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Lingis v. Motorola

June 17, 2009


The opinion of the court was delivered by: Rebecca R. Pallmeyer United States District Judge

Judge Rebecca R. Pallmeyer


Defendant Motorola, Inc. is a Fortune 100 telecommunications company that sells products ranging from cell phones and digital video recorders to broadband network infrastructure. During the technology boom of the 1990s, Motorola's stock price increased ten-fold, as the company expanded both nationally and globally. In the late 1990s, a Motorola affiliate entered into an agreement with a Turkish telecommunications company called Telsim to finance Telsim's purchase of cellular infrastructure in Turkey. After several amendments to the original agreement, Motorola ultimately lent Telsim nearly $2 billion. In exchange, Telsim pledged 66% of its outstanding shares as collateral for the loan. In 2001, Telsim defaulted on its loan payments and refused to honor its share pledge agreement with Motorola. At least in part because of these defaults, the price of Motorola's shares plummeted. These events sparked numerous lawsuits, including suits between Motorola and Telsim, a class action securities fraud case filed by investors, and this case, brought under the Employee Retirement Income Security Act ("ERISA").

Plaintiffs in this case are a class of Motorola employees who held Motorola stock in their individual retirement accounts. These accounts, also referred to as "401(k) accounts" based on their privileged status within the tax code, were established pursuant to a plan that gave employees nine different investment options in which to invest their retirement savings. One option was the Motorola Stock Fund, which, as its name would suggest, consisted of Motorola securities. According to Plaintiffs, Motorola and many of its officers and directors breached fiduciary duties they all owed to Plaintiffs under ERISA by continuing to offer the Motorola Stock Fund as an investment option in their 401(k)s when they knew about the problems with the Telsim loan. Plaintiffs further allege that Defendants misrepresented Motorola's financial health to them in violation of their ERISA duties. Both Plaintiffs and Defendants have moved for summary judgment. For the reasons given below, Plaintiffs' motion is denied and Defendants' motions are granted.


The Parties

Plaintiffs Stephen Lingis, Donald Smith, and Peter White are former Motorola employees. (Defs.' 56.1 ¶ 94.) During their tenure at Motorola, including during the class period, they invested in the Motorola Stock Fund through the Motorola 401(k) Plan (the "Plan"). (Id.) Lingis, Smith, and White represent a class consisting of "all persons for whose individual accounts the Motorola 401(k) Savings Plan purchased and/or held shares of the common stock of Motorola, Inc. at any time from May 16, 2000 to May 14, 2001, inclusive."*fn1 (Am. Class Order [ 290] ¶ 2.)

Fifteen Defendants have submitted a total of eight separate motions for summary judgment now before the court. Two of the Defendants are entities: Motorola, Inc. and the Profit Sharing Committee of Motorola, Inc. (the "Profit Sharing Committee" or "Committee"). During the class period, the Committee consisted of individuals appointed by the Board of Directors for the purpose of administering the Plan. (Defs.' 56.1 ¶¶ 31-32). As of 2006, the Committee no longer existed, and administration of the 401(k) Plan was assumed by the "Retirement Benefits Committee." (Id. ¶ 39.) Two individuals who were members of the Committee during the class period have been named as Defendants: Carl Koenemann, the Chief Financial Officer ("CFO") of Motorola (id. ¶¶ 33-34); and Gary Tooker, who served on the Committee until the end of 2000 and had previously served as Chief Executive Officer ("CEO") of Motorola and the Chairman of the Board of Directors. (Id. ¶¶ 171, 174.) A third individual Defendant, Rick Dorazil, was the Vice President of Global Rewards-Benefits during the class period, meaning that he was "responsible for strategy, design, implementation, communications, and compliance matters relating to Motorola's benefits programs, including the 401(k) plan." (Id. ¶ 136.) Dorazil was neither a Director nor a member of the Profit Sharing Committee during the class period.

