Shenk Matter 1

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UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF NEW YORK

ROBERT MICHAEL SHENK, Derivativelyon Behalf of SIRIUS XM RADIO INC.,

Plaintiff,

v.

MELVIN ALAN KARMAZIN, GARYPARSONS, JOAN L. AMBLE, LEON D.BLACK, EDDY W. HARTENSTEIN, JAMESP. HOLDEN, JAMES F. MOONEY, JACKSHAW, GREGORY B. MAFFEI, JOHN C.MALONE, DAVID J.A. FLOWERS, CARLE. VOGEL, and VANESSA A. WITTMAN,

Defendants,

-and-SIRIUS XM RADIO INC.,

Nominal Defendant.

:::

::::::::::::::::::

Case No. 1:11-cv-02943-JSR

PLAINTIFFS CORRECTED MEMORANDUM OF LAW IN OPPOSITION

TO DEFENDANTS MOTION FOR SUMMARY JUDGMENT

SPECTOR ROSEMAN KODROFF& WILLIS, P.C.

1818 Market Street, Suite 2500

Philadelphia, PA 19103Telephone: (215) 496-0300

Facsimile: (215) 496-6611

KAHN SWICK & FOTI, LLC206 Covington Street

Madisonville, LA 70447

Telephone: (504) 455-1400Facsimile: (504) 455-1498

Attorneys for Plaintiff Robert Michael Shenk

Case 1:11-cv-02943-JSR Document 53 Filed 04/18/12 Page 1 of 50


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TABLE OF CONTENTS

PRELIMINARY STATEMENT ................................................................................................. 1

STATEMENT OF DISPUTED FACTS...................................................................................... 3

ARGUMENT................................................................................................................................. 7

I. STANDARDS FOR SUMMARY JUDGMENT ............................................................ 7

II. GENUINE ISSUES OF MATERIAL FACTPRECLUDE SUMMARY JUDGMENT ON PLAINTIFFSCLAIMS ARISING FROM DEFENDANTS PRE-MERGERSTATEMENTS TO SHAREHOLDERS CONCERNING PRICES............................ 7

A. Violations of Section 10(b) of the Securities Exchange Act..................................... 7

1. Material Misstatements .............................................................................................. 8

2. Scienter....................................................................................................................... 12

3. Loss Causation and Injury ....................................................................................... 15

a. $193 Million in Antitrust Liability .................................................................... 15

b. $42 Million in Financial Distress ....................................................................... 16

c. Additional Costs to Obtain Merger Approval.................................................. 19

B. Breach of the Delaware Duty of Full Disclosure to Shareholders ........................ 19

III. GENUINE ISSUES OF MATERIAL FACT PRECLUDESUMMARY JUDGMENT ON PLAINTIFFS CLAIMSARISING FROM DEFENDANTS POST-MERGER PRICE INCREASES........... 23

A. The Business Judgment Rule and its Limitations.................................................. 23

B. The Business Judgment Rule does not Immunize Defendants Conduct ............ 23

1. Defendants Lies to the FCC in Order to Secure Approval for the ..................... 24

2. Causal Link Between Defendants Lies to the FCC and Subsequent PriceIncreases..................................................................................................................... 25

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C. Defendants Conduct Arising from Their Misrepresentationsto the FCC and Improperly Raising Prices Resulted intheBlessing Antitrust Matter and Injury to Sirius................................................ 28

IV. GENUINE ISSUES OF MATERIAL FACT PRECLUDE SUMMARY

JUDGMENT ON PLAINTIFFS CLAIMS ARISING FROM DEFENDANTSBIAS IN FAVOR OF THE MALONE TRANSACTION. .......................................... 31

A. Evidence that Defendants Breached their Fiduciary Duties underRevlon byRejecting Ergen I ...................................................................................................... 31

1. Ergen I Offer with 51% Equity Stake vs. Malone Offer....................................... 32

2. Defendants Fear of the Ergen I Deal and Bias Toward the Malone Offer isExposed ...................................................................................................................... 34

