Full opinion text
MEMORANDUM OPINION AND ORDER FRIOT, District Judge. Table of Contents I. Introduction .............................................................1201 A. Preliminary matters ..................................................1201 B. The Daubert and summary judgment record.............................1204 II. Factual Background.......................................................1204 III. Procedural History........................................................1227 IV. Summary of the claims of the WCG Subclass.................................1229 A. Rule 10(b) and Rule 10b-5 Claims — Basic Elements.......................1229 B. Section 20(a) Claims — Basic Elements...................................1229 V. The Daubert Motions......................................................1230 A. The general framework for Daubert analysis in this case...................1230 B. Qualifications ........................................................1232 C. Reliability...........................................................1233 D. The Daubert challenges with respect to Messrs. Mathis and Mintzer........1235 1. The division of labor between Messrs. Mathis and Mintzer with respect to FAS 121 impairment analysis ...........................1238 2. The experts’ methodology vs. the methodology the accountants were required to employ in their audit-related work......................1239 3. Daubert analysis — proposed expert testimony of H. Sean Mathis........1242 a. Qualifications..................................................1242 b. Reliability.....................................................1245 4. Daubert analysis — proposed expert testimony of Andrew M. Mintzer____1248 a. Qualifications..................................................1249 b. Reliability.....................................................1249 E. Daubert analysis — proposed expert testimony of Dr. Blaine Nye............1252 1. Dr. Nye’s three damage scenarios...................................1253 a. Scenario 1.....................................................1253 (i) General description of Scenario 1............................1253 (ii) Corrective disclosures — Scenario 1 ..........................1256 b. Scenario 2.....................................................1258 c. Alternative Scenario 2 ...........................................1260 2. Qualifications.....................................................1261 3. Reliability........................................................1261 a. The loss causation requirement...................................1262 (i) Loss causation — basic rules.................................1262 (ii) Loss causation — limits of the doctrine........................1264 (iii) Loss causation — materialization of the risk...................1265 b. The Daubert challenge as to Dr. Nye’s Scenario 1 (common stock)----1266 c. The Daubert challenge as to Dr. Nye’s Scenario 2 (common stock).... 1267 (i) Corrective disclosures on or after January 29, 2002 ............1267 (ii) The constant percentage inflation approach...................1269 d. The Daubert challenge as to Dr. Nye’s Alternative Scenario 2 (common stock)..............................................1270 e. The Daubert challenge with respect to the notes....................1271 VI. The Motions for Summary Judgment........................................1275 A. The Williams Companies, Inc. and Keith E. Bailey’s Motion for Partial Summary Judgment on Alleged Misstatements and Omissions Made Before WCG’s Spin-Off from Williams ................................1276 B. Motion of the Williams Companies, Inc. and Keith E. Bailey for Partial Summary Judgment on Alleged Misstatements or Omissions Made After WCG’s Spin-Off from Williams..................................1283 C. Defendant Ernst & Young LLP’s Motion for Summary Judgment...........1285 1. Material misstatements or omissions ................................1286 2. Scienter as to E & Y..............................................1288 D. WCG Defendants’ Motion for Summary Judgment........................1290 1. WCG’s contentions................................................1290 2. Plaintiffs’ response to WCG’s motion ................................1292 VII. Conclusion...............................................................1295 I. Introduction. A. Preliminary matters. These thirty consolidated securities fraud actions involve two subclasses of plaintiffs. One of the subclasses (the WMB Subclass) consists of purchasers of securities issued by Williams Companies, Inc. The other subclass (the WCG Subclass) consists of purchasers of common stock and notes issued by Williams Communications Group, Inc. The claims of the WMB Subclass have been settled. The remaining claims, as- serted by the WCG Subclass, are traceable to the rise and fall of Williams Communications Group, Inc., and arise under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5, promulgated thereunder. See, generally, In re Williams Securities Litigation, 339 F.Supp.2d 1206 (N.D.Okla.2003). Investors who bought WCG stock during the class period bought into an industry meltdown of historic proportions. The defendants maintain, correctly, that the plaintiffs are not entitled to insurance against improvident investment choices. The plaintiffs, having convincingly demonstrated that the views expressed privately by members of senior management of WMB and WCG belied their rosy public statements about WCG’s prospects, maintain, correctly, that they are entitled to present their claims to a jury if they can make a threshold showing of triable issues with respect to the contested elements of their securities fraud claims. The task now before the court is to determine whether plaintiffs have marshaled record evidence and expert testimony sufficient to survive (i) the defendants’ Daubert challenges to the proposed testimony of plaintiffs’ expert witnesses, and (ii) the defendants’ related motions for summary judgment. The following motions are before the court: Motion of Defendant Ernst & Young LLP for Summary Judgment, filed April 14, 2006 (doc. no. 1027); Motion of The Williams Companies, Inc. and Keith E. Bailey for Partial Summary Judgment on Alleged Misstatements or Omissions Made After WCG’s Spin-off from Williams, filed April 14, 2006 (doc. no. 1050); The Williams Companies, Inc. and Keith E. Bailey’s Motion for Partial Summary Judgment on Alleged Misstatements and Omissions Made Before WCG’s Spin-off from Williams, filed April 14, 2006 (doc. no. 1060); WCG Defendants’ Motion for Summary Judgment, filed April 14, 2006 (doc. no. 1092); WCG Defendants’ Motion to Exclude the Report and Testimony of Plaintiffs’ Expert Blaine F. Nye, filed April 14, 2006 (doc. no. 1103); Defendant Ernst & Young’s Motion to Exclude the Testimony and Report of Plaintiffs’ Expert Blaine F. Nye, filed May 16, 2006 (doc. no. 1297); Motion of The Williams Companies, Inc. and Keith E. Bailey to Exclude Testimony of Plaintiffs’ Proposed Expert Witness Blaine F. Nye (doc. no. 1316), and Joinder in WCG Defendants’ Motion to Exclude the Report and Testimony of Plaintiffs’ Expert Blaine F. Nye (doc. no. 1317), filed May 18, 2006; Defendant Ernst & Young LLP’s Motion to Exclude H. Sean Mathis’s Testimony and Evidence Under the Standards Established in Daubert and Kumho Tire, filed August 4, 2006 (doc. no. 1433); Defendant Ernst & Young LLP’s Motion to Exclude Portions of the Testimony and Report of