The remaining individual Defendants were all members of the Motorola Board of Directors during the class period. The Chairman of the Board, Christopher Galvin, also served as Motorola's CEO during the class period. (Id. ¶ 141.) Another Director, Robert Growney, was Motorola's Chief Operating Officer ("COO"). (Id. ¶ 142). The remaining Director Defendants were independent Directors, at least in the sense that they were not employed by Motorola.*fn2 Telsim Details of the relationship between Telsim and Motorola have been described in depth in other decisions, so the court provides only a brief overview here. See, e.g., In re Motorola Sec. Litig., No. 03 C 287, 2004 WL 2032769 (N.D. Ill. Sept. 9, 2004); Motorola Credit Corp. v. Uzan, 274 F. Supp. 2d 481, 491 (S.D.N.Y. 2003), vacated in part, 388 F.3d 39 (2d Cir. 2004). On April 24, 1999, the Motorola Credit Corporation ("MCC"), an international supplier of telecommunications equipment and a wholly-owned subsidiary of Motorola, Inc., entered into agreements with Turkey's second largest cell phone company, Telsim Mobil Telekomunikayson Hizmetleri, A.S. ("Telsim"). (Defs.' 56.1 ¶¶ 65-67.) Under these agreements, Telsim purchased cellular infrastructure equipment from Motorola's United Kingdom affiliate, as well as licenses required by the Turkish government to run a cellular service in Turkey. (Id. ¶¶ 67-68.) To finance these purchases, MCC loaned Telsim more than $550 million, secured by a pledge of 51% of Telsim's stock to MCC. (Id. ¶¶ 67-69.) The agreements were amended several times over the following months, usually to increase the amount of money MCC loaned to Telsim; as of September 29, 2000, when MCC made its final loan to Telsim, MCC had loaned Telsim more than $1.8 billion, secured only by a pledge of 66% of Telsim's then-outstanding shares. (Id. ¶¶ 70, 72, 74.) On April 24, 2001, unbeknownst to MCC, Telsim tripled the number of shares it held outstanding, thus diluting the collateral for the MCC loan to 22% of outstanding Telsim shares. (Id. ¶ 80.) Six days later, on April 30, Telsim defaulted on its first loan payment, and MCC issued a notice of default three weeks later. (Id. ¶ 81.)

The parties dispute how forthcoming Motorola was regarding its relationship with Telsim in its filings with the Securities and Exchange Commission ("SEC") during this period. On May 16, 2000 (the start of the class period), Motorola filed its 10-Q quarterly report with the SEC, in which Motorola stated: "The Company signed an agreement with Telsim, which is estimated to have a sales potential of at least $1.5 billion over three years. Under this agreement, the Company expects to provide infrastructure equipment, wireless phones and associated services to expand the countrywide GSM [Global System for Mobile communications] network in Turkey." (Id. ¶ 73.) The 10-Q disclosure makes no mention of Motorola's loans to Telsim.

The May 16 report appears to be the last specific reference to Telsim in any SEC filing until the 10-Q filed on May 14, 2001 (the close of the class period). The May 14, 2001 report discussed specifics regarding Telsim's indebtedness and default:

Some purchasers of the Company's infrastructure equipment continue to require suppliers to provide financing in connection with equipment purchases. Financing may include all or a portion of the purchase price and working capital. The Company may also assist customers in obtaining financing from banks and other sources. Although there are no outstanding financing commitments relating to third-generation (3G) wireless networks, the Company may provide such financing in the future. At March 31, 2001 and December 31, 2000 the Company had long-term finance receivables of $2.7 billion and $2.6 billion, respectively (net of allowance for losses of $218 and $233 million, respectively), which are included in other assets on the consolidated balance sheets. At March 31, 2001, the Company had outstanding unfunded commitments to provide financing to third parties of approximately $161 million.

As of March 31, 2001, approximately $2.0 billion of the $2.9 billion in gross long-term finance receivables related to one customer, Telsim, in Turkey (the "Telsim Loan"). Motorola's collateral for the vendor financing provided to Telsim is the ability, pursuant to a stock pledge agreement, to receive or sell 66% of the stock of Telsim. In addition, Motorola has other creditor remedies. On April 30, 2001, $728 million of the Telsim Loan became due, but was not paid. Under the terms of the Telsim Loan, Telsim has 30 business days to cure its failure to make this payment before an event of default occurs. Motorola is currently in discussions with Telsim to reschedule payments, including the April 30th payment, under the Telsim Loan. (Id. ¶ 82.) A similar statement had appeared in a March 2001 proxy statement, although that statement obviously did not contain the warning about the April 2001 default. (Id. ¶ 78.)