3. Defendants Red Herring: Net Operating Loss Tax Savings............................... 36

B. Evidence that Defendants Breached their Fiduciary Duties underthe Business Judgment Rule by Rejecting Ergen II and III ................................. 36

C. The Company Suffered Damages Arising from the Malone Transaction ........... 38

V. SUMMARY JUDGMENT MUST BE DENIED WITH RESPECT TOPLAINTIFFS CLAIMS ARISING FROM DEFENDANTS $35 MILLIONOPTION GRANT TO KARMAZIN. ............................................................................ 38

CONCLUSION ........................................................................................................................... 40

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TABLE OF AUTHORITIESPage(s)

CASES

Adickes v. S.H. Kress & Co.,398 U.S. 144 (1970)...............................................................................................................7, 8

Am. Hotel Intl Grp., Inc. v. OneBeacon Ins. Co.,611 F. Supp. 2d 373 (S.D.N.Y. 2009), affd, 374 F. Appx 71 (2d Cir. 2010)..........................8

Anderson v. AT & T Corp.,07 Civ. 5913 (MGC), 2010 WL 1780953 (S.D.N.Y. May 4, 2010)........................................12

Arnoldv. Socy for Sav. Bancorp,650 A.2d 1270 (Del. 1994) ......................................................................................................22

Auburn Chevrolet-Oldsmobile-Cadillac, Inc. v. Branch,

No. 5:06-CV-0362, 2009 WL 667430 (N.D.N.Y. Mar. 10, 2009) ..........................................23

In re Bank of Am. Corp. Sec., Deriv., & Emp. Ret. Income Sec. Act

(ERISA) Litig.,757 F. Supp. 2d 260 (S.D.N.Y. 2010), recon. denied, No.09-MD-2058 (PKC), 757 F. Supp. 2d 260 (S.D.N.Y. 2010)...................................8, 11, 12, 15

Barkan v. Amsted Indus., Inc.,567 A.2d 1279 (Del. 1989) ......................................................................................................32

Basic Inc. v. Levinson,485 U.S. 224 (1988)...................................................................................................................8

Bershad v. CurtissWright Corp.,535 A.2d 840 (Del. 1987) ........................................................................................................20

Blessing v. Sirius XM Radio Inc.,Civ. No. 1:09-cv-10035-HB (S.D.N.Y.)..........................................................................passim

Caiola v. Citibank, N.A.,295 F.3d 312 (2d Cir. 2002).....................................................................................................11

Caruso v. Metex Corp.,No. CV 89-0571, 1992 WL 237299 (E.D.N.Y. July 30, 1992) ...............................................20

Cede & Co. v. Technicolor, Inc.,634 A.2d 345 (Del. 1993) ........................................................................................................30

In re Chicago Flood Litig.,No. 93 C 1214, 1995 WL 437501 (N.D. Ill. July 21, 1995) ....................................................10

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In re Citigroup Inc. Sholder Deriv. Litig.,964 A.2d 106 (Del. Ch. 2009)..................................................................................................39

In re Columbia Secs. Litig.,155 F.R.D. 466 (S.D.N.Y. 1994) .............................................................................................12

In re Credit Suisse First Boston Corp. Sec. Litig.,No. 97 Civ. 4760 (JGK), 1998 WL 734365 (S.D.N.Y. Oct. 20, 1998) ...................................11

Di Tomasso v. Loverro,293 N.Y.S. 912 (N.Y. App. Div. 1937), affd mem., 276 N.Y. 551 (N.Y. 1937)....................29

Ebewo v. Martinez,309 F. Supp. 2d 600 (S.D.N.Y. 2004)......................................................................................18

Eisenberg v. Chicago Milwaukee Corp.,537 A.2d 1051 (Del. Ch. 1987)................................................................................................20

Envtl. Conserv. Org. v. Bagwell,No. 4:03-CV-807-Y, 2005 WL 2415957 (N.D. Tex. Sept. 28, 2005) .....................................10

Exxon Co., U.S.A. v. Sofec, Inc.,517 U.S. 830 (1996).................................................................................................................16