Plaintiffs’ Expert Andrew Mintzer Under the Standards Established in Daubert and Kumho Tire, filed August 4, 2006 (doc. no. 1436); WCG Individual Defendants’ Motion to Exclude Portions of Andrew Mintzer’s Expert Testimony and Report, filed August 4, 2006 (doc. no. 1437); Motion of The Williams Companies, Inc. and Keith E. Bailey to Exclude Portions of the Testimony and Report of Plaintiffs’ Expert Andrew Mintzer, filed August 4, 2006 (doc. no. 1445); Defendant Ernst & Young LLP’s Join-der in WCG Defendants’ Motion to Exclude the Report and Testimony of Plaintiffs’ Expert Rick Lawrence, filed August 4, 2006 (doc. no. 1447); WCG Plaintiffs’ Motion to Exclude the Reports and Testimony of Defendants’ Expert Eric P. Evans, filed August 4, 2006 (doc. no. 1448); WCG Plaintiffs’ Motion to Exclude the Reports and Testimony of Defendants’ Expert William W. Holder, filed August 4, 2006 (doc. no. 1450); WCG Individual Defendants’ Motion to Exclude the Report and Testimony of Plaintiffs’ Expert H. Sean Mathis, filed August 4, 2006 (doc. no. 1451); Joinder of The Williams Defendants to Motions and Supporting Briefs Filed by Ernst & Young LLP and the WCG Individual Defendants, filed August 4, 2006 (doc. no. 1453); WCG Plaintiffs’ Motion to Exclude the Reports and Testimony of Defendants’ Expert Thomas J. Mangold, filed August 4, 2006 (doc. no. 1455); WCG Defendants’ Motion to Exclude Certain Portions of the Report and Testimony of Plaintiffs’ Expert Rick Lawrence, filed August 4, 2006 (doc. no. 1456); WCG Plaintiffs’ Motion to Exclude the Reports and Testimony of Defendants’ Expert Paul A. Gompers, filed August 4, 2006 (doc. no. 1457); Joinder of The Williams Defendants to Reply Briefs Filed by Ernst & Young LLP and The WCG Individual Defendants, filed September 8, 2006 (doc. no. 1529); Defendant Ernst & Young LLP’s Motion in Limine to Exclude Evidence and Argument Relating to the Audit Quality Review Program, filed November 7, 2006 (doc. no. 1561); Defendant Ernst & Young LLP’s Motion in Limine to Exclude Evidence and Argument Relating to Dismissed, Abandoned and Unpled Claims, filed November 7, 2006 (doc. no. 1563); Defendant Ernst & Young LLP, WCG Defendants, and Williams Defendants’ Motion in Limine to Exclude Certain Irrelevant or Overly Prejudicial Evidence, filed November 7, 2006 (doc. no. 1566); Defendant Ernst & Young’s Motion in Limine to Exclude Plaintiffs’ Use of Trading Models to Estimate Aggregate Damages, filed November 7, 2006 (doc. no. 1567); WCG Defendants’ Motion in Limine to Exclude References to Executive Loan Forgiveness, Key Employee Retention Program, filed November 7, 2006 (doc. no. 1569); Motion in Limine No. 1 of The Williams Companies and Keith E. Bailey to Exclude Improper Expert Testimony, filed November 7, 2006 (doc. no. 1570); Motion in Limine No. 2 of The Williams Companies, Inc., Keith E. Bailey and Ernst & Young LLP to Exclude Evidence or Reference to “Corrective Disclosures” on Dates Where the Stock Price Did Not Move in a Statistically Significant Fashion, filed November 7, 2006 (doc. no. 1571); Motion in Limine No. 3 of The Williams Companies, Inc., Keith E. Bailey and Ernst & Young LLP to Preclude Evidence or Argument Regarding The Williams Companies, Inc.’s Financial Statements, filed November 7, 2006 (doc. no. 1575); Motion in Limine No. 4 of The Williams Companies, Inc., Keith E. Bailey, and Ernst & Young LLP to Preclude Evidence or Argument Regarding Alleged Uses of the Word “Junk” to Describe WCG, filed November 7, 2006 (doc. no. 1577); Motion in Limine of the WCG Defendants and Ernst & Young LLP to Exclude References to Directed Shares Transactions and Related Issues, filed November 7, 2006 (doc. no. 1578); Motion in Limine of the WCG Defendants and Ernst & Young to Exclude Plaintiffs’ Inadmissible Lay Witness Testimony, filed November 7, 2006 (doc. no. 1583); The WCG Subclass’s Amended Omnibus Motion in Limine, filed November 7, 2006 (doc. no. 1585); and . Joinder of The Williams Defendants to Motions and Supporting Materials Filed by Ernst & Young LLP and the WCG Individual Defendants, filed November 10, 2006 (doc. no. 1590). B. The Daubert and summary judgment record. The Daubert motions, briefs, exhibits and appendices consist of 119 filings, totaling more than 13,750 pages. The summary judgment motions, briefs, exhibits and appendices consist of 93 filings, totaling more than 22,900 pages. The briefs which are before the court with respect to these motions demonstrate outstanding advocacy. They have met the court’s highest expectations. As will be seen, with respect to the Daubert motions, the court’s attention has primarily been addressed to the defendants’ challenges to the proposed expert testimony of Messrs. H. Sean Mathis and Andrew M. Mintzer and Dr. Blaine F. Nye. II. Factual Background. For summary judgment purposes, the court views the facts and draws reasonable inferences from those facts in a light most favorable to the non-moving party. Piercy v. Maketa, 480 F.3d 1192, 1197 (10th Cir.2007). The following facts are either undisputed or viewed in a light most favorable to plaintiffs. Following the breakup of AT & T in the early 1980’s, WMB, an energy company, developed a strategy to run fiber-optic cables through some of its decommissioned pipelines, planning, under the original strategy, to provide services solely to other communications providers. After WMB secured adequate assurances of demand for its service, it authorized the initial $26 million build. WMB formed a subsidiary called Williams Telecommunications Company (“WilTel I”) in 1985, which eventually built a nationwide digital fiber-optic network, consisting of approximately 9,700 route miles. Bailey Aff., ¶ 8-11; Ex. 1 at EY-WCG-00-000005, Caroline L. Marshall Declaration (“CM Deck”). In 1995, WMB sold the WilTel I network business to LDDS Communications (thereafter WorldCom, Inc.) for approximately $2.5 billion. The sale included the nationwide fiber-optic network, together with the associated relationships with consumers and business and carrier customers. WMB excluded from the sale an approximately 9,700 route-mile single fiber network, comprised of a single fiber-optic strand and associated equipment along the original nationwide network, as well as WilTel I’s telecommunications equipment distribution business, and Vyvx Services, a provider of multimedia fiber transmission for the broadcast industry. WMB agreed with LDDS that it would not reenter the telecommunications business for three years. WMB incorporated the WilTel I businesses that it did not sell, including Vyvx Services, under the name of WilTel Technology Ventures, Inc. That name later changed to Williams Communications Group, Inc. in 1997. Bailey Aff., ¶¶ 11, 12; Ex. 1 at EY-WCG-00-000005, CM Deck The NASDAQ U.S. Telecommunications Index (“Telecom Index”) began the 1997 year at 215.71. Ex. 10 at 45, Joint Appendix of WCG Defendants (“JA”). By the end of 1997, the Telecom Index had increased to 306.60, an increase of 42%. Id. at 41. In January 1998, the non-compete agreement with LDDS Communications expired and WMB reentered the network communications market through WCG. The objective of WCG was to own or lease, operate and extend a nationwide fiber-optic network and to provide services exclusively to communications service providers. Bailey Aff., ¶ 13; Ex. 1 at EY-WCG-00-000005, EY-WCG-00-000007, CM Decl. Prior to 2001, WCG had four business units: Network, Broadband Media, Solutions and