In Re Williams Securities Litigation

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

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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

1

stock during the class period bought into an industry meltdown of historic proportions. The defendants maintain, correctly, that the

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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);

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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 .

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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.

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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

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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.

2

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 net

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work 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.

3

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

*1208

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

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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.

4

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,

5

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.

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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]

*1211

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.

*1212

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

*1213

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 strate

*1214

gy 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.

6

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

*1215

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

*1216

• 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

*1217

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

*1218

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 February 5, 2001, WCG announced earnings for the fourth quarter of 2000. Ex. 87, KB Decl. According to the press release, WCG “expects to be EBITDA-positive on operational basis by the end of

2001....” Id.

The press release also portrayed WCG’s business as continuing to be

*1219

strong, as “Janzen cited [WCG’s] success in both attracting new customers and meeting growing demand from established customers as proof of its broadband-en-ablement strategy and leadership in delivery of data, voice, Internet and media services.”

Id.

On February 15, 2001,

TheStreet.com

reported on the statements made by WCG at a Wall Street analysts’ conference. Schubert was quoted as stating: “We believe we are on a clear path to profitability____ We have a sound funding strategy in place.” Complaint, ¶ 68.

On February 26, 2001, WMB contributed the $975 million intercompany note and other assets in exchange for 24.3 million newly issued WCG shares. Ex. 1 at EY-WCG-00-000004, E Y-W CG-00-000092, CM Decl.

In March 2001, WCG issued $1.4 billion in structured notes. WMB provided indirect credit support for the notes through a commitment to issue its preferred stock in the event of default under the notes. Ex. D at 10, SJG Decl.

In a letter dated March 9, 2001, WMB advised E & Y that WMB had announced a plan that may result in WCG being spun off and that “[w]hile WCG is a subsidiary of [WMB], WMB will ensure that WCG has funding for its operations and financing needs.” Ex. 8, RM Decl. WMB also advised that “[WMB] will not spin off WCG to [WMB] shareholders unless management believes WCG possess sufficient liquidity through internal cash flows and external financing to enable it to fund its obligations through December 21, 2001.”

Id.

On March 12, 2001, WCG filed with the SEC its Form 10-K for the year-ended December 31, 2000, including financial statements purportedly presenting WCG’s 2000 financial statements in accordance with Generally Accepted Accounting Principles. Ex. 88, KB Decl. In the Report of Independent Auditors at page F-15 of WCG’s 2000 10-K, E

&

Y stated that “We conducted our audits in accordance with auditing standards generally accepted in the United States” and that, in its opinion, “the financial statements ... present fairly, in all material respects, the consolidated financial position of [WCG] at December 31, 2000 ... in conformity with accounting principles generally accepted in the United States.”

Id.

The Form 10-K did not report material impairments of long-lived assets as of December 31, 2000. Ex. 88, KB Decl. The February 5, 2001 press release announcing fourth quarter earnings did not announce the recording of material impairments of long-lived assets as of December 31, 2000. Ex. 87, KB Decl. .

E & Y’s work papers for the YE 2000 WCG audit totaled 17,000 pages. However, only two sentences were included regarding network impairment. Specifically, E & Y noted that “We did not identify any impairment indicators w/Pr [waive further review].” It also noted that “Since the majority of in-service assets have been added within the past 2 years as the construction of the network has been underway, we determined that there are no impairment indicators which would warrant a write-down of PP & E [Property, Plant and Equipment].” Ex. 18 at EY-WCG-AWS-00-165, EY-WCG-AWS-00-164, RM Decl.

An E & Y internal quality control review performed on E & Y’s 2000 audit of WCG shortly after it issued its audit opinion on WCG’s 2000 financial statements stated:

Network and dark — fourth quarter market changes, overall decline in market cap to book value, and potential technological changes.

Could have considered impairment issues in 2000.

Client has not yet defined specific indicators of im

*1220

pairment. This issue will be addressed this year.

Ex. 56 at EY-WCG/DF-007293, CM Decl. (emphasis added).

E & Y audited WCG’s debt covenant calculations and concluded that at YE 2000 it had no reason to believe that WCG was in violation of its debt covenants, as defined by the credit agreement. Ex. 2, Ex. 6, Dan Neale Declaration “DN Decl”. WCG was required to maintain a Leverage Ratio of no more than 18:1 as of December 31, 2000. According to WCG’s Debt Compliance Certificate for year-end 2000, approved by E

&

Y, WCG’s Leverage Ratio was 17.07. Ex. 36 at EY-WCG-00-001532, CM Decl. WCG was also required to comply with a minimum annual 2000 EBITDA covenant of $120 million. According to WCG’s Debt Compliance Certificate, WCG’s EBITDA was $160 million. Ex. 36 at EY-WCG-00-001532-33, CM Decl.

E

&

Y considered whether WCG would continue as a going concern for 12 months beyond the date of the financial statements and concluded that there was no substantial doubt about WCG’s ability to continue as a going concern. Ex. 11, p. 92, 11. 15-25, Christopher R. Harris Declaration (“CH Decl.”).

WMB paid E & Y $25.8 million for work performed in 2000. Of that amount, $4.4 million was for the annual audit. Ex. 16 at LP-WCG-010105, CM Decl.

Janzen, in a press release dated March 15, 2001, announcing the private placement of $1.4 billion in structured notes, was quoted as stating: “Closing this transaction enhances our overall liquidity and positions us well in anticipation of the proposed spinoff.” Complaint, ¶ 73.

In a March 17, 2001 e-mail to Schubert and defendant, Howard Kalika, a Vice President of WCG, regarding WCG’s viability, Lehman Brothers stated that “we believe we can give the viability opinion,

but have serious concerns for your funding position going forward.”

Lehman Brothers advised that it had said the same to McCarthy, WMB’s CFO. Ex. 96, KB Decl. (emphasis added). In an e-mail to Bailey and others that same day, McCarthy wrote: “Lehman is now marginally comfortable with [WCG’s] ‘financial visability’.... They are struggling with ... what will happen in the near term to the share price of WCG. They can see as much as 50% decline following the spin due to their review of WMB shareholders who would be likely to sell and also their view that the market for WCG is weak at this time.” Ex. 95, KB Decl.

In a March 20, 2001 e-mail from Schubert to Janzen, Schubert stated:

[T]he note offering is struggling to get up to the full $1.4 b and we had to reduce the b traunche bank offering to $300 mm from $500 mm. These items plus the fall in tech farm values and the ATL sale deferral is putting pressure on the Lehman viability opinion.

Ex. 98, KB Decl.

Despite WMB’s credit support for the $1.4 billion structured notes, Lehman Brothers and CSFB, as joint bookrunners for the offering, were unable to sell off the final $200 million in notes, a point they worked to keep secret, as indicated by a March 22, 2001 e-mail from Spencer Cutter of Lehman Brothers to Kenny Gunder-man, also of Lehman Brothers:

[T]he fact that Lehman and CSFB will be left holding bonds is TOP SECRET — though the company is aware of it, if other firms or investors catch wind that we are sitting on $200 million — it will be BAD.

Ex. 99, KB Decl.

On March 30, 2001, Lehman Brothers made a presentation to the WMB board of directors about the spin-off, discussing

*1221

WCG’s performance in comparison to its peers in the telecommunications industry. It outlined the key business risks faced by WCG, including customer concentration risk, industry risk with market conditions deteriorating, market risk of supply and demand and WCG’s ability to perform in accordance with its business plan. Lehman Brothers stated that WCG was adequately capitalized and forward funded for 15 months. However, it disclosed that WCG’s peers were forward funded for 18 to 24 months. Lehman Brothers discussed the key financial risks related to the spin-off, including the fact that WCG’s business plan was not fully funded for 18 months, its balance sheet was highly leveraged and that WCG would have a strong need to access equity capital markets to de-leverage the balance sheet and fund its business plan. It revealed that WCG would need $450 million for 18 months’ funding and $1.5 billion to be fully funded. It further observed that the equity capital markets were closed for WCG’s peer group and that the market was not likely to open before 4Q 2001. Ex.102, WMB. 00550045, Ex.101, WMB/WC. 00047022, WMB/WC.00047023, WMB/WC.00047024, WMB/W C.00047033, WMB/WC.00047035, KB Decl.

Lehman Brothers’ actual opinion letter to WMB in connection with the spin-off of WCG neither “opined whether [WCG was] going to survive after the spin-off’ nor stated “whether or not WCG [was] going to be a viable stand-alone company after the spin-off.” Ex. 83 at 68-71; Ex. 67, CM Decl. Lehman Brothers opined only that the spin-off “[would] not materially impair the ability of [WCG] to fund in the future, from external sources or through internally generated funds, its currently anticipated operating and capital requirements as currently projected in the financial forecasts prepared by the management of [WCG].” Ex. 67 at WMB/WC.00047066, CM Decl.

In its opinion letter, Lehman Brothers also informed WMB and its board of directors that:

With respect to the financial forecasts of [WCG], upon advice of managements of [WMB] and [WCG],

we have assumed that such forecasts have been reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of [WCG] as to the future financial performance of [WCG] and that [WCG] will perform in accordance with such forecasts.

Ex. 67 at WMB/WC.00047065, CM Decl. (emphasis added).

On March 30, 2001, WMB issued a press release announcing that WMB had approved the spin-off of WCG. In the press release, Bailey was quoted as stating:

Today’s decision brings to a conclusion an effort that began last summer. That is when our board began analysis of whether separating [WMB] and [WCG]

would best enable each to reach its full potential and to most efficiently access capital markets

.... With sufficient capital in hand to meet its needs well into 2002 and its next-generation network completed and open for business, we believe [WCG] is poised to deliver on its great potential.

Ex. 92 at LB 066355, KB Decl.

On that day, WCG issued a press release about the spin-off. Janzen was quoted as stating:

“[T]his spinoff is the natural evolution of a business strategy begun in 1998, when we re-entered the telecommunications space.... The spinoff gives [WCG] the best opportunity to strengthen its industry leadership and the ability to attract investors who value the vast potential of broadband.”

CAC, ¶ 75.

In a letter dated April 10, 2001 to a U.S. Treasury Department official, McCarthy

*1222

stated: “The objective of the [spin-off] is to maintain [WMB’s] credit rating and increase its borrowing capacity so that it can efficiently fund the capital needs of its growing business.” Ex. 188, KB Decl.

In April, 2001, senior WMB executives also participated in a roadshow in connection with the spin-off. Ex. 93, Ex. 94, KB Decl. During the roadshow, the executives described the spin-off as something that “Better enables each company to execute its business plan”; “Optimizes access to capital”; “Facilitates pursuit of growth opportunities” and “Creates a ‘Win-Win’ for WMB and WCG shareholders.” Ex. 94 at WCG-HJ-E000015845, KB Decl.

On April 18, 2001, Winstar Communications, a significant customer of WCG, announced that it had filed for protection under Chapter 11 of the Bankruptcy Code. WCG had entered into an agreement with Winstar Communications in 1998 for a 25-year indefeasible right to use of approximately 2% of the wireless local capacity of Winstar Communications. Ex. D, at 12, SJG Decl.; Ex. 49 at EY-WCG-01-005034, CM Decl.

On April 23, 2001, WMB spun off WCG. WMB distributed approximately 400 million shares, or 95 percent of WCG common stock held by WMB, to WMB shareholders in a tax-free distribution. Following the distribution, WMB retained approximately 5% of WCG’s common stock. As a result of the spin, WCG’s business was completely separated from WMB. Bailey resigned as chairman of WCG’s board of directors. Ex. D, SJG Deck; Bailey Aff. ¶ 33.