The only other disclosures made by Motorola during the class period that even arguably related to the Telsim transaction were generic references to Motorola's practice of vendor financing. In November 2000, for instance, Motorola's 10-Q read: "The company wishes to caution the reader that the factors below . . . could cause the Company's results to differ materially from those stated in the forward-looking statements. These factors include: . . . (vi) the demand for vendor financing and the Company's ability to provide that financing in order to remain competitive . . . ." (Id. ¶ 75.) Motorola also informed investors that it "may also assist customers in obtaining financing from banks and other sources." (Id. ¶ 76.)

Defendant Koenemann, Motorola's CFO, was involved in working on financing deals with Telsim as early as 1998. (Pls.' 56.1 ¶ 73.) Although the record does not clearly reflect when Koenemann first became aware of potential problems-or of the severity of those problems-with the transaction, it is clear that he discussed potential problems with the Telsim loan with KPMG, Motorola's external auditor, around the time of the signing of the final amendment in September 2000. (Defs.' Resp. to Pls.' 56.1 ¶ 45.) Koenemann discussed these issues with Galvin and Growney around the same time, although they certainly knew about the loan itself before then. (Pls.' 56.1 ¶¶ 52, 77-78.) The record contains no evidence that any of the other Defendants-including Dorazil, Tooker, and the outside directors-had any knowledge of any problems with the Telsim transaction. (E.g. Pls.' Resp. to Defs.' 56.1 ¶¶ 137, 173, 174, 153, 154, 166, 167.)

At least in part because of the Telsim transactions, Motorola's financial position deteriorated during the class period. Motorola reported net income of $2.2 billion for the fiscal year ending December 31, 2000; the following year, Motorola reported a net loss of $5.5 billion. (Pls.' 56.1 ¶¶ 58-59.) This change in fortune was also reflected in Motorola's share price: based on publicly available information, the share price of Motorola dropped from around $30 per share at the start of the class period to about $15 per share at the end. See Yahoo! Finance, com/q?s=mot (last visited June 16, 2009).

The 401(k) Plan

Throughout the class period, the Profit Sharing Committee administered the 401(k) Plan and was the named fiduciary of the Plan. (Pls.' 56.1 ¶ 120.) Defendant Tooker chaired the Committee through the end of 2000 and was succeeded by Koenemann. (Id.) The Motorola Board of Directors appointed the members of the Committee; at least during the class period, the Committee members were appointed to one-year terms. (Id. ¶ 124; Defs.' 56.1 ¶¶ 33-34.) The 401(k) Plan provided individual retirement accounts to employees of Motorola. Participants in the Plan directed the investments of their own accounts. (Defs.' 56.1 ¶ 9.) Prior to July 1, 2000, employees had four investment options from which to choose: the Balanced Fund, the Equity Fund, the Short-Term Income Fund, and the Motorola Stock Fund. (Id. ¶ 11.) After that date, participants had nine options: the Short-Term Bond Fund, the Long-Term Bond Fund, Balanced Fund I, Balanced Fund II, the Large Company Equity Fund, the Mid-Sized Company Equity Fund, the International Equity Fund, the Small Company Fund, and the Motorola Stock Fund. (Id. ¶ 12.) Plan participants were provided with materials to help them make investment decisions, including Summary Plan Descriptions, newsletters, and a Prospectus that discussed each of the nine investment options. (Id. ¶ 44.) The Prospectus and Summary Plan Description ranked the riskiness of the various investments, and warned that the Motorola Stock Fund was the riskiest of the nine funds offered. (Id. ¶ 45.) The governing documents of the Plan did not require that the Motorola Stock Fund be offered at all, but did explicitly permit the Plan to offer the Fund as an option. (Pls.' 56.1 ¶¶ 134-35.) At no time were participants required to invest in the Motorola Stock Fund. (Defs.' 56.1 ¶ 15.)

Participants could contribute up to 20% of their compensation to their 401(k) account. Motorola made additional contributions as well: the company matched the first 3% of the employee's income contributed to the employee's account dollar-for-dollar, and matched the next 3% of income at fifty cents to the dollar. (Id. ¶ 19.) Each participant could choose the manner in which the matching funds were provided, including designating one of the nine investment options to receive the matching contribution, or receiving the contribution directly in Motorola stock. (Id.) For any participant who did not specify a method, the matching contribution was made, by default, to the Balanced Fund (which contained no Motorola stock). (Id.)