Strategic Investments. The Network unit offered Internet, data, voice and video services, as well as rights of use of dark fiber (fiber that WCG installed but for which it did not provide communications transmission services), on WCG’s fiber-optic network. The Broadband Media unit provided worldwide transmission of live and non-live media content through integrated fiber-optic, satellite and teleport services. The Solutions unit provided professional and maintenance services and distributed communications equipment from leading vendors for the voice and data communications needs of businesses of all sizes, as well as for governmental, educational and non-profit institutions. Through the Strategic Investments unit, WCG invested strategically in communications businesses which WCG believed would increase revenue opportunities for the Network and other business units. Ex. 30 at LB 066319, Ex. 88 at WMB. 00003044, Kent A. Bronson Declaration (“KB Decl.”). In a February 11, 1998 press release, WMB announced that it was “accelerating the expansion of its national fiber-optic network with plans for a $2.7 billion investment in a 32,000-mile system by year-end 2001.” According to the press release, “[t]he network is projected to reach nearly 22,000 miles by year-end 1999 — doubling its current size. It will stretch to more than 25,000 miles by year-end 2000 and some 32,000 by the end of 2001.” See, Ex. 2, CM Decl. In 1998, WCG established an Asset De-feasance Program (“ADP”), in the form of an operating lease agreement covering a portion of the fiber-optic network, with a group of financial institutions. The total estimated cost of the network assets to be covered by the lease agreement was $750 million. The lease term included an interim term, during which the covered network assets were to be constructed, and a base term. The interim and base terms were expected to total five years, and, if renewed, could total seven years. WCG had an option to purchase the covered network assets during the lease term. WMB provided a residual value guarantee equal to a maximum of 89.9% of the transaction. Ex. 12 at 143, JA. Under a subsequent agreement, if WCG exercised its option to purchase the covered network assets during the lease term, WMB was obligated to fund the purchase price of the ADP assets in exchange for debt or equity from WCG. Ex. 60 at WTL 0282528, CM Decl. By the end of 1998, the Telecom Index closed at 500.91, an increase of 63% during the course of the year. Ex. 10 at 36, JA. On February 9, 1999, WCG and SBC Communications, Inc. entered into a 20-year business relationship in which each agreed to be the other’s preferred provider of network services. Ex. 1 at EY-WCG-00-000022, Ex. 60 at WTL 0282526, CM Decl. Two days later, in a February 11, 1999 press release, WCG announced a “$4.7 billion expanded and accelerated construction plan that nearly doubles its original $2.7 billion financial commitment and advances its target network completion date by a full year.” According to the press release, WCG planned “to finish its 32,000-mile network in 2000.” “Under the ‘turbocharged plan,’” WCG’s “current 19,000-mile network will expand to 26,000 miles by year-end and to 32,000 miles in 2000, ultimately connecting 125 cities.” The press release quoted defendant, Howard Janzen, WCG’s president and chief executive officer, as stating “ ‘[t]he funds to support this “turbo-charged” plan will come from a variety of sources ... [t]hese include [WCG’s] planned initial public offering, a related high-yield bond offering, a separate equity investment by SBC Communications, revenue from fiber transactions and network services, and the additional traffic we will generate by completing the network more rapidly.’ ” Ex. 2, Robert J. Malionek Declaration (“RM Deck”) In September 1999, WCG established a $1.05 billion credit facility with a group of banks. Bank of America was the administrative agent. The credit facility consisted of $525 million seven-year senior multi-draw amortizing term loan facility and a $525 million six-year senior reducing revolving credit facility. WCG could borrow under the term loan facility during a one-year period beginning on the credit facility’s commencement date and could borrow under the revolving credit facility throughout the six-year term. WCG’s credit agreement included a minimum EBITDA (earnings before interest, taxes, depreciation and amortization) covenant and a Total Leverage Ratio covenant. Under the credit facility, E & Y, WMB and WCG’s outside auditor, was required to provide to WCG’s board of directors and Bank of America an annual debt covenant compliance report stating whether E & Y had obtained any knowledge of a default during its annual audit. Ex. 1 at EY-WCG-00-000080, CM Deck; Ex. 62, KB Deck WCG, then a wholly owned subsidiary of WMB, received capital contributions and interest-bearing advances from WMB in order to fund its operations. In September 1999, previous non-capital borrowings from WMB were converted into a seven-year note bearing interest at an annual rate based upon WCG’s credit rating. Although the intercompany note ranked equal with the credit facility note, WMB agreed that the intercompany note would be subordinated to the rights of the credit facility lenders in any bankruptcy, insolvency, liquidation or dissolution of WCG and in the event of default under the credit facility. Ex. 1 at EY-WCG-00-000079, CM Deck To raise funds for operations, including network construction, WCG conducted an initial public offering (“IPO”) in October, 1999. The IPO offered for sale 29,600,000 shares of Class A common stock. The underwriters for the IPO exercised their options and purchased 4,440,000 additional shares to cover over-allotments. In separate private placements, SBC Communications, Intel Corporation and Telefonos de Mexico, S.A. de C.V., respectively acquired 20,226,812, 9,225,093 and 4,612,546 shares of WCG’s Class A common stock. The financing effort also included the issuance of high yield notes in addition to the equity. The total amount raised from the IPO, private placement and high yield notes was approximately $3.4 billion. Ex. lat EY-WCG-00-000005, CM Deck; Ex. 12 at 4,6, JA; Ex. 1 at WCG 00650, KB Deck Following the IPO, shares of WCG stock began to trade on the New York Stock Exchange. Shares of WCG closed on October 1, 1999, the first day of trading, at $28.06 per share. Ex. 11 at 1, JA. The Telecom Index closed on October 1, 1999 at 616.80, representing growth of 23% from the end of 1998. Ex. 10 at 32, JA. WMB and WCG anticipated that the amount raised from the IPO would be sufficient to fund completion of WCG’s network buildout and other capital requirements and enable WCG to generate a positive cash flow without the need for further outside financing. Bailey Aff., ¶ 14; Ex. 1 at WCG 001650, Ex. 2 at WMB.00064219, KB Decl. However, six months later, WCG internally updated its capital expenditure plans to show that capital expenditures in 2000-2001 would be more than $1 billion higher than WCG’s internal forecast for that time period at year-end 1999. Ex. 4 at WTL 0090117, Ex. 5 at 35-38, KB Decl. In a memorandum dated January 24, 2000, John Williamson (“Williamson”), E & Y’s engagement partner for the YE 2000 audit of WCG, set forth his reasons for designating WCG as a “close monitoring engagement.” One such reason was: With the IPO in October 1999, the management of WCG will be under significant pressure to manage