On April 26, 2001, during WMB’s first quarter 2001 analyst conference call, Bailey stated the following regarding WCG:

We also have been pleased with the way the [WCG] stock has traded since the spin. While we obviously were disappointed that the combination of the market conditions in that sector and the overhang of the shares that came onto the market as a result of our dividend put continued pressure on that stock, it appears that the market pretty fully discounted it, it’s found a hard bottom and because their financing is in place and their performance we believe is good and will continue to be good, we think that there’s significant upside in that stock as well[,] as soon as it reaches a new ownership equilibrium.

Ex. 115 at WMB.00032222, KB Deck

Shortly after the spin-off, The Blackstone Group began working with WCG to restructure its balance sheet or find an investor to infuse more capital into WCG. On or about April 30, 2001, Bumgarner requested certain WCG employees “to evaluate the potential of repurchasing up to $1 billion of WCG bonds,” which were then trading at a steep discount. Ex. 118, Ex. 119, KB Deck

On May 17, 2001, during a WMB shareholder meeting, Bailey commented as follows:

[W]e were ultimately successful, and in a way that we believe best assures the long-term health and prosperity of both companies.... [WCG] is strongly positioned for success. Its core network asset is in place. It has demonstrated history of technical performance. And, it has the financial resources in place to enable it to deliver on the promise of a very bright future.

Ex. 116 at WMSE005813519, KB Deck

On June 17, 2001, Janzen forwarded to Bumgarner an e-mail written by T.J. Gallagher announcing a freeze on capital spending. Ex. 120, KB Deck In late June 2001, WCG announced that it would lay off up to 10% of its work force. Ex. 74 at EY-WCG-01-006032, CM Deck

In a July 18, 2001 Preliminary Restructuring Proposal, The Blackstone Group outlined two proposed restructuring trans

*1223

actions, both of which contemplated purchase by SBC of WCG’s notes on the open market and SBC’s tender of the notes to WCG in exchange for prepayment of services and additional new securities. Ex. 121, KB Decl. In its July proposal, The Blackstone Group stated:

[WCG’s] liquidity position seems viable in the very short term, but WCG will need future funding to meet its business plan. [WCG] will need to (i) undergo a restructuring to alleviate cash flow until it can reach cash flow neutral, and/or (ii) raise further capital from an investor to fund future cash funding needs.

[WCG] should not use cash to repurchase debt because it will adversely affect future liquidity and hinder achieving business plan.

Ex. 121 at WTL 0023210, KB Decl. (emphasis added).

At a special meeting on July 30, 2001, WCG’s board of directors authorized WCG’s officers to proceed with evaluation of, and initial steps to implement, a proposal to restructure [WCG’s] balance sheet by acquiring [WCG’s] outstanding high-yield bonds. Ex. 126, KB Decl.

In July and August of 2001, WCG approached SBC for financial assistance but SBC decided against making any investment. Ex. 123 at WTL 0250417, KB Decl. An August 23, 2001 presentation to the WCG board of directors stated:

From a financial standpoint we realize the cash generated from our business plan is insufficient to service our debt. The action we are recommending is to buy back $1.5-2 B of our bonds in their discounted condition to reduce debt payments.

The presentation further stated:

WCG is very close to falling into a chasm of the red “danger” zone — we are hampered by a weak financial structure and disappointing operational performance.

Ex. 124 at WTL 0093794, 0093745, KB Decl.

After unsuccessful attempts to get help to buy back its notes on the open market, WCG set up a subsidiary, CG Investments, to purchase its notes. WCG elected to go forward with the repurchase of the notes despite advice that the banks would view it “as contrary to the spirit, if not the language, of the credit agreement.” Ex. 126 at WTL 0023330, Ex. 127, KB Decl., Ex. 23, Ex. 24, MK Decl.

In October 2001, WCG prepared for discussions with lending banks about debt covenants for 2002 and beyond. It informed Bank of America, the administrative agent of the lending banks, of its use of cash to repurchase the notes. Ex. 60 at WTL 0282531, CM Decl. On October 12, 2001, counsel for WCG’s lending banks advised WCG of concerns that the bond repurchases violated WCG’s credit agreement. Ex. 128, KB Decl.

At the beginning of a meeting with lending banks on October 19, 2001, WCG received a letter from Bank of America informing it that WCG’s buy-back of the publicly-traded notes violated certain provisions of the credit agreement and that the administrative agent was reserving all of its rights under the credit agreement, including termination. The letter acknowledged that WCG disputed the validity of Bank of America’s position. Ex. 60 at WTL 0282531; Ex. 129, KB Decl. During the meeting, WCG presented an overview of its current business plan. It indicated that its strong cash position eliminated the need to raise new capital by year-end 2001 under one of its covenants and also suggested covenant revisions for the next year and thereafter. Ex. 60 at WTL 0282531.

During the October 19 meeting, WCG agreed to allow PricewaterhouseCoopers LLP (“PWC”), on behalf of the lending banks, to perform an evaluation of WCG’s

*1224

business plan. It was agreed that the review would be completed by January 15, 2002, and that WCG would not continue the bond buy-back program until completion of the review. Ex. 60 at WTL 0282532; Ex. 130, KB Deck

On October 31, 2001, WCG announced in a press release that it had “amended the company’s bank credit facility covenant that required the company to raise additional capital by the end of [2001].” . Before the amendment, WCG had to raise additional debt and equity in the amount of $225 million by December 1, 2001. Under the amendment, which had been agreed to by the lending banks the day before, October 30, 2001, WCG was not required to raise any additional capital until July 1, 2003. Ex. 25, MK Deck; Ex. 60 at WTL 0282532, CM Deck WCG’s press release also revealed WCG’s buy back of “approximately 18.3% of its outstanding publicly traded senior notes at a total cost of about 43 cents per dollar of face value.” It also quoted Schubert as stating:

As the company continues to optimize its capital structure and position itself for long-term success, we will be working jointly with our bank group to perform a more comprehensive review of the existing credit agreement.... This review will ensure that the existing credit agreement remains consistent with our current capital structure, our reduced capital expenditure requirements and the overall market environment. During this review period, which may require 60-90 days to compete, the company will not make any additional cash purchases of its publicly traded debt.

Ex. 25, KM Deck

In an October 31, 2001 e-mail to Janzen, Bailey stated:

I gave.a fire breathing endorsement of WCG and the strategy that underpinned it (a bandwidth machine-low cost-high quality) during our analysts meetings yesterday.

Ex. 117, KB Deck

After his fire breathing endorsement and at a time when he possessed undisclosed adverse information about WCG, Bailey (without any public reporting or disclosure) sold nearly 400,000 shares of WCG stock, for a profit of approximately $500,000. Ex. 138 at WMDC007752, Ex. 141, Ex. 142, KB Deck

In November 2001, PWC began its review of WCG. During November and December of 2001, WCG began to explore other restructuring alternatives. Ex. 60 at WTL 0282532, CM Deck

In the third and fourth quarters of 2001, WCG took impairment charges on excess network equipment. Specifically, WCG took charges of $150 million in the third quarter and $186 million in the fourth quarter on excess equipment. Ex. 11 at EY-WCG-01-003946, RM Deck In the third quarter of 2001, WCG wrote down 100% of its $35 million in Sycamore Networks equipment on hand. Ex. 167, Ex. 71 at 353-56, KB Deck

By the end of 2001, WCG’s stock declined to $2.35 per share. Ex. 11 at 12, JA. At that point, WCG’s stock had lost 96% of its value since its high on March 7, 2000 and 92% of its value since the beginning of the class period on July 24, 2000. The Telecom Index closed on December 31, 2001 at 236.63. Ex. 10 at 21, JA. This was down 81 % from its high on March 10, 2000 and 73% from the beginning of the class period.

On January 11, 2002, WCG presented its business plan to the lending banks. At the meeting, it was indicated that, as a prerequisite to amendment of the covenants, WCG should restructure all of its debt. The meeting concluded with an agreement to extend the negotiation period until Jan

*1225

uary 24, 2002. The negotiation period was subsequently extended to February 28, 2002. WCG was required to develop a comprehensive plan for the financial restructuring and de-leveraging of its balance sheet. Ex. 60 at WTL 0282533, CM Decl.

On January 23, 2002, PWC formally reported to WCG’s bank group that it was uncertain whether WCG would achieve the cash flows projected in its business plan as WCG was forecasting “very aggressive growth rates in revenue drivers” and “projecting huge increases in its market share in all major products.” Ex. 132, KB Decl.

On January 28, 2002, Global Crossing, a competitor of WCG, filed for Chapter 11 bankruptcy protection. Ex. 60 at WTL 0282534, CM Decl.

On January 28, 2002, WCG’s stock closed at $1.63 per share. Ex. 11 at 64, JA. At that time, WCG’s stock had lost 97% of its value since March 7, 2000 and 94% of its value since the outset of the class period. On that day, the Telecom Index closed at 217.06, a decline of 83% from its high on March 10, 2000 and of 75% since the outset of the class period. Ex. 10 at 21, JA.

Because the credit facility provided for an interest rate that was reset on a periodic basis, WCG, on January 28, 2002, issued an interest rate reset request. The request required the reaffirmation of certain representations and warranties in the credit facility. In response to the request, Bank of America informed WCG that due to negative developments in the telecommunications industry, WCG may have been in default of its representations and warranties. On January 29, 2002, the Bank of America sent WCG a reservation of rights letter concerning the possible default. Ex. 60 at WTL 0282533, CM Decl.

WMB, in a January 29, 2002 press release, announced that “Today’s planned release of complete unaudited 2001 earnings has been delayed pending an internal assessment of [WMB’s] contingent obligations related to [WCG].”

See,

Ex. 14, JA. On the same day, WCG issued a press release stating that “the assessment WMB is undertaking has no direct impact on WCG’s operations, WCG’s financial performance or the contingent guarantees WMB provided in support of WCG’s $750 million network lease agreement (ADP facility) and the $1.4 billion of WCG sénior notes issued in March of 2001.”'

See,

Ex. 15, JA.

On the same day, January 29, the first of the present class actions was filed by the Milberg, Weiss law firm on behalf of these plaintiffs.

(Cali,

et

al. v. Williams Companies, Inc, et

al No. 02-CV-072, N.D. Okla., Doc. No 1.) The January 29 Cali complaint is discussed in more detail later in this memorandum.

The price of WCG’s stock closed on January 29, 2002 at $1.34 per share, down 11.6% (net of market ánd industry effects) from the previous day’s closing price. Ex. 11, JA; Ex. 1 at - ¶ 88, MK Decl. The weighted average price of WCG’s notes fell 8.6% on January 29, 2002 and fell an additional 13.9% on the following day. Ex. 1 at ¶ 91, MK Decl.

On January 29, 2002, another WCG competitor, Level 3 Communications, Inc., announced that it was taking a $3.2 billion impairment charge for its long-lived assets. Ex. 15, MK Decl.

On February 1, 2002, shares of WCG’s stock closed at $1.42, down 98% from the stock’s high on March 7, 2000 and 95% from the outset of the class period. Ex. 11 at 12, JA.

On the next trading day, February 4, 2002, WCG issued a press release announcing that its preliminary fourth quarter results did not include “any impairment related to [WCG’s] long-lived assets”

*1226

and that bankruptcy announcements by other telecom companies and impairment charges taken by competitors had “resulted in a continuing analysis of this assessment.”

