebaert stated:
Last month we talked and we highlighted the issues we were seeing in the cable access market. There we saw our MSO customers shifting their focus from expanding their addressable market by building new infrastructure to increase profitability by signing up more customers in the places where they have the infrastructure in place. That trend continued during the whole quarter right down to the end. In just the last few weeks, however, we experienced a more controlled order flow from our larger customers than we originally anticipated.
Clearly the environment has resulted in near term caution in the pace at which
customers are deploying equipment. Our customers are exercising a high degree of prudence over every dollar spent. Let me balance this a bit and say that everything we hear from the customers indicates that our end user demand for services continues to grow. Fortunately for Tellabs, our TITAN family of products helps our carrier customers meet this demand in a cost effective way, which is the major reason we are still able to grow total revenue 20% year-over-year even in this environment. While the US market has been challenging we continue to see pockets of strength globally, particularly in Latin America.
(R. 336-1, ¶ 90; R. 301-12, Ex. 73, TEL 669446-47.) Plaintiffs contend that the statement about end user demand "clearly was intended to give cause for optimism" about Tellabs's performance and that the statement was therefore misleading in light of all that Notebaert knew regarding Tellabs's performance. Plaintiffs, however, have failed to establish a genuine issue of material fact regarding whether this statement was misleading or made with the requisite scienter.
The undisputed evidence shows that the term "end user" refers to customers of service providers, Tellabs's core customer base, and that end user demand was in fact growing at the time Tellabs made the statement. Plaintiffs maintain that "even if Internet, telephone, and wireless users' demand was still growing, it was deceptive for Notebaert to suggest that it would mean additional business for Tellabs." (R. 329-1, Pls.' Opp'n, p. 48.) There is no indication in Notebaert's answer, however, that he intended his comment to reflect the demand of Tellabs's direct customers. Indeed, the full context of his answer reveals that Notebaert expressly disclosed that Tellabs was experiencing weakened demand from its own customers. There is accordingly no evidence from which a reasonable jury could conclude that Notebaert's statement was misleading. The Court accordingly grants summary judgment for Defendants with respect to this statement.
IV. Collateral Estoppel With Respect to the Brieger Class
Defendants seek summary judgment on the claims of the members of the class in the companion ERISA case against Tellabs, Brieger v. Tellabs, Inc., Case No. 06-cv-1882 (N.D. Ill.). "Collateral estoppel (also called `issue preclusion') refers to the simple principle that `later courts should honor the first actual decision of a matter that has been actually litigated.'" Chicago Truck Drivers, Helpers Warehouse Union Pension Fund v. Century Motor Freight, 125 F.3d 526, 530 (7th Cir. 1997) (internal citations omitted). Collateral estoppel ensures that "once an issue is actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation." Id. For a ruling to have collateral estoppel effect, "four elements must be met: `(1) the issue sought to be precluded must be the same as that involved in the prior litigation, (2) the issue must have been actually litigated, (3) the determination of the issue must have been essential to the final judgment, and (4) the party against whom estoppel is invoked must be fully represented in the prior action.'" H-D Mich., Inc. v. Top Quality Serv., 496 F.3d 755, 760 (7th Cir. 2007) (citing Meyer v. Rigdon, 36 F.3d 1375, 1379 (7th Cir. 1994)). "Although the party asserting estoppel has the burden of showing that the claim was actually litigated and decided, `proof is not limited to the formal record of the prior action, and may involve elaborate processes of inference in order to determine whether a particular issue has been decided.'" Gilldorn Sav. Ass'n v. Commerce Sav. Ass'n, 804 F.2d 390, 394-395 (7th Cir. 1986).
While the Court need not add address Defendants' collateral estoppel argument as it applies to the claims on which the Court has granted summary judgment, collateral estoppel provides an independent basis for granting summary judgment against the Brieger plaintiffs with respect to certain claims.
A. Claims Regarding Shipment of Unordered Products
With respect to Plaintiffs' fourth quarter and full year 2000 channel stuffing claims, Plaintiffs contend that collateral estoppel is not applicable because (i) Judge Kennelly did not make any express findings with respect to the channel stuffing allegations present in this case that Tellabs over-inventoried customers to falsely portray growing revenues, and (ii) Defendants have not shown that the issue was fully litigated in Brieger. The record from the Brieger case, however, demonstrates that the issue is the same as that involved in the present litigation and that the issue was fully litigated during the Brieger trial.
The Brieger complaint, as well as the guidance and arguments presented at trial, establish that the issues are the same and were actually litigated. The Brieger complaint alleged that Tellabs "engaged in troubling, improper practices in an attempt to conceal the problems with the TITAN 5500" including "overloading customers with shipments of unwanted products and falsifying purchase orders." (R. 336-1, ¶ 96) (citing Brieger v. Tellabs, Inc., Case No. 06-1882 (N.D. Ill.), Answer, Docket Entry 82, Ex. 109 at ¶ 129). Indeed, the evidence adduced during discovery in Brieger demonstrates that the plaintiffs relied on some of the same evidence presented by Plaintiffs in the present case, namely internal Tellabs emails regarding Tellabs shipping allegedly unordered products to Verizon, to show that the defendants breached their fiduciary duties by making material misrepresentations and omissions.