operating results to those included in the forecasts presented in connection with the Initial Public Offering process. The company has historically experienced significant net losses.... The expectation is that losses in and of themselves are not a significant issue to WCG’s investors so long as WCG is able to meet the expectations included in the IPO model. Ex. 9 at EY-WMB-E-01302453, CM Decl. In his memorandum, Williamson also noted a “key area” for partner review being “[impairment analysis on assets or investments identified as having impairment indieators-WCG.” Ex. 9 at EY-WMB-E-01302454, CM Decl. WCG’s Financial Outlook for February 2000, distributed to defendant, Keith E. Bailey (“Bailey”), WMB’s chief executive officer and then chairman of WCG’s board of directors, as well as to other WMB executives, stated, as to WCG’s network business unit: “[RJevenues continue to fall short of plan due to service delivery and provisioning issues.” Ex. 4 at WTL 0090087, KB Decl. It also stated that “Network capital spending expected to be above plan due to carryover spending projects from 1999.” Ex. 4 at WTL 0090088, KB Decl. WCG’s Financial Outlook for March 2000, distributed to Bailey and other WMB executives, stated: “Network quarterly revenue of $130MM is 14% below plan due to service delivery and provisioning problems. We expect these issues to continue throughout 2000 resulting in significantly lower EBITDA targets.” Ex. 38 at WTL 0027923, KB Decl. It also said: “We expect [capital] spending to exceed plan by year-end due to the additional carryover spending from 1999 and the authorization of new projects.” Ex. 38 at WTL 0027924, KB Decl. The price of WCG’s stock generally climbed from October 1, 1999 until March 7, 2000, when it reached $61.81 per share, the highest level at which WCG’s common shares would ever trade. Ex. 11 at 3, JA. The Telecom Index also continued to rise during this period, closing at 1170.64 on March 7, 2000. Ex. 10 at 30, JA. The Telecom Index reached its own zenith of 1248.06 on March 10, 2000, three days after WCG’s stock peaked. Id. During and after WCG’s IPO process, WMB considered a spin-off of WCG, to make it an independent company. Bailey Aff. ¶ 15. In a letter dated March 7, 2000, Lehman Brothers, an investment banking firm, at the request of WMB, provided its view, from a financial and debt capital markets perspective, “of a distribution to public stockholders of all of the Class B common stock in [WCG].” Ex. 24 at LB101808, KB Deck Lehman Brothers understood that “[the] transaction would be effected via a pro rata distribution of the Class B common stock of [WCG] to the stockholders of [WMB] and would constitute 100 percent of the Class B common shares outstanding” and that it “would result in two unaffiliated publicly held companies.” Id. Lehman Brothers also understood “[the] letter [would] be used in connection with a request for ruling that [WMB had] filed with the Internal Revenue Service concerning the Federal income tax consequences of the Distribution.” Ex. 24 at LB 101809, KB Deck As reported in the letter, Lehman Brothers viewed “the Distribution [to] provide [WMB] with the optimal capital structure to achieve its business objectives.” Ex. 24 at LB 101809, KB Deck In arriving at its view, Lehman Brothers stated: Prior to the Offerings [WCG’s IPO, private placement and high yield notes], [WMB] had been under ratings pressure due to funding its own aggressive business plan while simultaneously funding WCG’s business plan. The Offerings were necessary for [WMB] to fund [WCG’s] business plan through 2000 and retain its investment grade rating. From a credit ratings perspective, [WMB] and [WCG] are now considered separate credits by the credit rating agencies due to the non-recourse nature of the Notes Offerings [high yield bonds]. However, [WMB] continues to carry the burden of having funded [WCG] prior to the Offerings.... WMB continues to fully consolidate [WCG’s] $2.0 billion of debt.... And, since WMB owns a substantial portion of [WCG], we believe [WMB’s] lenders do not fully appreciate the separation of the higher risk profile [WCG] business from the lower risk energy businesses. The result is that [WMB’s] balance sheet, while currently investment grade, is stretched with limited future debt capacity. * * * * :¡í * [WMB] needs to retain, and possibly improve, its credit rating to continue to be competitive among its industry peers. # # :jc # :J; The continued deterioration of [WMB’s] credit quality would affect its cost of financing, ability to compete among its peers and ultimately execute on its business objectives. The Distribution would incrementally reduce [WMB’s] current balance sheet pressure, increase [WMB’s] future financing capacity and provide the opportunity to improve its competitive profile. Ex. 24 at LB 101813, KB Deck (emphasis added). On April 11, 2000, defendant, Howard Janzen (“Janzen”), WCG’s chief executive officer, sent an e-mail to defendant, Scott Schubert (“Schubert”), WCG’s chief financial officer, stating “We need to get a solid handle on capital spending.... ” Ex. 6, KB Deck On that day, Janzen also issued a memorandum announcing a policy “prohibiting] future participation by WCG employees in directed share programs [“friends and family stock”] offered by other companies that do business, or are likely to do business, with [WCG].” Ex. 77, Sarah Jane Gillett Declaration (“SJG Deck”). WCG had previously allowed its employees to receive directed shares or friends and family stock in the IPO’s of companies with which WCG had invested and had strategic alliances. One such company was Sycamore Networks. Shortly before the Janzen memorandum, Fortune magazine had published an article discussing the sale of friends and family stock to defendant Matthew Bross (“Bross”), WCG’s chief technology officer, from Sycamore Networks. The article reported that Bross had been given the opportunity to buy Sycamore Networks’ stock at the IPO price of $38 per share, which he could immediately sell in the open market for a substantial profit. The article reported that Sycamore Networks’ stock commenced trading on opening day at $270 per share and that the value of Bross’ stock surged to $1 million dollars. Bross and a group of employees under him had specifically recruited Sycamore Networks to develop products that WCG wanted to deploy on its network. Approximately seven months before the IPO, WCG had announced that it would buy $400 million of Sycamore Networks products for its network. After WCG decided to award a contract to Sycamore Networks, the company offered the friends and family stock to Bross. The Fortune magazine article noted that while the offering of friends and family stock was not illegal, it might not be “100% ethically sound.” Ex. LLLLL, SJG Decl. On May 18, 2000, WCG obtained approval from WMB for another $1 billion of capital expenditures on “transport, switching and colocation facilities and equipment.” Ex. 7 at WMB.00429828, KB Decl. The minutes of the WMB’s May board of directors meeting stated that Janzen “discussed results for the first quarter and issues that had caused revenues to fall short of plan, including challenges associated with service delivery, SBC’s delay in obtaining Section 271 relief from the Federal Communications Commission, and the fact that [the] Solutions [unit] suffered a revenue decline in the first quarter.” Ex. 7 at WMB.00429827. Following the May board