See,

Ex. 16, JA. WCG also announced that “On January 29, the banks, through their administrative agent, had informed [WCG] that, in their view, the Company may be in default under its credit agreement, and have reserved their rights accordingly.” According to the press release, “The possible default relates to the fact that, due to recent negative developments in the telecommunications industry, the banks are questioning whether the Company can confirm the representations and warranties included in the credit agreement.... The banks have also reserved their right to claim that the purchase by [WCG] of certain of its redeemable notes in 2001 previously reported by the Company may violate the credit agreement.” WCG announced that it had agreed to submit to the banks by February 25, 2002, “a comprehensive plan for restructuring and de-leveraging its balance sheet.” In developing this plan, it was “considering various possible restructuring alternatives” but that “successful execution of the options currently envisioned does not include seeking bankruptcy protection or the substantial dilution of equity security holders.”

See,

Ex. 16, JA.

In response to the February 4, 2002 press release, WCG’s stock fell by 22.8% (net of market and industry effects); trading volume was 26.0 shares, 3.9 times the average post-spin off daily volume. The stock closed at $1.00. On the following day, WCG’s stock price declined another 11.6%. WCG notes fell by an average of 23.6% on February 4, 2002 in response to WCG’s announcement. Ex. 1 at ¶ 94, MK Deck

On February 13, 2002, WCG held a conference call with analysts. During this call Schubert said:

To re-summarize, last week WCG agreed to submit a comprehensive plan for restructuring and de-levering the balance sheet to our bank group by February 23. We continue to work with our financial and legal advisors on the development of this plan. Our previously stated goal remains. That is to successfully execute a plan without needing to seek bankruptcy court protection or requiring substantial dilution of our current equity shareholders.

However, based on the number of questions we have received, I must remind everyone that the ultimate outcome will be influenced by stakeholders outside of the company. As a result we cannot ensure success regarding our stated goal.

Ex. 17 at 2-3, JA.

Shares of WCG closed on February 12, 2002 at $.067, down $.01 from the previous day’s close. Ex. 11 at 12, JA.

At the same time WCG was negotiating with its lending banks, it was in discussions with WMB and SBC, seeking substantial cash infusions. These discussions ultimately proved to be unsuccessful and ended in late February 2002. Ex. 63 at EY-WCG-01-000514, CM Deck

On February 25, 2002, WCG issued a press release which announced that “The company, along with its bank group, is pursuing a comprehensive resolution to restructure its balance sheet” and “discussions are being expanded to include multiple restructuring options.” According to WCG, “As part of evaluating the expanded options, the company is considering the potential benefits of a negotiated Chapter 11 reorganization process.”

See,

Ex. 18, JA.

In response to the February 25, 2002 press release, WCG’s stock price fell by 61.6% (net of industry and market effects). Ex. 1 at ¶ 95, MK Deck The price of WCG’s stock closed at $0.22 per share.

*1227

Ex. 11 at 13, JA. The next day, February 26, Moody’s lowered its credit ratings for WCG, and WCG’s stock price was down another 16.2% (net of industry and market effects) on that day. Ex. 1 at ¶ 95, MK Decl. The WCG notes declined by 16.6% and 15.8% on February 25 and February 26, 2002, respectively. Ex. 1 at ¶ 96, MK Decl.

On March 5, 2002, WCG and the bank group agreed to extend the negotiating period to March 27, 2002. Ex. 60 at WTL 0282535, CM Decl.

On March 8, 2002, WCG exercised its option to purchase the ADP assets in accordance with the terms of the ADP. Under a prior agreement, WMB was obligated to fund the purchase price of the ADP assets in exchange for debt or equity from WCG. Ex. 60 at WTL 0282536, CM Decl.

By March 28, 2002, the price of WCG’s stock had declined further, to close at $0.14 per share. Ex. 11 at 13, JA. The Telecom Index closed on March 28, 2002 at 173.76, a decline of 86% from its high on March 10, 2000 and 80% from the outset of the class period. Ex. 10 at 20, JA.

On April 1, 2002, WCG filed its Form 10-K for the year 2001. Ex. 19, JA. This filing disclosed that WCG had taken a total of $2.9 billion in impairment charges with respect to long-lived assets.

Id.

at F-ll, F-12. It further stated that “Among the [restructuring] options is reorganization under Chapter 11 of the U.S. Bankruptcy Code.” Ex. 19 at V-3, JA. E

&

Y included a “going concern” statement in its opinion, based on the potential for default claimed by WCG’s creditors:

The accompanying financial statements have been prepared assuming that [WCG] will continue as a going concern. As more fully described in Note 1, certain of the Company’s creditors have informed WCG that in their view WCG may be in default under the terms of its credit facility. This condition raises substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

E & Y did not issue an annual debt covenant compliance report for YE 2001. E & Y’s issuance of the going concern explanatory paragraph constituted an event of default under WCG’s credit agreement. Ex. 12, RM Decl.

The price of WCG’s stock on April 1, 2002 closed at $0.13 per share. Ex. 11 at 13, JA.

On April 22, 2002, the price of WCG’s stock closed at $0.17 per share. Ex. 11 at 13, JA. This was down 99% from the March 7, 2002 high and down 99.4% from the outset of the class period.

After the market close on April 22, 2002, WCG filed for Chapter 11 bankruptcy protection. Ex. 20, JA. The next trading day, April 23, 2002, WCG’s stock price fell by 67.3% (net of industry and market effects). Ex. 1 at ¶ 98, MK Decl. The price of WCG’s stock closed at $0.06, representing a total class period decline of 99.8%. Ex. 11 at 13, JA. Trading volume in WCG common stock on April 23, 2002 was 46.8 million shares, 7.1 times the daily average trading volume for WCG stock during the period following WCG’s spin-off from WMB. The average price of WCG notes was down 17.6% on April 23, 2002. Ex. 1 at ¶ 98, MK Decl. The Telecom Index closed on April 23, 2002, at 148.94. Ex. 10 at 20, JA. At that point, the Telecom Index had declined approximately 83% from its high on March 10, 2000.

III.

Procedural History

Beginning on January 29, 2002, the date of WMB’s press release announcing the

*1228

delay of the release of the 2001 earnings pending an internal assessment of WMB’s contingent obligations related to WCG, thirty separate class actions were filed in this judicial district against WMB and other defendants. By orders dated April 15, 2002 and June 21, 2002, the actions were consolidated and by order dated July 15, 2002, the consolidated action was styled,

In re Williams Securities Litigation,

Case No. 02-CV-72-F(M), Lead Case.

7

In the June 21, 2002 order, the court bifurcated the consolidated action in the two subclasses of plaintiffs: (i) the WMB Subclass and (ii) the WCG Subclass.

8

On July 8, 2002, the court appointed Alex Meruelo (“Mer-uelo”) as lead plaintiff of the WCG Subclass. The 148-page Consolidated Amended Class Action Complaint was filed by lead plaintiff on behalf of the WCG Subclass on September 27, 2002. The Consolidated Amended Class Action Complaint alleged claims against (i) all defendants under § 10(b) of the Exchange Act, 15 U.S.C. § 78 (b), and SEC Rule 10(b)’ promulgated thereunder, 17 C.F.R. § 240 .10b-5, and (ii) the individual defendants and WMB as controlling persons under § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). More specifically, the amended complaint alleged that during the class period, as a result of defendants’ materially false and misleading statements, members of the WCG Subclass purchased or acquired WCG equity and debt securities at prices that were artificially inflated. Motions to dismiss the complaint were filed by the WCG defendants and E & Y on November 25, 2002. By order dated December 12, 2003, the motion of the WCG defendants was denied and the motion of E & Y was granted in part and denied in part.

See, In re Williams Securities Litigation,

339 F.Supp.2d at 1242 .

On January 12, 2005, Meruelo filed a motion to certify the WCG Subclass and to appoint himself and Norman Kirkendoll (“Kirkendoll”) as representatives of the WCG Subclass. As previously noted, on November 11, 2005, the case was reassigned to the undersigned.

In an order dated June 12, 2006, this court certified the WCG Subclass and designated Mereulo and Kirkendoll as representatives for the WCG Subclass. Pursuant to the court’s June 12, 2006 order and a subsequent order of August 8, 2006, the WCG Subclass consists of all persons who purchased or otherwise acquired the securities of WCG between July 24, 2000 and April 22, 2002, inclusive (the class period), and who were damaged thereby.

9

On August 16, 2006, the court entered an order approving the Notice of Pendency

*1229

of Class Action, Summary Notice and Notice Dissemination Program. In that order, the court specifically ordered that all members of the WCG Subclass “who do not timely request exclusion from the Class by October 18, 2006 ... will be bound by any judgment or determination of the Court affecting the Class.”

On October 31, 2006 and November 1, 2006, the court heard arguments on Dau-bert and summary judgment motions. Shortly thereafter, on November 14, 2006, the court entered an order staying proceedings in this case as related to the WCG Subclass pending the entry of an order on the Daubert and summary judgment motions.

IV.

Summary of the claims of the WCG Subclass

The WCG Subclass plaintiffs allege that the WMB defendants and WCG defendants made materially false and misleading statements or omitted to disclose material facts as to the reasons for the April 2001 spin-off and as to WCG’s financial condition and operating results both before and after the April 2001 spin-off.

The WCG Subclass alleges that E

&

Y issued a clean audit opinion that falsely stated that WCG’s financial statements for YE 2000 complied with generally accepted accounting principles. It also alleges that E & Y’s audit opinion falsely stated that the audit complied with generally accepted auditing principles. Specifically, the WCG Subclass contends that WCG’s network assets and other fixed assets were materially impaired under Statement of Financial Accounting Standards No. 121 (FAS 121) in 2000 and that WCG failed to disclose these impairments in the financial statements. Additionally, the WCG Subclass alleges that WCG improperly recognized revenue on certain indefeasible right of use (“IRU”) fiber transactions. It also contends that WCG failed to disclose debt covenant violations. The WCG Subclass contends that E & Y knew or recklessly disregarded facts showing that the assets were impaired, that WCG improperly recognized revenue with respect to the IRU transaction, and that WCG had violated its debt covenants. The WCG Subclass further alleges that E

&

Y failed to disclose “going concern” doubts in the audit report even though E

&

Y knew or recklessly disregarded facts showing that there was substantial doubt about WCG’s ability to continue as a going concern.

A.

Rule 10(b) and Rule 10b-5 Claims

— Basic

Elements.

Section 10(b) of the Exchange Act forbids (1) the “use or employ[ment] ... of any ... deceptive device,” (2) “in connection with the purchase or sale of any security,” and (3) “in contravention of’ the SEC “rules and regulations.” 15 U.S.C. § 78j(b). SEC Rule 10(b)-5 forbids, among other things, the making of any “untrue statement of material fact” or the omission of any material fact “necessary in order to make the statements made ... not misleading.” 17 C.F.R. § 240 .10b-5. In cases involving publicly traded securities and purchases or sales in public securities markets, the basic elements of a securities fraud claim under § 10(b) and Rule 10b-5 include: (1) a material misrepresentation (or omission); (2) scienter,

i.e.,

a wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation,

i.e.

a causal connection between the material misrepresentation and the loss.

Dura Pharmaceuticals, Inc. v. Broudo,

544 U.S. 336 , 125 S.Ct. 1627 , 161 L.Ed.2d 577 (2005).

B.