Moreover, the Brieger plaintiffs argued at trial, based on these emails, that Tellabs's fourth quarter 2000 financial statements were misstated because Tellabs had shipped unordered product to Verizon during the fourth quarter. Thus, Defendants have demonstrated that the issue is the same as in the prior action and that the issue was actually litigated. While Plaintiffs have presented evidence of additional transactions in the present case to support their channel stuffing claim, this does not preclude the application of collateral estoppel. See Perry v. Sheahan, 222 F.3d 309, 318 (7th Cir. 2000) ("Only facts arising after the complaint was dismissed — or at least after the final opportunity to present the facts to the court — can operate to defeat the bar of issue preclusion.") Moreover, while the Brieger opinion did not specifically address whether Tellabs had shipped unordered product, Defendants have demonstrated that the determination of the issue was essential to the final judgment. In his written opinion after trial, Judge Kennelly addressed "[plaintiffs' contentions] that defendants made misrepresentations to them and to the public in general regarding Tellabs's business and that they failed to disclose information that plaintiffs needed in order to make informed decisions about the allocation of their contributions to the Plan." Brieger v. Tellabs, Inc., 629 F. Supp. 2d 848, 857 (N.D. Ill. 2009). Judge Kennelly specifically held that, "defendants did not make any material misrepresentations to plaintiffs. Defendants certainly made a number of predictions about Tellabs and the telecommunications industry that turned out to be wrong. But the evidence does not demonstrate that defendants misrepresented either the facts or their expectations when they made those statements." Id. at 865. Given that the Brieger plaintiffs put allegations regarding misstatements about unordered products at issue in their complaint and the parties addressed the issue at trial, Judge Kennelly necessarily determined that defendants had not made any material misrepresentations in this regard. See La Preferida, Inc. v. Cerveceria Modelo, S.A. de C.V., 914 F.2d 900, 907 (7th Cir. 1990) ("[T]he court in the second action may look beyond the earlier judgment and may `examine the pleadings and the evidence in the prior action. And if the rendering court made no express findings on issues raised by the pleadings or the evidence, the court may infer that in the prior action a determination appropriate to the judgment rendered was made as to each issue that was so raised and the determination of which was necessary to support the judgment.'"). As the Seventh Circuit explained in Gilldorn:
Although the party asserting estoppel has the burden of showing that the claim was actually litigated and decided, "proof is not limited to the formal record of the prior action, and may involve elaborate processes of inference in order to determine whether a particular issue has been decided." 18 C. Wright, supra, § 4405, at 38. Although the Texas court did not make findings of fact in support of its decision nor explicitly consider each of the bases for the motion, the court implicitly rejected all four grounds in denying the motion. Had any one of the grounds been sufficient, a contrary result would have been unavoidable. Thus, by denying the dismissal motion the Texas court necessarily decided all four issues in Commerce's favor.
804 F.2d at 394-395. Similarly, because the alleged misrepresentations regarding Tellabs shipping unordered product were at issue, the
Brieger court necessarily determined that issue in
Tellabs's favor in granting judgment for the defendants. Defendants have accordingly demonstrated that, even if Plaintiffs' channel-stuffing claims survived summary judgment, which they do not, collateral estoppel is applicable to the unordered products claims with respect to the members of the
Brieger class.
B. Claims Regarding Tellabs's 2001 Guidance
Plaintiffs argue that collateral estoppel is not applicable with respect to the claims relating to Tellabs's 2001 guidance because the Brieger complaint did not specifically address the 30% forecast. Plaintiffs admitted in their response to Defendants' statement of materials facts that the plaintiffs in Brieger challenged Tellabs's 2001 guidance as having been false, starting with the guidance given at the analysts conference on December 11, 2000, and continuing through at least June 19, 2001. The Court, however, has reviewed the evidentiary support for Defendants' contention and Defendants have not met their burden of demonstrating that the issue of Tellabs's 2001 guidance issued on December 11, 2001, January 23, 2001, March 7, 2001, and April 18, 2001 was actually litigated in Brieger.