meeting, Bailey wrote to Janzen: I think it is probably an exercise in understatement to observe that both boards were very uncomfortable with the rate which we are driving spending at [WCG] and had a concern that we not overreach either from, a capital or organizational perspective .... I think with the clear view on the part of the Board[ ] that we need to move further away from the brink in terms of credit rating and the willingness to sell common equity to do it we would be well advised to push that lever hard this year assuming the markets don’t tank in the next few months.... Given the number of folks who heard the Williams Board view that it is inevitable that we will need to separate the companies ... it is unlikely that mil remain a secret. Ex. 9, KB Decl. (emphasis added). A June 2000 Network Business Review report for May 2000 results for WCG showed a negative revenue variance of $127.7 million and noted: “Unfavorable revenues caused by service delivery concerns.” Ex. 40 at WTL 0206653, KB Decl. In a June 21, 2000 e-mail to Janzen and others, Bailey suggested that WCG seek immediate board approval for the issuance of WCG equity. Ex. 10, KB Decl. However, in order to maintain tax consolidation benefits, WMB placed limits on the amount of additional equity that WCG could issue to fund its still-growing capital requirements. Ex. 11, KB Deck On June 26, 2000, WCG issued a press release announcing that WCG’s board of directors had “approved expenditure of nearly $1 billion over the next several years to build data centers, expand its network colocation facilities and to scale up its Internet Protocal (IP) network.” Ex. 12, KB Deck WCG also held a conference call to discuss the new initiatives and expenditures. During the call, Schubert, the CFO, also discussed certain revenue delays related to service delivery problems and SBC Communications-related delays. Ex. 13 at TWC-018449, KB Deck The market reacted unfavorably to WCG’s announcement of additional capital expenditures and deferred revenue expectations, and the price of WCG’s common stock fell 14% in response to the news. Ex. 14 at ¶ 32, KB Deck On June 27, 2000, Bailey sent an e-mail to Janzen and others which stated: Obviously with the negative reaction of the market to the conference call and the down grading of our near term financial expectations [for WCG] we are getting a lot of calls and will need to do a fair amount of handholding with unhappy investors at both levels.... Our “bet” is approaching $7 billion with the announced spend and right now the market is beginning to think we are going to spend into the future without any sense of the need to be profitable. Some of the stronger than expected reaction is due to the fact that the market tone has changed dramatically. In another e-mail to Janzen later that day, Bailey stated: I would hope with the next several days we are able to sell the merits of the investments and to talk back down some of the over reaction that has taken place but my experience tells me that until you string a few quarters together that fully meet the market expectations for performance without any more downward adjustments you will be selling into a very skeptical marketplace. It is also clear that the $1 billion of equity is out of reach within the tax consolidation limits today and you may need to back off of capital spending just to manage that dynamic as a practical matter. Ex. 15, KB Deck (emphasis added). In an e-mail exchange on July 7, 2000, Janzen and Bailey agreed to delay any WCG equity offering to fund WCG’s increased capital needs after Bailey noted that “[WCG’s] stock is weak and I am concerned filing into a weak and declining stock price sends the wrong message to the market about our confidence in the future.” See, Ex. 16, KB Deck By July 12, 2000, WCG projected spending a total of $5.4 billion on WCG’s network in 2000-2001, compared to the $1.9 billion projected for the same time period at the time of WCG’s IPO. Ex. 17, KB Deck On July 13, 2000, Bailey sent an e-mail to the WMB board of directors in which he explained that following the June 27, 2000 conference call, WCG’s stock had gone into “something of a funk” and “the bad news far outweighs the good.” He also explained that WCG had developed a “credibility problem,” “impairing] WCG’s ability to raise capital at least in the short term” and that WCG “[was] adjusting [its] appetite for capital to meet that reduced capacity.” See, Ex. 23, KB Deck In that e-mail, Bailey noted “the pressure on the [WMB] balance sheet which comes from funding [WCG’s] needs and trying to respond to the opportunities in the energy business.” Id. Bailey, clearly beginning to chafe under what he felt to be a hair shirt in the form of WCG, stated that the upcoming WMB board meeting would be designed to answer “one question,” whether WCG should be spun off from WMB. Id. Bailey further stated: I think the decision [of whether to stay the course] would be relatively easy if we come away with a very high confidence level regarding [WCG’s] ability to deliver that [revenue] ramp within the capital it identified in May. The more that promise is deferred and the less confidence you have in it the more dificult the decision to stay the course, particularly given the robust real time performance and expansion opportunities in the energy area. Id. (emphasis added). Between March 7, 2000 and July 21, 2000, the price of WCG’s stock declined by more than 50%, closing on July 21, 2000 at $29.38 per share. Ex. 11 at 5, JA. From March 10, 2000 to July 21, 2000, Telecom Index declined 28% to 904.71. Ex. 10 at 28, JA. On July 22, 2000, Lehman Brothers made a presentation to the WMB board of directors about the current structure of WMB and WCG, maintaining status quo, separation alternatives and recapitalization. Ex. 184, KB Decl. According to Lehman Brothers, maintaining the status quo “could have negative implications for WMB’s ratings.” Ex. 184 at WMB. 00264690, KB Decl. On July 24, 2000, the first day of the class period in the case at bar, WMB issued a press release stating that the WMB board of directors had “authorized management to pursue a course of action that, if successful and approved by the board, would lead to the complete separation of [WMB and WCG].” The press release quoted Bailey as stating about the spin off: We believe these steps [leading to a separation of WMB and WCG] are the best way to ensure that both our energy and communications businesses have the eficient and effective access to the capital necessary to pursue the substantial growth that each enjoys .... Obviously, the ability to do that is consistent with the best long-term interest of our shareholders. Ex. 27, KB Decl. WCG’s stock price dropped slightly following this announcement, declining 2.98% on July 24, 2000 to close at $28.50. Ex. 11 at 5, JA. On that day, the Telecom Index closed at 873.96. Ex. 10 at 28, JA. On July 27, 2000, WCG issued a press release announcing financial results for the second quarter of 2000. In the press release, Janzen was quoted as stating: “We have continued to see a dramatic ramp-up in overall industry demand for bandwidth.” Consolidated Amended Class Action Complaint (“Complaint”), ¶ 61. In a conference call the next day, July 28, 2000, Bailey remarked: As stated in the press release, we believe this course of action, if successful, is the best way to assure that every part of our company can enjoy optimal growth as a result of the opportunities that are available to us and that continue to become available to us and it enables us to fund those opportunities in an efficient and an effective way. Ex. 28 at 1-2, KB Decl. (emphasis added). On August 8, 2000, WMB announced that it had received approval from the IRS for a proposed tax-free distribution of WCG to shareholders. Ex. 33 at EY-WCG-DF-001565, KB Decl. WCG completed the sale of $1 billion of high yield bonds on August 3, 2000. In a September 11, 2000 memorandum to the WMB board of directors, Janzen stated: “Although the bond offering raised more capital than originally forecast, we are still approximately $800 million under-funded through the end of 2001.