Section 20(a) Claims

— Basic

Elements.

Under § 20(a) of the Exchange Act, “[ejvery person who, directly or indirectly, controls any person liable” under Section

*1230

10(b) and Rule 10(b) — 5 “shall also be liable jointly severally with and to the same extent as such controlled person is liable.15 U.S.C. § 78t. The basic elements of a control person liability claim under § 20(a) are (1) a primary violation of the securities laws and (2) “control” over the primary violator by the alleged controlling person.

City of Philadelphia v. Fleming Companies, Inc.,

264 F.3d 1245, 1270-71 (10th Cir.2001) (citing

Maher v. Durango Metals, Inc.,

144 F.3d 1302 (10th Cir.1998)).

V.

The Daubert Motions.

A.

The general framework for Daubert analysis in this case.

The basic principles which govern the resolution of a challenge to the admissibility of proposed expert testimony are nearly rote, but bear repeating with an eye to the context of the issues now before the court. Those principles are discussed in broad terms at this point. Further, more specific, discussion and analysis will be found later in this memorandum opinion.

The Supreme Court’s decisions in

Daubert v. Merrell Dow Pharmaceuticals, Inc.,

509 U.S. 579 , 113 S.Ct. 2786 , 125 L.Ed.2d 469 (1993) and

Kumho Tire Company, Ltd. v. Carmichael,

526 U.S. 137 , 119 S.Ct. 1167 , 143 L.Ed.2d 238 (1999) establish a “gatekeeper” function for trial judges under Rule 702, Fed.R.Evid.

See also, Goebel v. Denver and Rio Grande Western R. Co.,

215 F.3d 1083 at 1087 (10th Cir.2000)

(Goe-bel

I). The gatekeeper function “requires the judge to assess the reasoning and methodology underlying the expert’s opinion, and determine whether it is scientifically valid and applicable to a particular set of facts.”

Id.

The question of

how

to perform its ga-tekeeping function is a discretionary matter for the trial court. The court may conduct a hearing, it may perform its ga-tekeeping obligation by ruling on a motion in limine or on an objection at trial, or even by ruling on a post-trial motion.

Id.

When faced with a Daubert objection to proposed expert testimony, the court must adequately demonstrate by specific findings on the record that it has performed its duty as gatekeeper.

Goebel I,

215 F.3d at 1088 . The Court of Appeals has left no room for doubt on this point,

e.g., Dodge v. Cotter Corp.,

328 F.3d 1212 , 1227 (10th Cir.2003),

cert. denied,

540 U.S. 1003 , 124 S.Ct. 533 , 157 L.Ed.2d 408 (2003) (“Again, we lack specific, detailed findings about [the expert’s] reasoning or the reliability of his methodology in arriving at his conclusions.”).

When the proposed testimony of an expert is challenged under

Daubert

and its progeny, Rule 104 of the Federal Rules of Evidence applies to the court’s consideration and determination of the issues raised by the Daubert challenge.

Dau-bert,

at 592, n. 10, 113 S.Ct. 2786 . Rule 104(a) casts upon the proponent of the testimony the burden of establishing the admissibility of the testimony by a preponderance of the evidence.

Id. See also, Ralston v. Smith & Nephew Richards, Inc.,

275 F.3d 965, 970, n. 4 (10th Cir.2001) and the Advisory Committee notes to the 2000 Amendment to Rule 702 (“[T]he admissibility of all expert testimony is governed by the principles of Rule 104(a). Under that Rule, the proponent has the burden of establishing that the pertinent admissibility requirements are met by a preponderance of the evidence.”). It is in that light, and with that burden

10

in mind,

*1231

that the court considers the pending Dau-bert motions.

Even though the court may delve deeply into the minutiae of the proposed expert’s opinions while conducting the Daubert analysis, the court must always remain mindful that its focus “must be solely on principles and methodology, not on the conclusions that they generate,”

Daubert,

509 U.S. at 595 , 113 S.Ct. 2786 , except that a Daubert challenge may succeed if the court “conclude[s] that there is simply too great an analytical gap between the data and the opinion proffered,”

General Elec. Co. v. Joiner,

522 U.S. 136, 146 , 118 S.Ct. 512 , 139 L.Ed.2d 508 (1997). Thus, the ultimate objective of

Daubert

scrutiny is to ascertain whether the proffered expert testimony is “not only relevant, but reliable,”

Daubert,

509 U.S. at 589 , 113 S.Ct. 2786 .

An essential component of the relevance evaluation is the determination of whether the proposed expert testimony fits the issues in the case. In assessing “fit,” as the Supreme court called it, the court must determine whether the “expert testimony proffered in the case is sufficiently tied to the facts of the case that it will aid the jury in resolving a factual dispute.”

Dau-bert,

509 U.S. at 591 , 113 S.Ct. 2786 [internal quotation marks omitted].

As explained by the Court of Appeals:

[I]n fulfilling its

Daubert

obligations a trial court must also conduct a further inquiry into whether proposed testimony is sufficiently “relevant to the task at hand.”

Daubert,

509 U.S. at 597 , 113 S.Ct. 2786 , 125 L.Ed.2d 469 . Relevant evidence “means evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence.” Fed.R.Evid. 401. The Supreme Court has described the consideration of relevant evidence as one of “fit.”

Daubert,

509 U.S. at 591 , 113 S.Ct. 2786 , 125 L.Ed.2d 469 . A trial court must look at the logical relationship between the evidence proffered and the material issue that evidence is supposed to support to determine if it advances the purpose of aiding the trier of fact. Even if an expert’s proffered evidence is scientifically valid and follows appropriately reliable methodologies, it might not have sufficient bearing on the issue at hand to warrant a determination that it has relevant “fit.”

Bitler v. A.O. Smith Corp.,

400 F.3d 1227, 1234 (10th Cir.2004)

cert. denied sub nom. WHITE-RODGERS v. BITLER,

546 U.S. 926 , 126 S.Ct. 395 , 163 L.Ed.2d 274 (2005).

In

Kumho,

the Court elaborated upon the Daubert gatekeeping function as applied to proposed expert testimony outside of the realm of classical scientific testimony. The Court emphasized that even where the proposed expert testimony is not scientific, in the classical sense, the trial judge is nevertheless required to ascertain whether the expert “employs in the courtroom the same level of

intellectual rigor

that characterizes the practice of an expert in the relevant field.”

Kumho,

526 U.S. at 152 , 119 S.Ct. 1167 (emphasis added).

It is clear that, in our circuit, the Dau-bert gatekeeping function is undertaken by means of a two-step analysis.

Ralston,

275 F.3d 965 at 969 .

First,

the court must determine whether the proposed expert is qualified. This requires an assessment of his “knowledge, skill, experience, training or education.”

See

Rule 702 and

Ralston

at 969 .

Secondly,

if the proposed expert is determined to be sufficiently qualified, the court must determine whether his opinions are “reliable” in the sense required by

*1232

Daubert

and

Kumho. Ralston,

275 F.3d 965 at 969 .

B.

Qualifications.

In

Gardner v. General Motors Corporation,

507 F.2d 525 (10th Cir.1974), our Court of Appeals noted that a proposed expert “should not be required to satisfy an overly narrow test of his own qualifications.”

Id.

at 528. This self-evident admonition should be read in light of subsequent post-D<m&eri decisions.

The decision in

Ralston,

275 F.3d 965 , provides a good starting point, because that decision turned entirely on the expert’s qualifications. Plaintiff asserted that the warnings accompanying an implanted orthopedic nail were inadequate.

Id.

at 967-68 . The Court of Appeals affirmed the trial court’s exclusion of the testimony of plaintiffs expert, a board-certified orthopedic surgeon who was also an associate professor of medicine at the University of Kansas Medical School. The expert’s

general

credentials were clearly as good as could reasonably be expected, but she had done no research “specifically looking at this nail,”

id.

at 969 , and had not drafted a warning for a surgical device.

Id.

Her general credentials, though seemingly impressive as general credentials, were not good enough: “[MJerely possessing a medical degree is not sufficient to permit a physician to testify concerning any medical-related issue.”

Id.

at 970 . The board-certified orthopedic surgeon’s “reliance upon general principles and concepts” did not suffice.

Id.

Accordingly, her proposed testimony about the adequacy of the warning was not within the “reasonable confines” of her expertise.

Id.

If her proposed expert testimony had been within those “reasonable confines,” her lack of specialization would have gone to the weight, not the admissibility, of her proposed expert testimony.

Id.See also,

as to specialization,

Broadcort Capital Corp. v. Summa Medical Corp.,

972 F.2d 1183, 1194-95 (10th Cir.1992) (affirming trial court determination that an attorney with “some education and training in the field” was not qualified “as an expert in the securities area”).

In this case, as is discussed in Part V(D) and (E), below, the Daubert challenge, and the resultant Daubert scrutiny, focuses on some unusually specific and discrete matters which plaintiffs’ experts propose to address in their testimony- — -and on the interrelationships between the conclusions of those experts. Consequently, it should be borne in mind that “[t]he issue with regard to expert testimony is not the qualifications of a witness in the abstract, but whether those qualifications provide a foundation for a witness to answer a specific question.”

Berry v. City of Detroit,

25 F.3d 1342, 1351 (6th Cir.1994),

cert. denied,

513 U.S. 1111 , 115 S.Ct. 902 , 130 L.Ed.2d 786 (1995).

See also, Wheeling Pittsburgh Steel Corp. v. Beelman River Terminals, Inc.,

254 F.3d 706, 715 (8th Cir.2001) (“To begin with, we agree with the district court that Dr. Curtis ... easily qualifies as an expert under Federal Rule of Evidence 702. The real question is, what is he an expert about?”) and

Westfed Holdings, Inc. v. United States,

55 Fed. Cl. 544, 571 (2003),

rev’d in part on other grounds,

407 F.3d 1352 (Fed.Cir.2005). Thus, on the issue of expert qualifications,

Ralston

and like cases establish that the qualifications of the proposed expert are to be assessed only after the specific matters he proposes to address have been identified. The controlling Tenth Circuit cases, exemplified by

Ralston ,

establish that the expert’s qualifications must be both (i) adequate in a general, qualitative sense

(i.e.,

“knowledge, skill, experience, training or education” as required by Rule 702) and (ii) specific to the matters he proposes to address as an expert.

11

*1233

C.

Reliability.

Under Rule 702, an expert with the necessary qualifications in the relevant field may give expert testimony if (i) the testimony is based upon sufficient facts or data, (ii) the testimony is the product of reliable principles and methods, and (iii) the witness has applied the principles and methods reliably to the facts of the case. Rule 702, Fed.R.Evid.

See, generally, Goebel v. Denver and Rio Grande Western R. Co.,

346 F.3d 987, 991 (10th Cir.2003)

(Goe-bel II).

The evaluation for reliability cannot be permitted to evolve into an assessment of the ultimate persuasiveness of the proffered expert testimony. Faced with a Daubert challenge, expert testimony must meet “exacting standards of reliability,”

Weisgram v. Marley Company,

528 U.S. 440, 455 , 120 S.Ct. 1011 , 145 L.Ed.2d 958 (2000), but those exacting standards are still applied within a well-defined framework, because

Daubert

scrutiny is neither a substitute for jury resolution of contested issues fairly presented by conflicting testimony from qualified experts nor a grant of uncabined discretion to district judges to reject expert testimony that rubs them the wrong way. “Vigorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence.”

Daubert,

at 596, 113 S.Ct. 2786 .