Fleming v. Verizon New York, Inc.,No. 03 Civ. 5639 (WHP), 2006 WL 2709766 (S.D.N.Y. Sept. 22, 2006) ..............................18

Frank v. Arnelle,No. CIV. A. 15642, 1998 WL 668649 (Del. Ch. Sept. 16, 1998) .....................................20, 22

Frankel v. Slotkin,984 F.2d 1328 (2d Cir. 1993).....................................................................................................8

Goldman v. Belden,754 F.2d 1059 (2d Cir. 1985)...................................................................................................11

Guttman v. Huang,823 A.2d 492 (Del. Ch. 2003)..................................................................................................29

Haber v. ASN 50th Street, LLC,

272 F.R.D. 377 (S.D.N.Y. 2011) .............................................................................................17

J.I. Case Co. v. Borak,377 U.S. 426 (1964).................................................................................................................15

Jeffreys v. City of N.Y.,426 F.3d 549 (2d Cir. 2005).......................................................................................................7

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In re Joint E. & S. Dist. Asbestos Litig.,

52 F.3d 1124 (2d Cir. 1995).....................................................................................................17

In re Kidder Peabody Sec. Litig.,

10 F. Supp. 2d 398 (S.D.N.Y. 1998)........................................................................................12

Lentell v. Merrill Lynch & Co., Inc.,396 F.3d 161 (2d Cir. 2005).....................................................................................................16

Longview Equity Fund, L.P. v. iWorld Projects & Sys., Inc.,No. 05 Civ. 6745 (RJS), 2008 WL 833230 (S.D.N.Y. Mar. 26, 2008) .....................................7

Malpiede v. Townson,780 A.2d 1075 (Del. 2001) ................................................................................................20, 22

McClellan v. Smith,439 F.3d 137 (2d Cir. 2006).......................................................................................................7

Mendell v. Greenberg,927 F.2d 667, amended, 938 F.2d 1528 (2d Cir. 1990).............................................................8

Metro Commcn Corp. BVI v. Advanced Mobilecomm Techs., Inc.,854 A.2d 121 (Del. Ch. 2004)............................................................................................28, 30

Miller v. American Tel. & Tel. Co.,507 F.2d 759 (3d Cir. 1974)...............................................................................................28, 29

Mills Acquisition Co. v. Macmillan, Inc.,559 A.2d 1261 (Del. 1989) ......................................................................................................32

Novak v. Kasaks,216 F.3d 300 (2d Cir. 2000)...............................................................................................11, 12

Ocean Partners, LLC v. N. River Ins. Co.,546 F. Supp. 2d 101 (S.D.N.Y. 2008)........................................................................................8

In re Pfizer Inc. Sec. Litig.,584 F. Supp. 2d 621 (S.D.N.Y. 2008)......................................................................................13

Playboy Enters., Inc. v. Dumas,

960 F. Supp. 710 (S.D.N.Y. 1997).............................................................................................8

Press v. Chem. Inv. Servs. Corp.,

166 F.3d 529 (2d Cir.1999)......................................................................................................12

Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.,506 A.2d 173 (Del. 1986) ......................................................................................31, 32, 35, 38

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RMED Intl, Inc. v. Sloans Supermarkets, Inc.,185 F. Supp. 2d 389 (S.D.N.Y. 2002)..................................................................................9, 13

Rogers v. American Can Co.,187 F. Supp. 532 (D.N.J. 1960), affd, 305 F.2d 297 (2d Cir. 1962).......................................29

Samaritan Health Ctr. v. Simplicity Health Care Plan,459 F. Supp. 2d 786 (E.D. Wis. 2006).....................................................................................10

San Leandro Emergency Med. Grp. Profit Sharing Plan v. Philip Morris Cos. ,75 F.3d 801 (2d Cir. 1996).......................................................................................................11

In re Santa Fe Pac. Corp. Sholder Litig.,669 A.2d 59 (Del. 1995) ..........................................................................................................20

Sec. Ins. Co. of Hartford v. Old Dominion Freight Line, Inc.,391 F.3d 77 (2d Cir. 2004).........................................................................................................7