[W] e are planning to return to the capital markets with a $250 million convertible preferred stock offering in a private placement transaction by mid-September____ We expect to bridge the remainder of the cash shortfall through a combination of asset sales, dark fiber sales and utilization of the bank credit facility as well as further debt and equity offerings.” Ex. 44 at WTL 0077116, KB Decl. However, he also stated: “we anticipate a need to request additional capital to offset cost overruns associated with the core network build out.” He anticipated “advancing a request for capital at the November [WMB board of directors] meeting.” Id. Approximately $240.5 million in preferred stock was issued in a private placement in September, 2000. In that month, WCG also drew $525 million under its credit facility. Ex. 7, Robert Malionek Declaration (“RM Decl”), Ex. 1 at EY-WCG-00-000080, CM Decl. In September of 2000, E & Y conducted a meeting to discuss WCG’s audit for 2000. One of the overall goals of E & Y for the audit, noted by Williamson, was “[a]t separation [of WCG and WMB], there should be no thoughts about switching audit firms.” Ex. 13 at EY-WCG-DOC2-004108, CM Decl. Shortly before the September meeting, Williamson had sent an email to the E & Y engagement team detailing discussions he had had with Schubert. He had questioned Schubert about “key areas to focus on to ensure [that E & Y] continuéis] as [auditor] of [WCG] post spin-off’ and relayed those areas to the team. Williamson further wrote: Regarding areas to focus over the next 6 months [Schubert] commented on the following: [WCG] will do something with ... [the] Solutions [unit] and we need to make sure we are not a roadblock to whatever they do. I asked him what this might mean, but he did not have further clarification other than to be ready, whatever they do. Ex. 15 at EY-WCG-DOC2-000071, CM Decl. On September 20, 2000, Bailey sent two e-mails to Janzen on the subject of WCG’s capital. In the first e-mail, Bailey stated: With the latest pressure on stock price I think it is fair to say [you] are out of capital capacity.... I don’t think you have any choice at this point -other than going on a rigid, essential need only capital diet while you restore capital capacity through operating performance and selling non core assets like [the] Solutions [unit] and ATL and some of the technology investments. My hope is that we can turn things around in a couple of quarters of good performance but the market is clearly running away from us.... Ex. 35, KB Decl. In the second e-mail, Bailey observed: For whatever reason, the market has lost confidence in the company and the cost of funds has spiraled upwards.... I suspect our Board would be amazed if we told them we were on a capital diet at WCG. Ex. 34, KB Decl. On September 22, 2000, Bailey instructed John Bumgarner (“Bumgarner”), who served as a senior officer for both WMB and WCG, to prepare a report for WMB showing that WCG has: a point of view in advance of our priorities and what we would do to ensure the funding for the highest of those under the most difficult scenarios as post spin the ultimate safety blanket of [WMB] financial backstops will no longer be available .... Obviously the current view of the next year has a funding gap. It also shows a number of possible ways to close that gap, but, at today[’s] stock price and credit market condition, I believe only those that involve the sale of existing assets would be practical answers and that is not entirely within our control.... The bottom line is we need to know before a funding crisis hits what gives first and how much flexibility we have in delaying capital to manage around the need.... Ex. 45, KB Decl. (emphasis added). Bumgarner took responsibility for preparing the report, internally referred to as the “White Paper.” Although Boston Consulting Group, an outside consulting firm, ostensibly authored the White Paper, the details of the White Paper were principally the work product of WCG’s network finance team of Mardi De Verges, T.J. Gallagher and Bill Cornog, with Bumgar-ner acting as editor in chief. The White Paper was presented to the WMB board of directors at its November 16, 2000 meeting. A September 2000 Financial Outlook for WCG discussed a “Negative 3Q operating EBITDA variance from plan driven primarily by 34% shortfall in data revenues due to provisioning issues and higher than anticipated credits/billing adjustments. ...” Ex. 46 at WTL 0094619, KB Decl. In an October 9, 200 e-mail from defendant Bob McCoy (“McCoy”), WMB vice president of law, to Jack McCarthy (“McCarthy”), WMB’s chief financial officer (and copied to WMB and WCG executives), McCoy revealed his concerns about the proposed spinoff: [T]he capital market landscape has changed dramatically since the [WMB] board started examining separation as a strategy. What was possible for WCG on a stand alone basis last spring and early summer may not be possible today. Ex. 36, KB Decl. In an October 12, 2000 e-mail to Bailey, Janzen stated: “Our $500 million gap has grown because of decline of our strategic investments and the network cost overrun (which isn’t known yet outside the company).” He also stated that analysts “believe[d] this gap is a major issue for [WCG].” Ex. 47, KB Decl. On October 25, 2000, Bailey, during a WMB conference call with analysts to discuss WMB’s and WCG’s financial results for the third quarter of 2000, stated that WCG expected to achieve EBITDA positive numbers by the end of 2001 and that WCG was “pre-funded for their capital needs in this time of more unsettled capital markets, to carry them to that point of EBITDA positive.” Ex. 53 at WMB. 00227224, KB Decl. (emphasis added). At his deposition, Bailey admitted that as he told investors WCG was prefunded, WMB had not yet put in place a plan to fill WCG’s funding gap. Ex 3 at 130-131,134, 144-46, KB Decl. On the same day, October 25, WCG issued a press release announcing its financial results for third quarter of 2000. Bross was quoted as stating: Through our unique Technology Farm System, [WCG] continues to test and deploy leading-edge optical technologies that split the spectrum of light to increase capacity and improve quality of service.... By combining these emerging technology [sic] with our industry-leading ability to expand and provision customer demand for recurring capacity, [WCG] is executing on its stated strategy to drive network utilization and accelerate the decline in unit costs. Complaint, ¶ 62. In a November 8, 2000 e-mail to Bailey and others, Schubert stated: “We have worked hard to eliminate the $700MM gap through a combination of capital reductions, capital deferral, cost reductions and additional dark fiber sales. Practical side however is that