Thus, the court’s “focus generally should not be upon the precise conclusions reached by the expert, but on the methodology employed in reaching those conclusions.”

Bitler,

400 F.3d at 1233 . As explained by Judge Becker for the Third Circuit, a challenge to proposed expert testimony “does not mean that plaintiffs have to prove their case twice — they do not have to demonstrate to the judge by a preponderance of the evidence that the assessments of their experts are correct, they only have to demonstrate by a preponderance of evidence that their opinions are reliable.”

In re Paoli R.R. Yard PCB Litigation,

35 F.3d 717, 744 (3rd Cir.1994),

cert. denied sub nom. General Elec. Co. v. Ingram,

513 U.S. 1190 , 115 S.Ct. 1253 , 131 L.Ed.2d 134 (1995). The reliability standard is “lower than the merits standard of correctness.”

Id.

Thus, the trial court’s determination of “reliability,” in the Dau-bert sense, is not a determination as to whether the expert’s proposed testimony is substantively correct — determinations of that kind would stretch most judges beyond their competence in most cases.

12

The reliability determination must be made regardless of the subject of the proposed expert testimony:

*1234

We conclude that

Daubert’s

general principles apply to the expert matters described in Rule 702. The Rule, in respect to all such matters, “establishes a standard of evidentiary reliability.” 509 U.S. at 590 , 113 S.Ct. 2786 , 125 L.Ed.2d 469 . It “requires a valid ... connection to the pertinent inquiry as a precondition to admissibility.”

Id.,

at 592 , 509 U.S. 579 , 113 S.Ct. 2786 , 125 L.Ed.2d 469 . And where such testimony’s factual basis, data, principles, methods, or their application are called sufficiently into question, see Part III,

infra,

the trial judge must determine whether the testimony has “a reliable basis in the knowledge and experience of [the relevant] discipline.” 509 U.S. at 592 , 113 S.Ct. 2786 , 125 L.Ed.2d 469 .

Kumho,

526 U.S. at 149 , 119 S.Ct. 1167 .

Daubert ,

of course, involved a proffer of expert testimony in a classical scientific discipline — epidemiology. Bearing that context in mind, it is nevertheless appropriate to review the non-exclusive list of five factors which were provided by the

Daubert

court to guide trial court determinations of reliability. The Court said that the trial judge should (1) assess whether the expert’s technique or theory can be or has been tested — that is, whether the expert’s theory can be challenged in some objective sense, or whether it is instead simply a subjective, conclusory approach that cannot reasonably be assessed for reliability, (2) determine whether the technique or theory has been subject to peer review and publication, (3) evaluate the known or potential rate of error of the technique or theory when applied, (4) ascertain the existence and maintenance of standards and controls and, (5) determine whether the technique or theory has been generally accepted in the scientific community.

See,

509 U.S. at 590-94 , 113 S.Ct. 2786 .

Kumho

made it clear that the gatekeeper function applies even where the proposed expert testimony is outside the realm of science in the classical sense.

Kumho

involved a proffer of engineering testimony in a product liability case. The

Kumho

decision makes it clear that, although the ultimate task of the trial judge, as gatekeeper, remains the same, the factors which were included in the nonexclusive list in Daubert are to be used only to the extent that they are logically applicable.

See Kumho,

526 U.S. at 149 , 119 S.Ct. 1167 . Thus, for instance, it has been noted that the factors mentioned by the Court in Daubert do not neatly apply to expert testimony from a sociologist,

Tyus v. Urban Search Management,

102 F.3d 256 (7th Cir.1996), and that lack of peer review or publication is not dispositive where the expert’s opinion is supported by “widely accepted scientific knowledge.”

Kannankeril v. Terminix International, Inc.,

128 F.3d 802, 809 (3rd Cir.1997). Moreover, as noted by the Advisory Committee in commenting on the 2000 amendments to Rule 702, courts both before and after

Daubert

have found other factors relevant in determining whether expert testimony is sufficiently reliable to be considered by the jury. Those additional factors which may be relevant depending on the circumstances include (1) whether the expert proposes to testify about matters growing naturally and directly out of his research, independent of the litigation, or whether he has developed his opinion expressly for the purpose of testifying, (2) whether the expert has unjustifiably extrapolated from an accepted premise to an unfounded conclusion, (3) whether the expert has adequately accounted for obvious alternative explanations, (4) whether the expert is being as careful as he would be in his regular professional work outside his paid litigation consulting, and (5) whether the field of expertise claimed by the expert is known to reach reliable results for the

*1235

type of opinion the expert would give.

See,

Advisory Committee notes to 2002 amendments, and cases there cited.

In sum, to make the Daubert assessment of reliability, the court — having found that the expert possesses the requisite expertise (if challenged), and having determined that the proposed expert testimony fits the issues in the case — must determine whether the expert’s conclusions are the product of (i) application of that expertise using recognized and supportable methodologies, (ii) on the basis of adequate data which is (iii) rationally tied to the opinions which purport to be based on that data.

“Under

Daubert ,

any step that renders the analysis unreliable ... renders the expert’s testimony inadmissible. This is true whether the step completely changes a reliable methodology or merely misapplies that methodology.”

Goebel II,

346 F.3d at 992 (citations and internal quotations omitted);

Mitchell v. Gencorp Inc.,

165 F.3d 778, 782 (10th Cir.1999). If the challenged expert testimony is crucial to the proponent’s case, the result of a successful Daubert challenge may be entry of judgment as a matter of law.

Joiner,

522 U.S. at 142-43 , 118 S.Ct. 512 ;

cf. Tellabs, Inc. v. Makor Issues & Rights, Ltd.,

— U.S. -, 127 S.Ct. 2499 , 2511 n. 8, 168 L.Ed.2d 179 (2007);

Weisgram,

528 U.S. at 453 , 120 S.Ct. 1011 .

See, e.g., Truck Ins. Exchange v. MagneTek, Inc.,

360 F.3d 1206, 1213 (10th Cir.2004);

Ralston,

275 F.3d at 974 . Although the standard of appellate review is no more stringent where the trial court’s exclusion of expert testimony is outcome-determinative,

Joiner,

522 U.S. at 142 , 118 S.Ct. 512 , it certainly would be — and is here — natural to proceed with great caution where the court’s rulings may be dispositive with respect to all or major portions of the case before it.

D.

The Daubert challenges with respect to Messrs. Mathis and Mint-zer.

Plaintiffs’ counsel retained H. Sean Mathis and Andrew M. Mintzer as two of their experts in this case. Mr. Mathis is a Managing Director in Miller Mathis & Co., an investment banking firm which was founded by Mr. Mathis and another principal. Mathis Rpt. at 2. Mr. Mintzer is a Certified Public Accountant. The qualifications of Messrs. Mathis and Mintzer are discussed in more detail in parts 3(a) and 4(a), below.

The scope of Mr. Mathis’s engagement as an expert in this case has been described in various ways, but it is clear that his work in this case relates entirely to an impairment analysis of WCG’s dark fiber and spare conduit assets under Statement of Financial Accounting Standards No. 121 (FAS 121), a statement of accounting standards which was promulgated by the Financial Accounting Standards Board in 1995. The joint efforts of Messrs. Mathis and Mintzer with respect to FAS 121 provided a major portion of the basis for Mr. Mintzer’s opinion that the financial statements of WCG as of December 31, 2000 and for the first three quarters of 2001 were not presented in conformity with generally accepted accounting principles (GAAP

13

). Mintzer Rpt., ¶¶ 86-171, 269-

*1236

280. As is discussed in more detail below, in situations to which it applies, FAS 121 generally governs accounting for the impairment of long-lived assets. (FAS 121 has been superseded, but is the only impairment-related Statement of Financial Accounting Standards which is relevant to this case.)

Mr. Mintzer’s work as an expert in this case covers more ground than Mr. Mathis’s work (and thus, Mr. Mintzer’s work involves matters in addition to application of FAS 121), but Mr. Mintzer’s work is, in several significant respects, dependent on Mr. Mathis’s work, and Dr. Nye’s work is, in turn, predicated in part on the work of Messrs. Mathis and Mintzer.

As Mr. Mintzer wrote in his report, he was engaged in this case to render an opinion as to:

a. Whether or not the financial statements of Williams Communications Group, Inc. (WCG) were prepared in accordance with applicable Generally Accepted Accounting Principles (GAAP), and

b. Whether or not Ernst

&

Young LLP (E & Y) adhered to applicable professional standards in the performance of its audits of the fiscal 2000 financial statements of WCG.

Mintzer Rpt. at 5 (footnote omitted).

As a prerequisite to analysis of the Dau-bert challenges to the expert testimony of Messrs. Mathis and Mintzer, it is necessary, as discussed in Part V(B) and (C), above, to identify the specific matters they propose to address in their expert testimony. That, in turn, requires at least a general familiarity with FAS 121.

FAS 121 “establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of.” FAS 121, p. 4.

14

As relevant to the issues in this case, and ignoring numerous details for the moment, FAS 121 essentially requires entities that report their financial condition on the basis of GAAP to review for, recognize, measure and report losses resulting from drops in the value of assets within the scope of the statement “whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.”

Id.

Under FAS 121, and asset is said to be “impaired” if application of FAS 121 indicates that the asset is not worth the value at which it is carried on the books of the company.

Id.

at 6. “FAS 121 anticipates and requires that managers, like the defendants, exercise considerable business judgment in performing an impairment review.”

In re: Serologicals Sec Litigation,

2003 WL 24033694 at *14 (N.D.Ga. Feb. 20, 2003).

See also,

involving FAS 121,

In re K-tel International, Inc. Securities Litigation,

300 F.3d 881 (8th Cir.2002);

Amalgamated Bank v. Coca-Cola Co.,

2006 WL 2818973 (N.D.Ga. Sept. 29, 2006);

Rosen v. Textron, Inc.,

321 F.Supp.2d 308

*1237

(D.R.I.2004) and

Cutsforth v. Renschler,

235 F.Supp.2d 1216 (M.D.Fla.2002).

The determination as to whether an impairment loss must be recorded pursuant to FAS 121 involves three steps:

Step One: Review

long-lived assets for impairment whenever events or changes in circumstances (i.e., a trigger) indicate that the carrying amount of an asset may not be recoverable.

Step Two: Estimate

the future cash flows expected to result from the use of the asset and its eventual disposition (undiscounted and without interest charges). Impairment loss is to be recognized if this amount is less than the carrying amount of the asset.

Step Three: Measure

the amount of the impairment loss as the amount by which the carrying amount of the asset exceeds its fair value (determining fair value on the basis of market price, or, in the absence of a market price, on the basis of such measures as discounted future cash flows).

FAS 121 at ¶¶ 4-17, pp. 6-9.

15

The short version of a description of the scope of the respective assignments of Messrs. Mathis and Mintzer with respect to FAS 121 analysis is that Mr. Mintzer performed Step 1 and Mr. Mathis performed Step 2 and Step 3 of the FAS 121 analysis. Doc. No. 1498 (Plaintiffs) at 5; Doc. No. 1499 (Plaintiffs) at 5.

16

That much is undisputed. Thus, Mr. Mathis’s description of his engagement is that he was retained to:

perform an impairment analysis, consistent with Financial Accounting Standards No. 121[sic] (“FAS 121”), of (i) the excess dark fiber and spare conduit assets of WCG as of December 31, 2000, which is one year prior to the impairment analysis conducted by the Company as of December 31, 2001 ... and (ii) the excess dark fiber and spare conduit assets held by the Asset Defeasance Program (“ADP”) as of December 31, 2000.