Shenk v. Karmazin,No. 11 CIV. 2943 (JSR), 2011 WL 5148667 (S.D.N.Y. Oct. 28, 2011) .........................passim

Smith v. Van Gorkom,

488 A.2d 858 (Del. 1985) ........................................................................................................20

Stroud v. Grace,606 A.2d 75 (Del. 1992) ..........................................................................................................20

In re Syncor Intern. Corp. Shareholders Litig.,857 A.2d 994 (Del. Ch. 2004)..................................................................................................30

In re Toys R Us, Inc. Sholder Litig.,877 A.2d 975 (Del. Ch. 2005)..................................................................................................35

In re Transkaryotic Therapies, Inc.,954 A.2d 346 (Del. Ch. 2008)..................................................................................................21

TSC Indus., Inc. v. Northway, Inc.,426 U.S. 438 (1976)...............................................................................................................8, 9

Turner v. Bernstein,

No. 16190, 1999 WL 66432 (Del. Ch. Feb. 9, 1999) ..............................................................20

U.S. v. All Right, Title & Interest in Real Prop. & Appurtenances,77 F.3d 648 (2d Cir. 1996).......................................................................................................17

United Paperworkers Intl Union v. Intl Paper Co.,985 F.2d 1190 (2d Cir. 1993)...................................................................................................11

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vii

Unocal Corp. v. Mesa Petroleum Co.,493 A.2d 946 (Del. 1985) ........................................................................................................32

Virginia Bankshares, Inc. v. Sandberg,501 U.S. 1083 (1991).................................................................................................................8

In re Walt Disney Co. Deriv. Litig.,

825 A.2d 275 (Del. Ch. 2003)..................................................................................................40

In re Walt Disney Co. Deriv. Litig.,907 A.2d 693 (Del. Ch. 2005)................................................................................23, 27, 28, 38

In re Walt Disney Co.,No. Civ. A. 15452, 2004 WL 2050138 (Del. Ch. Sept. 10, 2004) ....................................39, 40

Wilshire Oil Co. of Tex. v. Riffe,409 F.2d 1277 (10th Cir. 1969) ...............................................................................................29

Wilson v. Great Am. Inds., Inc.,855 F.2d 987 (2d Cir. 1988).....................................................................................................11

In re WorldCom, Inc. Sec. Litig.,No. 02 Civ. 3288 (DLC), 2005 WL 638268 (S.D.N.Y. Mar. 21, 2005)....................................7

Wortley v. Camplin,333 F.3d 284 (1st Cir. 2003)....................................................................................................16

STATUTES

Section 10(b), 15 U.S.C. 78j(b) .............................................................................................. 7-19

8 Del. C. 102(b)(7).......................................................................................................... 20, 21-22

OTHER AUTHORITIES

Fed. R. Civ. P. 7(b)(1)(B) ..............................................................................................................39

Fed. R. Civ. P. 37(c)(1)..................................................................................................................17

Fed. R. Civ. P. 56(c) ......................................................................................................................17

Fed. R. Evid. 801(d)(2)(B).............................................................................................................10

Rule 10b5.....................................................................................................................................15

Rule 26(a).................................................................................................................................17, 18

R. Franklin Balotti & Jesse A. Finkelstein,Delaware Law of Corp. & Business Org. 4.19, at 4-335 (Supp. 1992) .....................................................................................................22



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PRELIMINARY STATEMENT1

Defendants desperately want to make this case about the Board simply exercising its

business judgment to raise prices and opting for a better financing deal in the face of the

collapsing U.S. economy in 2008. In the end, however, the documents and testimony tell a far

different storyone involving lies to federal regulators and Siriuss shareholders concerning

lower prices after the Sirius-XM merger, actual price increases in violation of express

promises to regulators, and the favoring of an inferior financing deal motivated by Defendants

desire to entrench themselves on the Board.

Summary judgment must be denied unless the facts, in material part, are not subject to

genuine dispute. Here, material facts areheavily disputed. As the record demonstrates, there is

substantial evidence from which a reasonable jury could find Plaintiffs factual claims to be true.