we have set in motion a series of events, all of which need to occur, in order to just be able to say that we are prefunded [for] 12 months.” Ex. 56, KB Decl. In a November 12, 2000 e-mail to Bailey and others, Schubert wrote: To WCG, the capital markets are closed and should be expected to remain that way. Our accessing the debt markets will be very costly.... Several of the banks in our commercial facility have stated they want out. They indicated that they only got in due to the insistence of WMB, as part of their energy relationship and have no desire to hold telecom paper. Ex. 79, KB Decl. As has been noted, the White Paper was presented to the WMB board at its November 16, 2000 meeting. The White Paper contained an Executive Summary which included the following observations: [To] date the near-term returns on the investment have fallen short of the original expectations. Much lower prices than expected have hurt margin realization. Higher volumes at these lower prices have driven up total costs and consumed much more of the network than anticipated at the time of approval of the original and turbo plans. Without any further capital expenditure beyond that originally envisioned, the cash generating potential of the existing lit network is much lower than originally expected. More broadly, there has been a “train wreck” in the telecommunications industry in 2000. Beginning in the spring of this year and accelerating this fall, the equity and fixed income security prices of all sectors of the industry are down considerably. The falling prices have and will prevent many players from reaching operations that are cash flow positive. Many investors have lost confidence, and an industry credit crunch has ensued. Many smaller players are bankrupting, and many larger players are fundamentally and immediately shifting their strategies. Ex. 62 at WMB.00400486, KB Decl. The White Paper identified WCG’s repeated failures to meet its previous forecasts and attributed those “disappointments” to increased demand and falling prices: [Financial performance has significantly missed expectations. The October 1999 IPO projection showed the Network achieving positive EBITDA from operations by 2Q 2000 with $29M for the total year. The latest forecast projects EBITDA turning positive by 4Q2001 with a negative $204M in 2000. Perhaps more importantly, the same factors driving this year’s financial performance also directly and negatively impact the cash producing potential of the existing investment. H? H< H* ‡ * ❖ The assumptions about market development differed from actual experience on two main dimensions: • Demand greatly exceeded expectations • Prices fell much more quickly than expected The reality of these two factors has driven the differences between the planned and actual performance. Ex. 62 at WMB .00400439-40. As a result of these adverse circumstances, the White Paper described the situation then facing telecommunications industry companies as a “doom loop”: Of course, WCG is not the only company to be impacted by the unexpected demand and low prices. This dynamic has been a result of super-heated and irrational capital markets, low barriers-to-entry for small and niche players, and a misunderstanding by many players and analysts around what is a successful and sustainable business model. In short, companies have been on a “capital treadmill.” A market with easy capital resulted in a host of new players entering the market and building out networks. In order to generate revenue quickly, many players cut prices to fill their networks. To continue and expand these builds, additional capital was required .... [T]his quickly became a treadmill, but one that has ultimately proved unsustainable. In fact, the treadmill has turned into a “doom loop” for many of these companies. H< * * * * * With the evolution from the treadmill to the doom loop, the bottom has dropped out of the equity and debt markets. Beginning in March 2000, technology stocks have plummeted. Since September 1st, the market has in particular begun punishing telecom stocks, with virtually all players across the value chain experiencing dramatic losses in valuations. Fiber players, networks, and hardware vendors have all been hurt. * ❖ * i * * Creditors are also beginning to seriously question the ability of companies to meet their obligations. H< H« * * ❖ H* As a result, capital markets have become much more difficult to access for telecommunications companies. Ex. 62 at WMB.00400444-46, KB Deck The White Paper offered some optimism for WCG’s future position within the troubled telecom industry: “WCG is [ ] one of the best-positioned players to take advantage of a market recovery.” But it specifically tempered any future expectations for WCG with a comment that the timing of any improvements could not be predicted and that, accordingly, concerns remained: Of course, no one knows exactly how the competitive environment will shift or how prices will react. Of course, there is a possibility that all will not go according to plan in 2001. There is potential for better than expected results but also the risk of a below plan outcome. Chief concerns include: Prices continue to decline at 1999/2000 pace • Service delivery issues prevent meeting planned volumes because of: —vendor problems, —customer issues, —internal issues • Capital markets for telecom do not reopen • Alternative sources of funds are not available. Ex. 62 at WMB.00400436, WMB.00400453, KB Decl. Any expressions of positive expectations for WCG in White Paper assumed that WCG would perform in accordance with its latest projections. Employees within WCG responsible for the projections testified that they were not certain that the projections had been fully developed or that WCG would be viable as a stand-alone company after the spin-off. Ex. 71 at 638, 141-145, Ex. 72, Ex. 70 at 130-133, 137-MO, 221-222; Ex. 41 at 475-478. The White Paper was also distributed to the WCG board of directors and was described in the November 20, 2000 board minutes. E & Y’s working papers for the 2000 audit stated that all board minutes were reviewed. Ex. 6 at 181-184, CM Decl.; Ex. 35 at WTL 0324757, CM Decl.; Ex. 36 at EY-WCG-00-001433, EY-WCG-00-001437. In addition to receiving the White Paper, the WMB board of directors also received a November 16, 2000 report from Lehman Brothers. The Lehman Brothers report stated that the energy markets were “strong” while the “equity, high yield and bank markets [were] currently closed” for WCG. Ex. 81 at WCG 023252. Lehman Brothers noted that WCG’s leverage ratios were “double its peers” and that WCG’s bank covenants were “at risk.” It also noted that WCG was “4 months funded before financings or asset sales” and “3.4B of new funds [were] required to fund plan through 1 Q02.” Ex. 81 at 023254. On November 16, 2000, WMB issued a press release which announced that the WMB board of directors had authorized management to continue to pursue a tax-free spin-off of WCG. The press release quoted Bailey as stating: This important step continues a process that we believe remains in the best long-term interests of our shareholders. Our energy and communications businesses have tremendous opportunities before them. Creating the most effective and efficient access to capital will help fuel that growth, and we believe that can best be achieved by creating two independent businesses. Ex. 84, KB Decl. On that day, WCG also issued a press release