Mathis Rpt. at 2.

As has been noted, closer analysis of the allocation of work as between Mr. Mathis and Mr. Mintzer is required, but that analysis should be undertaken in light of the gist of the Daubert challenges advanced by the defendants.

The WCG defendants argue that Mr. Mathis is “not qualified to testify as an expert regarding application of FAS 121” and that “numerous and substantial flaws in Mathis’s methodology render his opinions wholly unreliable.” Doc. No. 1451 (WCG defendants) at 2. Similarly, E & Y asserts that Mr. Mathis is not qualified to conduct an impairment analysis under FAS 121 because “he lacks the required experience and accounting knowledge.” Doc. No. 1433(E & Y) at 1. E & Y also asserts that Mr. Mathis’s methodology is fatally deficient because his FAS 121 analysis “actually contradicts FAS 121” and uses a method that “is not allowed under FAS 121.”

Id.

at 2. The defendants seek to exclude Mr. Mathis’s proposed expert testimony

in toto.

The Daubert challenges as to Mr. Mint-zer are narrower. The defendants seek to

*1238

exclude everything Mr. Mintzer has to say about FAS 121, but not everything he has to say on other subjects. E & Y seeks to exclude Mr. Mintzer’s opinions that WCG should have taken an impairment charge as of December 31, 2000 as to (i) the fiber network and (ii) the equipment inventory.

17

Doc. No. 1436(E

&

Y) at 1. E & Y argues that Mr. Mintzer lacks sufficient knowledge and experience with respect to application of FAS 121, that his reliance on the work of Mr. Mathis as to impairment of the fiber network is fatal to his own opinion as to impairment, and that Mr. Mint-zer’s opinion that WCG should have taken an impairment charge with respect to unspecified equipment inventory as of December 31, 2000 is fatally nonspecific and unreliable.

Id.

at 1-2.

The WCG defendants seek to exclude Mr. Mintzer’s opinions as to violation of debt covenants and as to whether FAS 121 Step 1 triggering events occurred in

2001.

Doc. No. 1437 (WCG defendants) at 3. Those defendants assert that Mr. Mint-zer’s opinion as to violation of the debt covenants is inadmissible because it lies outside his area of expertise.

Id.

at 4. The challenge to Mr. Mintzer’s opinion as to FAS 121 triggering events in 2001 is premised on arguments as to methodology, not as to qualifications.

Id.

at 7. The WCG defendants also adopt E & Y’s motion as to Mr. Mintzer.

Id.

The WMB defendants attack only the opinions expressed in the last four paragraphs of Mr. Mintzer’s 305-paragraph report, those being the paragraphs in which Mr. Mintzer opines that the financial statements of Williams Companies, Inc. were misstated as a result of WCG’s failure to write down its assets under FAS 121. Doc. No. 1446-1 (WMB defendants) at 1. The challenge is based on the substance of, and the support for, the opinions, rather than on Mr. Mintzer’s qualifications.

Id.

at 4-14. (The WMB defendants also adopt the motions of E & Y and the WCG defendants as to Mr. Mintzer.

Id.

at 6, n. 3.)

1.

The division of labor between Messrs. Mathis and Mintzer with respect to FAS 121 impairment analysis.

Viewing the Daubert challenges to the proposed expert testimony of Messrs. Mathis and Mintzer with respect to application of FAS 121 in light of the complexity of the accounting issues as to which they opine, in light of the reliance Mr. Mintzer necessarily places on Mr. Mathis’s work, and in light of the bases for the defendants’ challenges to the opinions of the two experts, closer analysis of the division of labor between the two experts with respect to application of FAS 121 is required. The determination of the existence of an impairment loss under FAS 121 as of (or at any time after) December 31, 2000 plainly required (whether made contemporaneously or by Messrs. Mathis and Minter as retained experts) several separately identifiable analyses and judgments. The following is a non-exhaustive summary of the analyses and judgments which application of FAS 121 entailed and of the division of labor between Messrs. Mathis and Mintzer with respect to those tasks:

STEP 1

FAS 121, ¶¶ 4, 5

Determine whether impairment indicators exist.

*1239

Identify triggers of impairment analysis. FAS Mintzer 121, ¶¶4, 5_

STEP 2

FAS 121, ¶ 6

Determine whether an impairment must be recognized.

(“undiscounted future cash flows” vs. “carrying amount”)

Estimate undiscounted future cash flow from Mathis asset and its disposition and compare to carrying amount of the asset. FAS 121, ¶ 6

2.1 Classify assets for grouping purposes. Mathis FAS 121, ¶¶ 8, 98_

2.2 Determine amount of “excess” dark Mathis fiber. FAS 121, ¶ 8_

2.2(a) Determine extent of reliance on Mathis management’s grouping. FAS 121, ¶ 98

2.2(b) Determine number of fiber strands to be retained. Mathis

2.2(c) Determine extent of reliance on Mathis management’s budgets and projections. FAS 121, ¶ 142_

2.3Identify “reasonable and supportable Mathis assumptions” re: expected future cash flows from excess dark fiber FAS 121, ¶ 9_

2.3(a) Estimate future prices — market Mathis factors.

2.3(b) Estimate future prices — • technology factors. Mathis

2.3(c) Estimate future bandwidth volumes — market factors. Mathis

2.3(d) Determine number of years (i.e. Mathis useful life) for which “future cash flows [are] expected to be generated by [the] asset.” FAS 121, ¶ ¶ 6, 9

2.4Determine “likelihood of possible out- Mathis comes” re: estimate of future cash flow. FAS 121, ¶ 9_

STEPS

FAS 121, ¶ 7

Determine amount of impairment loss to be recognized.

3.1 Determine “the fair value of the asset.” Mathis FAS 121, ¶ 7_

3.1(a) Select dark fiber valuation Mathis approach. FAS 121, ¶ 7

3.1(b) Select appropriate discount rate [if discounted cash flow approach is used]. FAS 121, ¶ 7 Mathis

Ancillary steps:

Judgment as to qualifications of Mathis to per- Mintzer form Steps 2 and 3

2.

The experts’ methodology vs. the methodology the accountants were required to employ in their audit-related ivork.

One more matter should be addressed before applying the Daubert and Rule 702 standards to the challenges to the proposed expert testimony of Messrs. Mathis and Mintzer. As has been noted, Mr. Mintzer is a Certified Public Accountant. Mr. Mathis is not. E & Y asserts, in essence, that in evaluating Mr. Mintzer’s work as a retained expert in this case, the court should apply the standards that would have governed Mr. Mintzer’s work (both substantively and with respect to methodology) if he were performing the audit of the financial statements of WMB and WCG in the first instance. Thus, in support of its criticism of Mr. Mintzer’s reliance on Mr. Mathis’s performance of Steps 2 and 3 of the FAS 121 impairment analysis, E

&

Y argues that Auditing Standard 336 precluded Mr. Mintzer from adopting or otherwise relying on Mr. Mathis’s work. Doc. No. 1436(E & Y) at 11; Doc. No. 1525(E

&

Y) at 7. In response, plaintiffs argue that “Mintzer, of course, was not conducting an audit. He was evaluating and opining on the methodologies employed by WCG and its auditors related to WCG’s 2000 audit. Thus, GAAS[

18

] does not define the standard to which he is held and AU 336 is not relevant to this case. The applicable standard for his opinion is Fed.R.Evid. 703.” Doc.

*1240

No. 1499 (Plaintiffs) at 6. Plaintiffs assert, instead, that the relevant professional standard is the Statement on Standards for Consulting Services, published by the American Institute of Certified Public Accountants (AICPA).

Id.

at 7 (citing “SSCS § 100.06”). In reply, E & Y argues that “Plaintiffs also are wrong that SSCS § 100.06 applies because Mintzer was hired only as a ‘consultant.’ Perhaps what Mintzer is doing

for plaintiffs

qualifies as ‘consulting,’ but what he is purporting to do

for the jury

is step into the shoes of an auditor and accountant performing a FAS 121 analysis.” Doc. No. 1525 at 10 (citation omitted).

The court rejects E & Y’s contention that the GAAP and GAAS standards that governed its audit work apply, of their own force, to Mr. Mintzer’s work as a retained expert. His work as a retained expert (and hence the court’s evaluation of his work under

Daubert)

certainly must be informed by the relevant GAAP and GAAS standards. But

Daubert

and Rules 702 and 703, as well as the relevant standards governing the public accounting profession, lead the court to the conclusion that Mr. Mintzer’s work is not to be judged by wholesale application of the standards that would have governed his work (both methods and substantive principles) had he performed the WMB and WCG audits himself.

As a beginning point, the court will examine how the public accounting profession characterizes and defines Mr. Mint-zer’s engagement as a retained expert in this case. The AICPA’s standards and related interpretive materials provide valuable guidance.

The AICPA distinguishes between what it calls “attest services” and other types of service. “For years, attest services generally were limited to expressing a positive opinion on historical financial statements on the basis of an audit in accordance with generally accepted auditing standards (GAAS).” AICPA Professional Standards:

Statements on Standards for Attestation Engagements,

as amended (AICPA, 2001). Attest services now include services other than traditional audits,

id.,

but the common characteristic of all attest engagements is that the practitioner is attesting to, or providing assurance on, subject matter that is the responsibility of another party. Jane M. Mancino and Charles E. Landes,

A New Look at the Attestation Standards,

Journal of Accountancy, vol. 192, no. 1 (AICPA July 2001).

19

See also, In re Computer Learning Centers, Inc.,

285 B.R. 191, 215 (Bkrtcy.E.D.Va.2002). Attest services are the gold standard; expert opinions in litigation are more like base metal: “An expert opinion is not an attest opinion as the term is used in reference to a set or specified elements of financial statements. On rare occasions, though, an expert opinion may relate to an examination of a financial presentation or to a judgment on whether financial statements are presented in accordance with generally accepted accounting principles (GAAP).” Peter B. Frank and Michael Wagner,

Providing Litigation Services,

Consulting Services Practice Aid 93-1, at ¶ 70/110.03 (AICPA 1993).

Frank and Wagner go on to comment that: “In general, litigation services engagements are considered to be a form of consulting services as defined by the AIC-PA. Therefore, the Statements on Standards for Consulting Services (SSCS) must be followed in a litigation services engagement.”

Id.

at 70/130.18. As a consulting service:

[Litigation work] excludes three general categories of services subject to AICPA

*1241

Technical Standards. These standards are Statements on Auditing Standards (SASs), Statements on Standards for Attestation Engagements (SSAEs), or Statements on Standards for Accounting and Review Services (SSARSs). The excluded services may be performed in conjunction with consulting services, but only the consulting services are subject to the SSCS.

Peter B. Frank, Michael Wagner and Roman L. Weil,

Litigation Services Handbook: The Role of the Accountant as Expert Witness,

at 3 (John Wiley & Sons, Inc.1993 supp.) (hereinafter:

Handbook).

Because of the sharp differentiation between attest services and consulting engagements (of which litigation services are one variety), the AICPA cautions that:

When the practitioner determines that an attest service is to be provided as part of a consulting service engagement, the practitioner should inform the client of the relevant differences between the two types of services and obtain concurrence that the attest service is to be performed in accordance with the appropriate professional requirements. The practitioner should take such actions

because the professional requirements for an attest service differ from those for a consulting service engagement.