The story told by this record stars Mel Karmazin, the CEO of Sirius, who was singularly focused

on acquiring XM, Siriuss only competitor, despite the enormous $3 billion debt burden the

combined Company would inherit. Because of this massive debt, however, Defendants knew

that they would somehow have to raise prices and fees after the merger and, even then, would be

forced to turn to the high-risk debt market by February 2009 or face bankruptcy.

Sirius would have to clear the first hurdle and gain approval for the merger to monopoly

by federal regulators, including the Federal Communications Commission (FCC) and the

Department of Justice (DOJ) and from its shareholders. To do this, Defendants resorted to

their only option to gain approval from these agencies and shareholders alikedeceiving them

into believing that Sirius XM would not only maintain its prices, but that the merger would

1 As referred to herein, D Ex. refers to Defendants numbered exhibits as attached to theaffidavit of Mary E. McGarry. P Ex. refers to Plaintiffs numbered exhibits as attached to theaffidavit of Melinda A. Nicholson. P 56.1 refers to Plaintiffs Rule 56.1 Statement. D 56.1refers to Defendants Rule 56.1 Statement.



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actually lead to lower prices for consumers. Such misstatements were repeated over and over

again to shareholders, the FCC, the press, and to Congress.

These statements were manifestly untrueboth as to a combined companys ability to

lower prices and as to Defendants actual intentions. Prior to the merger, Defendants had

specifically approved plans to increase prices on many of Siriuss core services; and, almost as

quickly as the merger was consummated, Sirius Board approved price hikes and imposed new

fees on subscribers. These price hikes were considerable and, as Defendants likely anticipated,

quickly led to a civil antitrust class action that Sirius was forced to settle after this Court (Baer,

J.) denied summary judgment in favor of the plaintiffs and granted class certification. Thus, no

matter how far Defendants try to stretch the protections they claim they are owed under the

business judgment rule, their bald-faced misrepresentations to the FCC and the Companys own

shareholders, from which the antitrust liability and many other injuries arose, far exceed the

breaking point of the rule.

Likewise, there is substantial evidence from which a reasonable jury could conclude that

Defendants breached their fiduciary duties when they selected the single financing offer made by

John Malone despite better terms offered to the Company by Charles Ergen on, not one or two,

but three occasions in early 2009. In fact, from the evidence presented, a jury could conclude

that Defendants tilted the playing field in Malones favor, never giving Ergens multiple superior

offers a fair hearing. Rather, the Board allowed Karmazins personal animosity with Ergen and a

desire to retain their positions interfere with their judgment. Defendants course of misconduct

reached its climactic conclusion when, in June 2009, the Board after a perfunctory review

process, lavished on Karmazin a $7 million bonus and stock options worth over $35 million.

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STATEMENT OF DISPUTED FACTS

From the moment he joined Sirius as CEO, Mel Karmazin was singularly focused on

combining it with competitor XM, despite knowing that such a merger (the Merger) could

jeopardize the combined companys existence because of the massive debt that ensued, which

would exceed $3 billion for two companies that had experienced losses every year since

inception. P 56.1 171. This, in fact, occurred, and the company has suffered tens of millions

of dollars in damages in the form of financial distress arising from the debt load. P 56.1 235.

Because of such debt, Defendants knew that the combined company (Sirius XM)

would have to increase prices following the Merger. P 56.1 172, 187. Karmazin and the

Sirius Board of Directors had long discussed, and had approved plans for, substantial increases

on the prices of Siriuss core services such as basic subscriptions and multi-receiver

subscriptions. P 56.1 186. By no later than the summer of 2006, and continuing into 2007,

Karmazin and the Boards desire to raise prices had transformed into the development of

concrete plans to do so. P 56.1 186(b). At the Boards request, a 2007 budget was prepared

which would include at least $70 million in additional revenue, premised upon increases in the

prices of core services such as basic and multi-receiver subscriptions. P 56.1 186(d)(f).

Defendants have submitted an expert report in this litigation in which they admit that Sirius had

pre-merger plans to raise prices on basic, multi-receiver, and Internet streaming subscriptions. P

56.1 186(g).