touting the WMB board’s authorization to continue the pursuit of the tax-free spin-off of WCG. This release stated, in pertinent part, that “WCG is superbly positioned to achieve our goals.... ” Complaint, ¶ 65. On November 28, 2000, WCG issued a press release announcing that “its 33,000 mile network is on schedule for year-end completion, with 31,000 miles installed and 27,500 lit.” Ex. C, SJG Decl. On December 6, 2000, at a WCG officers’ meeting, a slide was presented demonstrating that WCG was “Not Delivering on the 2000 Financial Commitments” with “Revenues off by 24%;” “Gross Margin off 125%;” “EBITDA lower by more than $200 million;” and “Capital up by 45%.” Ex. 50 at WCG-HJ-E000010747, KB Decl. An internal Lehman Brothers document dated December 11, 2000 stated: The primary business purpose for the [spin-of! is to relieve WMB of the financing requirements from WCG and enable it to effectively pursue acquisition opportunities in its energy business .... The proposed capital plans of both WMB and WCG would continue to strain WMB’s balance sheet and jeopardize its investment grade credit ratings, having a detrimental effect on its ability to execute its business objectives. Ultimately, the [spin-off] will improve WMB’s competitive profile by reducing WMB’s balance sheet pressure and increasing its future financing capacity. Ex. 30 at LB 066320, KB Decl. In a December 15, 2000 e-mail to Bailey, Janzen stated: Our immediate crisis is largely a product of the market heading away from us and no doubt we are in for a battle where survival is by no means certain. :]{ ;¡« '■£ ‡ ‡ To listen to Jack [McCarthy] talk about working with Bankers on other alternatives to heave the junk called WCG overboard as fast as possible is [ ] depressing. Ex. 29, KB Decl. (emphasis added). In a December 21, 2000 memorandum to Janzen, Bumgarner wrote: One could go through every AFE [Authorization for Expenditure] or Board presentation or the 1999 IPO model or the 2000 Bond sale model and discover the same economic busts in forecasts and assumptions. At no time has network come close to making FINANCIAL estimate — either long-term or short-term. Focusing on more than just Voice, the overall company’s IPO model of October 1999 called for a year 2000 EBITDA of positive $56MM, and the latest estimate for the year is minus $279MM excluding Tech farm sales (a plus $277MM). If you look at just Network, the IPO model called for Year 2000 EBITDA of plus $29MM and produced minus $178MM (excluding Tech Farm and Power Tel). ‡ ífc ‡ ❖ ‡ In my opinion, the above financial results leave little room for the argument about the following conclusions: 1. Our WCG management group has little to no financial credibility left in the financial markets. 2. Our Voice strategy ... so far ... is a huge failure and when these revenues of $636MM in 2001 are added to Solutions[,] [unit] revenues $1,421 MM in 2001 represent 66% of total revenues ... on which we are breakeven or losing money. tfc ‡ sH ❖ ‡ In addition, Bumgarner stated: 1. Our capital spending process is still not functioning, i.e., (a) $500mm in overruns (b) low to no economies on $5.7 bil of spend (c) over counting; miscounting year 2001 capital requests numbers that were later worked out with BCG in October/N ovember. Has anyone seen the assumptions used in the projected spending for next year? Are they consistent with current reality? Are they consistent with each project? I, for one, have little confidence, and January 1 is ten days away. Ex. 52, KB Decl. (emphasis added). In a December, 2000 memo from Deborah Stanford, of E & Y, to Debbie Fleming, of WMB, regarding the potential spinoff, E & Y noted: We understand that losses in [WCG] hampered [WMB’s] ability to secure debt financing, and that this endangered [WMB’s] ability to grow its business. The market began to punish [WMB’s] stock for this inability to grow the business .... A spin-off of [WCG] was attractive in that it offered a way to segregate the profitable pipeline business from the communications business and in so doing, better position the pipeline business for debt financing. Ex. 11 at EY-WCG/DF-001564, CM Decl. By the end of 2000, the price of WCG’s stock declined to $11.75 per share. Ex. 11 at 7, JA. The Telecom Index closed on December 29, 2000 at 463.44. Ex. 10 at 26, JA. On January 26, 2001, at the request of WMB, Lehman Brothers issued another letter relating to the spin-off. In the letter, Lehman Brothers set forth its view regarding certain “Restructuring Transactions” which WMB and WCG had identified to be accomplished in addition to the spin-off. One of the identified transactions, which was to occur before the spinoff, would involve the transfer of a $975 million intercompany note (and other assets) from WMB to WCG in exchange for WCG’s common stock, certain intangible assets, and WCG’s release of certain claims. Lehman Brothers commented that it viewed the identified transactions as necessary to permit WMB to proceed with the spin-off and to enable WMB to achieve its business purpose for the spin off, which according to Lehman Brothers was “to enable [WMB] to increase its borrowing capacity.” Ex. 2 at WMB. 00064217, KB Decl. Lehman Brothers specifically stated that “Maintenance of [WMB’s] investment grade credit [was] a business necessity in order [WMB] to participate in the highest growth and highest margin areas of its business equity market and trading.” Ex. 2 at WMB. 00064220, KB Decl. (emphasis added). It further concluded that “in order to reposition itself to successfully compete with its peers, [WMB] must definitively separate itself from [WCG] by effecting the [spinoff].” Ex. 2 at WMB.00064228. In an internal memorandum in January of 2001, E & Y set forth Lehman Brothers’ argument for spin-off of WCG from WMB: The major argument (in a nutshell) was that the two divisions cannot achieve their goals by remaining combined. In order for WCG to grow it must have capital investment. Looking at it separately, it currently does not have an investment grade credit rating. In contrast [WMB’s] Energy division currently has this type of rating. The Energy division sees its growth in the trading [sic] natural gas and electricity. To do so it must keep its investment grade rating. This means that it cannot finance [WCG’s] growth without sacrificing [WMB’s] investment grade rating and therefore its[ ] growth. Ex. 12 at EY-WCG/DF-001557, CM Decl. It also noted that in May 2000: Telecommunications and dot. com stock prices dropped sharply, followed by a downward spiral in debt markets as well. Analysts described the market for telecommunications stock and debt as a “train wreck.” Ex. 12 at EY-WCG/DF-001564, CM Decl. On January 29, 2001, WCG announced that it had reached an agreement with Platinum Equity, LLC to sell the U.S., Mexican and Canadian operations of the Solutions unit. Ex. 87, KB Decl. In January of 2001, senior WMB executives, including Bailey, participated in a “roadshow” in connection with an anticipated WMB equity offering. During the roadshow, Bailey and other WMB executives met in various cities with current and prospective investors and analysts and described the spin-off of WCG as something that “Better enables each company to execute its respective business plan”; “Optimizes access to capital”; “Facilitates pursuit of growth opportunities”; and “Creates a ‘Win-Win’ ” for “WMB and WCG shareholders.” Ex. 85 at ML 070978; Ex. 3 at 377-382, KB Decl. On F