AICPA Professional Standards:

Statements on Standards for Attestation Engagements,

as amended, § 101, ¶ 110 (AICPA, 2001) (emphasis added).

In the case at bar, plaintiffs do not claim that Mr. Mintzer performed an audit conforming to GAAS. He was not required by

Daubert

(or Rules 702 and 703) to do that. This court agrees with the court in

United States v. Forbes,

2006 WL 2792883 (D.Conn. Sept. 28, 2006) that an accountant may testify with respect to GAAS or GAAP violations on the basis of work done in compliance with the AICPA’s standards for consulting work. In

Forbes ,

the court rejected the defendant’s assertion that the expert’s proposed testimony was:

deficient because he did not follow generally accepted auditing standards (GAAS) in formulating his opinions. [The expert] did not need to perform an audit in accordance with GAAS or attest to the accuracy under generally accepted auditing [sic] principles (GAAP) of CUC’s and Cendant’s financial statements in order to give his expert opinion that those financial statements violated GAAP.... He also did not need to use GAAS to identify the fraudulent accounting practices or to explain how they violated GAAP and inflated those earnings. [The expert’s] work on this case is governed by the consulting standards of the American Institute of Certified Public Accountants (“AICPA”), and his testimony complied with those standards. Contrary to Forbes’s contention, this does not mean that [the expert] did not employ the same level of intellectual rigor that characterizes the practice of an expert in his field.

Id.

at *1 .

As has been noted, E & Y’s primary complaint as to Mr. Mintzer’s asserted failure to comply with GAAS in his work as an expert in this case is that Mr. Mintzer’s use of, and reliance on, the FAS 121 Step 2 and Step 3 conclusions of Mr. Mathis violated Auditing Standard 336. Pointing out that Messrs. Mathis and Mintzer have never even spoken with each other (Mathis deposition at 89), E & Y argues, in effect, that the asserted AU 336 violation, without more, requires rejection of Mr. Mintzer’s proposed expert testimony. Doc. No. 1436(E

&

Y) at 11; Doc. No. 1525(E & Y) at 7.

20

Although the relationship between

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Mr. Mathis’s work and that of Mr. Mintzer deserves, and will get, more detailed treatment later in this memorandum, the court, relying on the legal and accounting authorities set forth above, rejects E & Y’s

per se

argument as to the impermissibility of Mr. Mintzer’s reliance on Mr. Mathis’s work.

21

3.

Daubert analysis

— proposed

expert testimony ofH. Sean Mathis.

a.

Qualifications.

Mr. Mathis’s qualifications must be assessed in light of the demands of his specific undertaking in this case. See the discussion in Part V(B) and (C), above.

The FAS 121 Step 2 and Step 3 analysis undertaken by Mr. Mathis represents the entirety of his expert work in this case, and forms an indispensable component of a significant portion of the expert work of Mr. Mintzer. Mathis Rpt. at 2-4; Mintzer Rpt., ¶¶ 150-52, p. 52-53.

22

Without repeating all of the task descriptions summarized in the chart in Part V(D)(1), above, Mr. Mathis’s FAS 121 Step 2 and Step 3 analysis plainly required, on the basis of an understanding of the then-relatively new (but rapidly expanding)

23

fiber optic data transmission business (augmented by an understanding of competing data transmission technologies): judgments as to classification and grouping

24

of fiber optic assets and related equipment assets (with related judgments as to the present and future physical and commercial interrelationship between lit and dark fiber assets), judgments (on a retrospective as well as prospective basis) as to the extent and effect of increases in industry-wide capacity, judgments as to future retention of core fiber and associated assets (with related judgments as to the impact of existing and foreseeable technology improvements

25

on capacity), judgments as to present and future domestic

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and international demand for internet, data, voice and video data transmission services and for rights of use of dark fiber, judgments as to the effect of market and technology factors on prices for data transmission services (and rights of use), as well as the costs of providing those services, judgments as to the remaining physical and technological useful life of the dark fiber assets, and judgments as to appropriate discount rates, as affected by both micro- and macro economic factors.

26

The qualifications that Mr. Mathis brought to this undertaking are summarized as follows: Mr. Mathis is a Managing Director in Miller Mathis & Co., an investment banking firm. He was graduated from Allegheny College with a Bachelor of Arts degree and from the Wharton Graduate School of Business with a Master of Business Administration degree. To put it mildly, he has substantial experience in the business world. His career history is summarized in Appendix B to his report.

Mr. Mathis asserts, and there is no reason to doubt, that he has substantial experience in discounted cash flow analysis. This is significant because, depending on the circumstances, a discounted cash flow analysis is a permissible valuation technique under FAS 121, Step 3. FAS 121, ¶ 7. In this respect, it is noteworthy that plaintiffs define Mr. Mathis’s task in this case narrowly and then assert that he was qualified to perform that narrowly-defined task.' Although plaintiffs acknowledge that they “retained Mathis to evaluate Step 2 and Step 3 of the impairment analysis,” Doc. No. 1498 (Plaintiffs) at 4, they favor a more limited description of what he actually did: they say that he was called upon to “opine on financial valuations based on cash flow analyses, an area well-within his expertise.”

Id.

at 2 . He has performed numerous “valuations based on discounted cash flow analyses,” for which reason “he is entirely qualified to perform a discounted cash flow analysis in this case.”

Id.

at 3 .

Bearing in mind that Mr. Mathis, and Mr. Mathis alone, is on the hook for FAS 121 Steps 2 and 3 in this case, it is clear that his engagement to perform the Step 2 and 3 analyses necessarily entailed judgments (whether they are characterized as accounting judgments, business judgments, or financial judgments, or some combination of the three) substantially more complex and industry-specific than is suggested by the description of his task as, essentially, a discounted cash flow analysis. The FAS 121 Step 2 and Step 3 analyses in this case required numerous quantitative (see the chart in Part V(D)(1), above) inputs which, by their nature, could only be the product of qualitative judgments resulting from the application of industry-specific knowledge, augmented by professional experience in selecting and evaluating the relevant data and then pushing the masses of data through the FAS 121 analytical process.

Viewing the matter in this light, it is evident that Mr. Mathis’s qualifications for his specific tasks in this case must be viewed both in light of his considerable business experience and in light of the credentials and experience that he does not possess.

Mr. Mathis is neither a certified public accountant nor “an accountant” nor an “auditor.” Mathis Dep. 38, 45. That, in itself, is dispositive of nothing, but it is relevant. He has never performed a FAS 121 analysis.

Id.

at 46 . This case is “the only time” he has ever been asked to render an opinion as to impairment of

*1244

assets under FAS 121.

Id.

at 53 . By his own description, he is “not a telecom expert.”

Id.

at 60 . He did not avail himself of the assistance of his firm’s telecom expert.

Id.

Though he sat, “from the late ’90s to the early 2000s” on the board of a wireless paging company (Arch Communications), he recalls no specific experience “working for or on behalf of a company that has a fiber network.”

Id.

at 58-60 .

The disjunctive language of Rule 702 makes it clear that experience can substitute for formal credentials.

E.g., LifeWise Master Funding v. Telebank,

374 F.3d 917, 928 (10th Cir.2004). But regardless of the mix of formal credentials and experience that is proffered as establishing the requisite “qualifications” under the rule, those qualifications must be

specific

as well as

general.

See the discussion in Part V(B), above. In this case, as a practical matter, the requirement of

specific

qualifications means that, for the FAS 121 Step 2 and Step 3 work for which Mr. Mathis undertook sole responsibility in plaintiffs’ lineup of experts, Mr. Mathis necessarily had to have industry-specific qualifications: “The real question is, what is he an expert about?”

Wheeling Pittsburgh Steel Corp.

254 F.3d at 715 .

The court concludes with no difficulty that, had Mr. Mathis been a member of a team of specialists collaborating on an FAS 121 analysis of WCG’s dark fiber and related assets, he would have had much to offer with respect to those aspects of FAS 121 Step 3 that would have included a discounted cash flow analysis (if that valuation method were selected). It is equally clear, however, that the numerous financial, accounting and business judgments (correctly referred to by E & Y and the WCG defendants as “industry-dependent judgments,” Doc. No. 1523 [E & Y and WCG] at 8) that are antecedent to a Step 3 discounted cash flow analysis are no more “within the reasonable confines of [Mr. Mathis’s] subject area” than were the board-certified orthopedic surgeon’s criticisms of the warnings accompanying the orthopedic nail in

Ralston. Ralston,

275 F.3d at 970 (quoting

Compton v. Subaru of America, Inc.,

82 F.3d 1513, 1520 (10th Cir.1996)). It should be noted, moreover, that the opinions expounded by Mr. Mathis as to FAS 121 Steps 2 and 3 are not undergirded by the work of Mr. Mintzer: “For purposes of evaluating Step 2 and Step 3 of the FAS 121 impairment calculation, I am relying on another expert retained by Plaintiffs with specialized knowledge and skills in the field of business valuation, Mr. Sean Mathis of the firm Miller Mathis. I am relying on Mr. Mathis in a similar fashion that an auditor relies on a specialist in the conduct of an audit.” Mintzer Rpt., ¶ 150, p. 52.

27

Although this is more relevant to an analysis of Mr. Mintzer’s work than to that of Mr. Mathis, it is also worthy of note that Mr. Mathis’s qualifications cannot be bolstered by any claim that he was selected by Mr. Mintzer. Mr. Mintzer did not select Mr. Mathis, and had never worked with or even heard of him before they both were hired by plaintiffs’ counsel in this case. Mintzer deposi

*1245

tion at 283. Mr. Mintzer undertook no investigation of Mr. Mathis other than to look for publicly available “negative citations.”

Id.

at 284.

The short of the matter is that Mr. Mathis, though clearly possessing the

general

qualifications required to perform a discounted cash flow analysis, does not possess the industry-specific expertise necessary to make the numerous judgments which had to be made in order to generate the inputs for a discounted cash flow analysis as applied to the dark fiber and related assets of WCG as of December 31, 2000. His expert opinions as to the outcome of a FAS 121 Step 2 and Step 3 analysis as applied to those assets in this case, are, accordingly, inadmissible under Rule 702 and

Daubert .

b.

Reliability.

The defendants attack the reliability of Mr. Mathis’s proposed expert testimony on several bases. Defendants assert that, in performing his FAS 121 analysis, Mr. Mathis improperly disregarded WCG’s business plans. They also assert that Mr. Mathis’s approach to asset grouping was fatally flawed in several respects. Because the court has determined that Mr. Mathis lacks the qualifications necessary to give the expert testimony he proposes to give, it would be sufficient to leave it at that, and forego analysis of any of the challenges to the reliability of that testimony. The court has determined, however, that it is appropriate to address two aspects of the challenge to the reliability of Mr. Mathis’s conclusions.

Methodology: Disregard for management’s budgets and projections.

In considering a Daubert motion, it is usually important for the court to determine whether the methodology employed by an expert “is generally accepted in the relevant [professional] community,”

Kumho,

526 U.S. at 151 , 119 S.Ct. 1167 , because a retained expert’s adherence to an established and recognized methodology (if there is one) is important under Daubert and its progeny.