Indeed, while the Brieger complaint refers to specific examples of statements made by Tellabs when issuing its guidance on some of these dates, the Brieger complaint does not specifically address the overall guidance provided by Tellabs on any of these particular dates. While the trial record reflects that the Brieger defendants adduced some evidence regarding Tellabs's 30/30 guidance on December 11, 2001 and January 23, 2001, given that the Brieger plaintiffs failed to identify these representations in their complaint, the Court cannot conclude that the Brieger court's ruling necessarily determined that the guidance issued on those dates did not constitute misrepresentations. See Gilldorn, 804 F.2d at 394-395. Indeed, while Judge
Kennelly's opinion addressed the March 7, 2001 guidance, there is no evidence before the Court demonstrating that the Brieger court addressed the issue of the full year 2001 guidance issued on March 7, 2001 that is at issue in this case:
More generally, plaintiffs point to a number of statements about Tellabs' prospects that they claim gave employees a false sense of optimism about Tellabs' future. One example is the revised earnings guidance Tellabs provided on March 7, 2001, lowering the first quarter 2001 revenue forecast, but stating that the company would still do well that quarter. This was supported with further statements about growth in 5500 sales. Plaintiffs compare that announcement to the February 19, 2001 letter from Notebaert to Birck, which appeared to paint a gloomier picture, including slow 5500 sales in the early part of 2001, as well as sanity check reports that showed slower sales. Defendants' statements were not misrepresentations. Though their predictions eventually proved wrong, at the time defendants made them, they were based on a significant backlog of orders, forecasts made by Pfefferle's department, and communications with customers. These facts, as well as the nature of Tellabs' products, led defendants to believe that Tellabs was in a unique position to weather the storm and even grow despite general industry and market conditions.
Brieger, 629 F. Supp. 2d at 859 (N.D. Ill. 2009). Thus, while the Court need not reach the issue because Plaintiffs' claims relating to Tellabs's 2001 guidance do not survive summary judgment, Defendants have failed to demonstrate that collateral estoppel bars the
Brieger plaintiffs' claims with respect to Tellabs's 2001 guidance.
C. March 7 and March 14 Statements Regarding the TITAN 5500
The Brieger plaintiffs, again like the plaintiffs in this case, specifically challenged as having been false: (1) Brian Jackman's March 7, 2001 statement in response to an analyst question about whether Tellabs was experiencing any weakness in TITAN 5500 product sales that, "We're still seeing that product continue to maintain its growth rate; it's still experiencing strong acceptance"; and (2) the March 14, 2001 statement in Tellabs's 2000 Annual Report, in which Notebaert and Birck responded to a frequently asked question "Are you worried that [the TITAN 5500] has peaked," by stating, "No. . . . Although we introduced the product nearly 10 years ago, it's still going strong." (R. 336-1, ¶ 99) (citing Brieger v. Tellabs, Inc., Case No. 06-1882 (N.D. Ill.), Docket Entry 82, Ex. 109 at ¶¶ 131, 141; Plaintiffs' Amended Proposed Findings of Fact and Conclusions of Law, Ex. 113 at ¶¶ 110, 112). Once again, Judge Kennelly's ruling after weighing the evidence from both sides that "defendants did not make any material misrepresentations to plaintiffs" established that the Brieger court necessarily determined whether these statements constituted misrepresentations. Brieger, 629 F. Supp. 2d at 865.
Indeed, the only objection Plaintiffs have to Defendants' argument is that collateral estoppel should not apply because, during the Brieger trial, the parties mistakenly proceeded under the assumption that Tellabs's 2000 Annual Report was issued in mid-February 2001 when it was actually issued in mid-March 2001. Plaintiffs contend that this mistake is significant because Tellabs's situation grew worse over time. In Montana v. United States, the Supreme Court held that "changes in facts essential to a judgment will render collateral estoppel inapplicable in a subsequent action raising the same issues." 440 U.S. 147, 159 (1979). While there is conflicting evidence in the Brieger trial record regarding the date that Tellabs issued its 2000 Annual Report, the date on which Tellabs issued its 2000 Annual Report has not changed since the date of the Brieger trial. Accordingly, although Plaintiffs' claims premised on the March 7, 2001 and March 14, 2001 statements survive summary judgment, collateral estoppel bars the Brieger plaintiffs from pursuing the claims regarding the statement made by Jackman on March 7, 2001 or the statement made by Notebaert and Birck on March 14, 2001.
V. Section 20(a) Control Person Liability
Claims under § 20(a) of the Securities Exchange Act of 1934 are "derivative, requiring proof of a separate underlying violation of the Exchange Act." Tellabs I, 437 F.3d at 605 (citations omitted); see 15 U.S.C. § 78t(a). Plaintiffs' claims based on Tellabs's fourth quarter and full year 2000 financial statements, Tellabs's 2001 guidance, and Notebaert's April 6, 2001 statement regarding end user demand do not survive summary judgment. Therefore, Plaintiffs' § 20(a) claims against Notebaert, Ryan, Jackman, and Birck based on those claims must also be dismissed. See Pugh, 521 F.3d at 698 (dismissal of § 10(b) and Rule 10b-5 claim mandates dismissal of § 20(a) claim). Because Plaintiffs' claims premised on Jackman's March 7, 2001 statement that the TITAN 5500 "was continuing to maintain its growth rate" and the Notebaert and Birck's March 14, 2001 statement in Tellabs's Annual Report that the TITAN 5500 was "still going strong" survive summary judgment, however, Plaintiffs' § 20(a) claims deriving from those statements also survive. Id.
CONCLUSION
For the foregoing reasons, the Court grants in large part and denies in part Defendants' motion for summary judgment and grants in part and denies in part Defendants' Motion to Strike.