Nonetheless, after the Merger was announced, Defendants madeand caused Sirius to

makebroad, affirmative, and unqualified representations to shareholders, regulators, Congress,

and the public that the Merger would result in lower or stable prices. P 56.1 173-182.

These statements included direct communications to shareholders and other widely-publicized

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statements that were available to shareholders, including a Joint Merger Proxy Statement, and

were repeated until the eve of the shareholder vote on the Merger in early November 2007. P

56.1 173(a), (c), (h), (j), (l), (n), (p), (r), (u), 182. The statements also included express

promises to Siriuss primary regulator, the Federal Communications Commission (FCC), that

the monthly price of a basic subscription ($12.95) and the monthly price of a multi-receiver

subscription ($6.99) would not rise. P 56.1 173(e). Such promises were included in a Joint

Application to the FCC which was disseminated to shareholders. P 56.1 173(f), (t).2 In none

of these statements did Sirius ever state that the promised lower prices referred only to new

subscription packages that the combined company might offer, such as partial-channel packages.

P 56.1 173(b), (d), (g), (i), (k), (m), (o), (q), (s), (v), 178.

Defendants plans to raise prices on basic, multi-receiver, and Internet streaming

subscriptions were put on hold after the Merger was announced. P 56.1 188. The decision to

put the price increases on hold was made, in part, out of concern that the increases would

jeopardize approval of the Merger by the FCC or the U.S. Department of Justice (DOJ). P

56.1 189. The plans to increase prices were not abandoned altogether, but were simply held in

abeyance until after the Merger was approved. P 56.1 190-198. Indeed, practically as soon as

the Merger was consummated in late July 2008, Defendants caused Sirius to increase the price of

multi-receiver subscriptions to $8.99 monthly, to increase the size of the Music Royalty Pass-

Through fee (MRF), and to impose a new Internet streaming charge of $2.99 per month. P

56.1 191. By October 26, 2008, Sirius executives, with Karmazins approval, had determined

2 While in one filing with the FCC, Sirius went into detail concerning several new, partial-channel subscriptions that would feature lower prices, P 56.1 175, 181, this filing was notdisseminated to shareholders, P 56.1 176, and in any event repeated promises concerninglower prices. P 56.1 177. Moreover, this filing affirmed that the $12.95 basic price and$6.99 multi-receiver price would not rise, P 56.1 179-180, and it downplayed the likelihood ofany increases with respect to even new services. P 56.1 181.

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to renew Siriuss pre-Merger plans to increase the price of a basic subscription from $12.95 to

approximately $14.95. P 56.1 192-193. This increase was implemented in January 2012. P

56.1 194. The Board of Directors also reviewed and approved a 2009 Operating Plan based on

increases in multi-receiver subscriptions (to $8.99 per month), Internet streaming, and the MRF.

P 56.1 195-196. These increases, too, were implemented. P 56.1 197. Defendants post-

Merger pricing decisions, and its financial results involving them, have been the subject of

renewed investigation or inquiry by federal regulators, including both the FCC and the Securities

and Commission. P 56.1 198. Defendants decisions to conceal their intentions of raising

prices substantially prolonged the Merger approval process, injuring Sirius. P 56.1 199-201.

Moreover, Defendants post-Merger pricing decisions gave rise to antitrust liability and injured

Sirius in the amount of $196 million, equal to the value of the settlement to which Sirius agreed

in theBlessing antitrust matter to obtain a release from liability, plus attorneys fees and

prejudgment interest. P 56.1 236.3

By early 2009, several players were interested in providing relief financing to Sirius XM.