Several significant changes were made to the Plan on July 1, 2000, a date that falls within the class period. Prior to that date, employees were restricted to investing no more than 25% of their account in the Motorola Stock Fund. (Id. ¶ 20.) In June 1999, however, as Motorola stock was experiencing strong growth, over 80% of Motorola employees voted to remove the cap.*fn3 (Id.) Consequently, Motorola employees could invest their entire 401(k) plans in the Motorola Stock Fund after July 1. (Id. ¶ 20.) Another change that went into effect on July 1, 2000 allowed participants to reallocate their assets among the nine available funds on a daily basis. (Id. ¶ 16.) Prior to that time, participants were permitted to reallocate their assets only once a month, though they were permitted to transfer funds out of the Motorola Stock Fund daily.*fn4 (Id.)

Litigation History

On July 21, 2003, Bruce Howell initiated this action on behalf of himself and a class of Motorola employees who invested in the Motorola Stock Fund through their 401(k) plans. Howell's complaint asserted a claim under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq., which, among other things, imposes fiduciary duties upon those who administer or otherwise control employee retirement accounts. On September 23, 2004, this court granted in part Defendants' motion to dismiss, finding that Plaintiffs had failed to allege a breach of fiduciary duty by the individual members of the Profit Sharing Committee, where the members were not even alleged to have knowledge of the Telsim transaction. Howell v. Motorola, Inc., 337 F. Supp. 2d 1079, 1091-92 (N.D. Ill. 2004). The litigation has since been delayed significantly by the inability to secure a class representative. In September 2005, the court denied Howell's motion for class certification, finding that he was an inadequate representative because he had signed a written waiver and release of claims upon his termination from Motorola. Howell v. Motorola, Inc., No. 03 C 5044, 2005 WL 2420410 (N.D. Ill. Sept. 30, 2005). The court later declined to approve the appointment of another class representative, John Endsley, concluding that he lacked standing because he had received a full distribution under the Plan. Howell v. Motorola, Inc., No. 03 C 5044, 2006 WL 2355586 (N.D. Ill. Aug. 11, 2006).

Finally, on November 1, 2007, the court certified a class consisting of "all persons for whose individual accounts the Motorola 401(k) Savings Plan purchased and/or held shares of the common stock of Motorola, Inc. at any time from May 16, 2000 to May 14, 2001, inclusive, except persons who signed valid releases of their claims against Motorola, Inc. [and current and former directors and officers of Motorola]."*fn5 (Am. Class Order [290] ¶ 2.) Plaintiffs Lingis, Smith, and White were named class representatives, after they had intervened in the action. (Id. ¶ 4.) The Complaint in Intervention (hereinafter "Complaint") alleges that Defendants breached their fiduciary duties to Plaintiffs by continuing to offer, and continuing to hold, the Motorola Stock Fund as an investment option under the Plan despite looming problems with the Telsim transaction. Count I charges that Defendants breached their fiduciary duties to act with prudence by offering what was, given the realities of the Telsim transaction, an imprudent investment. In Count II, Plaintiffs allege that Defendants negligently misrepresented and failed to disclose material information relating to the Telsim transaction, particularly in the SEC filings filed by Motorola during this period. Count III is brought only against the Director Defendants-including Galvin and Growney-and Motorola, and alleges that the directors failed to appoint appropriate fiduciaries to the Profit Sharing Committee, failed to monitor the Committee members adequately, and withheld material information from the Committee. Each of the three Counts contains a paragraph asserting that each Defendant is also liable as a co-fiduciary pursuant to ERISA § 405(a), which makes a fiduciary liable for the acts of another fiduciary in certain circumstances. 29 U.S.C. § 1105(a). Plaintiffs have not supported that allegation with any argument in any of their briefs for the motions now under consideration, however, and the court considers the argument waived. Argyropoulos v. City of Alton, 539 F.3d 724, 739 (7th Cir. 2008).

On February 15, 2008, both Defendants and Plaintiffs moved for summary judgment on all claims. The court now considers the competing ...

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