See, e.g., 103 Investors I, L.P. v. Square D Co.,

470 F.3d 985 (10th Cir.2006).

Paragraph 142 of FAS 121 states that “information necessary to perform the re-coverability test is generally available from budgets and projections used by management in the decision-making process.” As will be seen, Mr. Mathis acknowledged that, in performing his FAS 121 analysis, he disregarded WCG’s business plan. As a matter of methodology under paragraph 142, management’s business plans clearly ought not to be rejected out of hand: those business plans may ultimately, for some reason, be disregarded, but the auditor who takes it upon himself to reject them plainly should have a reasoned basis for doing so. Likewise, in this litigation context, the expert is one step removed from making professional auditing judgments in the first instance — his task is to provide expert testimony in aid of a determination of whether the others who came before him made judgments which were fraudulent or otherwise actionable.

As to whether he took management’s business plans into account in reaching his judgments under FAS 121, Mr. Mathis testified as follows:

Q. Did you try to conduct your analysis to be consistent with WCG’s business plan as of 12-31-2000?

A. FAS 121 does not mention business plan[

28

] anywhere. We wanted our analysis to be consistent with 121, and business plan is not mentioned, so business plan to us was irrelevant.

*1246

Q. The company’s business plan at 12-31-2000 was irrelevant to your analysis?

A. In terms of doing the FAS 121 analysis, yes.

Q. So you have no opinion whatsoever as to whether your analysis was consistent with the company’s business plan as of 12-31-2000; is that right?

MR. VINIK: I object to the form.

A. Our analysis is independent of any business plan.

Mathis deposition at 102-03-

Mr. Mathis reinforced this point when he testified that “we did not conduct our analysis with regard to their business plan, as consistent with FAS 121.”

Id.

at 104. Otherwise stated: “We did' not, consistent with FAS 121, consider the company’s business plan.”

Id.

at 105. • Later in his deposition, when pressed on a related point, Mr. Mathis reminded counsel, somewhat petulantly, that: “I told you, I don’t use company information.”

Id.

at 264.

In response to defendants’ arguments on this point, plaintiffs argue, first (and correctly) that: “Nothing in Paragraph 142 requires that budgets and projections used by management should be taken at face value, or that they 'should be the sole source of information relied on in an impairment analysis.” Doc. No. 1498 at 9. Plaintiffs also point out that Mr. Mathis testified as follows: “So would we look at management’s projections? The answer is we looked at some of management’s projections.” Mathis deposition at 113. The problem is that plaintiffs point to nothing in Mr. Mathis’s report or testimony reflecting consideration, analysis and reasoned rejection of management’s budgets and projections relevant to an FAS 121 impairment analysis. A fair reading of his testimony reliably indicates that Mr. Mathis made an

a priori

decision not to take management’s business plan into account.

Under Rule 702, it behooves the retained expert to use “reliable principles and methods.” Alteration of an established methodology is a “step that renders the analysis unreliable [and] renders the expert’s testimony inadmissible.”

Goebel II,

346 F.3d at 992 .

See also, Mitchell v. Gencorp Inc.,

165 F.3d at 782 . In the case at bar, the parties and the court have, in FAS 121, guidance as to methodology of a quality and definitiveness that could only be aspired to in most of the areas in which expert witnesses ply their trade. Where, as here, the document that is the lodestar of the expert’s endeavor spells out the method to be employed, the expert must either use that methodology or demonstrate that he has a reasoned basis for choosing to ignore it.

29

Mr. Mathis has done neither. In this very noticeable respect, his work was not “rooted in the principles and methodology of accountancy.”

Securities and Exchange Comm’n v. Lipson,

46 F.Supp.2d 758, 764 (N.D.Ill.1998).

*1247

Accounting for alternative explanations re: asset grouping: treatment of the network as a single asset.

One of the factors to be considered by the court is “[w]hether the expert has adequately accounted for obvious alternative explanations.” Rule 702, Fed.R.Evid., Adv. Committee note to 2000 Amendments.

Asset grouping is central to the validity of Mr. Mathis’s FAS 121 impairment analysis. The dispute as to network asset grouping for purposes of FAS 121 impairment analysis is, essentially, a dispute as to whether a year-end 2000 impairment analysis, if one had been performed, should have treated the entire fiber optic network as the relevant asset, or whether the dark fiber assets should have been separated out for impairment analysis, as was done by Mr. Mathis. Treatment of the fiber network as a unified asset for year-end 2000 impairment analysis is an “obvious alternative explanation” vis-a-vis the approach taken by Mr. Mathis. Mr. Mathis was invited — and declined — to express an opinion criticizing WCG’s failure to perform an impairment analysis on the network as a whole as of year-end 2000. He disclaimed an opinion as to whether it would have been inappropriate to perform an analysis on the basis of that asset grouping. Mathis deposition at 43-45. He expressed his opinion that he thought the group of assets he selected “was the correct group of assets.”

Id.

at 44. Thus, although it may well be that the reason Mr. Mathis performed an impairment analysis of only the dark fiber assets is that he “was asked [by plaintiffs counsel] to do an impairment analysis of the dark fiber assets,”

id.

at 20, he did assert that his conclusion as to grouping of assets was an expression of

his

analytical conclusion.

Id.

at 44. For that reason, it is especially noteworthy that Mr. Mathis expressly disclaims an opinion that it would have been

inappropriate

under FAS 121 to have performed an analysis of WCG’s network as a whole as of year end 2000.

Id.

at 43-45.

30

Moreover, this is not an issue that was handed off by Mr. Mathis to Mr. Mint-zer — Mr. Mintzer’s proposed expert testimony does not close this gap. It is clear from Mr. Mintzer’s report (¶¶ 147, et seq.) that, in expressing

his

opinion that WCG improperly failed to record an impairment charge at year end 2000, he relies entirely on Mr. Mathis as to FAS 121 Step 2 and Step 3. Otherwise stated, Mr. Mintzer’s proposed expert testimony provides no independent analysis or expression of opinion on the issue of grouping of assets under FAS 121 for purposes of the year-end 2000 financial statements. Thus, on the issue of whether it would have been inappropriate for WCG to have treated the fiber network as a single asset for FAS 121 purposes as of year end 2000, Mr. Mintzer clearly does not pick up where Mr. Mathis left off — and, as has been noted, Mr. Mathis stops short of opining that it would have been inappropriate under FAS 121 to have performed an analysis of

*1248

WCG’s network as a whole as of year end 2000.

It bears repeating that Messrs. Mathis and Mintzer, as retained experts, are not doing “first instance” auditing in this case. Especially where professional judgment is involved (and, as has been seen, the performance of an FAS 121 impairment analysis is a process that is shot through with judgment calls

31

), an expert’s opinion as to how

he

would have performed a task is of limited relevance at best unless he has given a reasoned explanation of why the most obvious alternative (in this case, treatment of the fiber network as a unified asset) is inappropriate and should consequently be rejected. Mr. Mathis’s selected approach to asset grouping does not, in and of itself, undermine an antipodal approach. In this context, the expert who goes no further than to select and defend his preferred approach leaves the job, at best, half done.

Plaintiffs have not carried their burden of establishing that the proposed expert testimony of Mr. Mathis is the product of reliable principles and methods, reliably applied to the facts of this case. It will be excluded.

4.

Daubert analysis

— proposed

expert testimony of Andrew M. Mintzer.

Various portions, but not all portions, of Mr. Mintzer’s proposed expert testimony have been challenged by the defendants. Mr. Mintzer’s opinion testimony is summarized in paragraph 67 of his report. The following table, adapted from Mr. Mintzer’s paragraph 67, shows the matters as to which Mr. Mintzer opines and identifies the defendants attacking those opinions.

Mintzer ¶ Opinions stated in Mr. Mintzer’s Motion by: report, per descriptions in ¶ 67of Mintzer report

WCG’s 2000 Fiscal Year Financial Statements

68 WCG’s December 31,2000 fi- (See nancial statements were materi- below) ally false and misleading as they were not presented in conformity with GAAP.

69-85 E

&

Y failed to perform the no motion 2000 audit of WCG while being independent.

86-171 Impairment of Network E & Y Assets — WCG’s network was impaired, yet it failed to record an impairment charge, thereby ovei’stating its assets by approximately $800 million and it failed to disclose that the dark fiber assets subject to its ADP were impaired by approximately $100 million.

172-223 Debt Covenant Violations— WCG WCG was, in reality, in violation of its debt covenants, thereby exposing its debt to being called by the lenders.

224-268 Going Concern Uncertainties— no motion There was significant uncertainty about WCG’s ability to continue as a going concern, yet E

&

Y failed to disclose the “going concern” doubts in its audit report.

269-280 Equipment Impairment— E & Y WCG’s equipment inventory was impaired, yet it failed to record an impairment charge, thereby overstating its assets.

281-294 E

&

Y ignored clearly evident no motion Fraud Risk Factors and did not exercise Professional Skepticism.

295-301 WCG published quarterly WCG financial statements at March 31, 2001, June 30, 2001 and September 30, 2001 which were materially misstated and not in conformity with GAAP.

[WMBJ’s Financial statements (Referred to by Mintzer as TWC)

302 [WMB] failed to record its share WMB of WCG’s impairment charges, as of December 31, 2000 and March 31, 2001, while WCG was its subsidiary.

303-305 [WMB] failed to record in its WMB June 30 and September 30, 2001 financial statements a contin

*1249

gent liability for its guarantees of certain the WCG transactions.

a.

Qualifications.

Mr. Mintzer’s expertise is attacked by the WCG defendants and by E & Y.

See,

Doc. No. 1437 at 4-6 and Doc. No. 1436 at 8-9. The WCG defendants attack Mr. Mintzer’s expertise only as to his opinion that WCG was in violation of the EBIT-DA-related provisions of its debt covenants. E & Y attacks Mr. Mintzer’s qualifications only as to his opinion on network impairment. Because the court’s exclusion of Mr. Mathis’s opinion testimony on that subject is fatal to the admissibility of Mr. Mintzer’s opinion testimony on the same subject, the court need not address E & Y’s attack on Mr. Mintzer’s qualifications.

As to Mr. Mintzer’s qualification to give expert testimony with respect to debt covenant violations, the WCG defendants argue that:

EBITDA is a non-GAAP term which is defined on a case-by-case basis by contracting parties. Here, the Credit Agreement provides the controlling definition of EBITDA. Thus, Mintzer’s fundamental opinion — that certain revenues were improperly included in the calculation of EBITDA — depends not on his analysis of the requirements of GAAP, but on a legal interpretation of the Credit Agreement, i.e. the intent of the contract between WCG and its Bank Group. Mintzer, a CPA, can offer no expertise, special or otherwise, regarding the intent of the parties to a contract. Nor can he seek to opine on the interpretation of a unique, contractual non-GAAP term, substituting his intent for that of the parties themselves.

Doc. No. 1437 at 5.

The WCG defendants conclude by asserting that:

Mintzer’s opinion relating to debt covenants is not founded upon any expertise in accounting, generally, or GAAP, specifically, but rather his personal lay interpretation of the parties’ intent regarding a contractually negotiated EBITDA definition. It is not, therefore, proper expert testimony and should be excluded.

Id.

at 6.

The court disagrees. Although EBIT-DA was a term which was contractually defined between WCG and its lenders, the beginning point for calculation of EBITDA was GAAP net income.

See,

Exh. 5916 and EY-WCG-00-001534-1537. The adjustments to GAAP net income, to calculate EBITDA, consist of items which can be expected to be well-understood by a Certified Public Accountant with Mr. Mint-zer’s experience. Judgment is involved (especially with respect to the adjustment for “non-cash extraordinary or non-recurring charges”), but the requisite judgment is accounting judgment, not legal judgment. The fact that the EBITDA calculation required the auditor to read, understand and apply contractual terms did not take the EBITDA c

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