Chief among them were Charles Ergen of Dish Network/Echostar and John Malone of Liberty

Media Corporation. The Board entertained offers from two parties in February and March of

3 Defendants lies to shareholders and regulators concerning post-Merger pricesrepresented merely the continuation of a longstanding policy to try to evade the restrictionsimposed on Sirius by its regulators. Indeed, to secure FCC approval of the Merger, Sirius wasrequired to agree to a $2.2 million penalty for the unauthorized placement of terrestrial repeaters(devices to retransmit its signals through densely populated urban areas). P 56.1 47. The FCCwas emphatic in describing the brazen nature of the violations. D Ex. 43, 169; D Ex. 41 at 1,20-22. Moreover, Sirius had a long history of disregarding a 1997 FCC Order requiring it tocertify that its final receiver design would allow Sirius radios to be interoperable with (i.e.,receive and process the signals of) XM radiosand to make such interoperable radioscommercially available. P 56.1 202-206. Karmazin and the Board were well aware of theseissues. P 56.1 205. The FCC analyzed the record and concluded that, contrary to Siriussarguments that it only had to design an interoperable radio, the 1997 FCC Order did, in fact,require Sirius to make such a radio commercially available. P 56.1 206.

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2009. However, the playing field was tilted in favor of Malone despite more favorable terms

offered by Ergen. Ergen made three separate offers that would have benefitted Sirius XM more

than the Malone offer, but each of Ergens offers was spurned in favor of the Malone Offer.

P 56.1 207-230. Plaintiffs estimate damages to Sirius XM arising from the choice of the

Malone offer at approximately $22.5 million. P 56.1 237.

In mid-2009, after Karmazin in his single-minded pursuit of the Merger had nearly

bankrupted Sirius XM, the Board approved a renewal of Karmazins employment contract on

lavish terms. P 56.1 231-234. The Board not only awarded Karmazin a $7 million bonus for

2009, approximately six times his base salary, it also awarded him 120,000,000 million stock

options at an exercise price of $0.43 per share. P 56.1 231. The fair value of these options on

the date of the grant was $35,209,400, as reported by Sirius itself. P 56.1 231. This brought

Karmazins total compensation for 2009 to $43,466,790. P 56.1 232. In determining to grant

Karmazin options worth over $35 million to stay with the Company for three more years, the

Board itself conducted no negotiations with Karmazin. The full Board attempted to insulate

itself from responsibility for Karmazins renewed employment contract by assigning the task of

negotiating with Karmazin to the Compensation Committee. The Compensation Committee

itself did not retain an independent compensation consultant to advise them in the negotiation of

Karmazins compensation arrangements or to assess the reasonableness of those arrangements.

The actual negotiations between the Compensation Committee and Karmazin involved the

participation of only a single other director. P 56.1 232. Malone, a controlling shareholder and

Board member, enthusiastically supported the renewal of Karmazins contract and the grant of

tens of millions of dollars in options. Malone had known Karmazin for over many years and had

interacted with him on dozens of occasions in social and professional settings alike. P 56.1

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233. Plaintiffs expert estimates that Sirius was injured by the Karmazin option grant in the

amount of $40 million. P 56.1 237.

ARGUMENT

I. STANDARDS FOR SUMMARY JUDGMENTTo defeat a motion for summary judgment, all that is required [from a non-moving

party] is that sufficient evidence supporting the claimed factual dispute be shown to require a

jury or judge to resolve the parties differing versions of the truth at trial. McClellan v. Smith,

439 F.3d 137, 144 (2d Cir. 2006) (citation and internal quotation marks omitted). The Court

must construe the evidence in the light most favorable to the non-moving party, drawing all

inferences in that partys favor. Jeffreys v. City of N.Y., 426 F.3d 549, 553 (2d Cir. 2005); Sec.

Ins. Co. of Hartford v. Old Dominion Freight Line, Inc., 391 F.3d 77, 83 (2d Cir. 2004) (the

court is required to resolve all ambiguities and draw all permissible factual inferences in favor of

the party against whom summary judgment is sought);Longview Equity Fund, L.P. v. iWorld

Projects & Sys., Inc., No. 05 Civ. 6745 (RJS), 2008 WL 833230, at *7 (S.D.N.Y. Mar. 26, 2008)

(credibility assessments, choices between conflicting versions of the events, and the weighing

of evidence are matters for the jury, not for the court on a motion for summary judgment).4

II. GENUINE ISSUES OF MATERIAL FACT PRECLUDESUMMARY JUDGMENT ON PLAINTIFFS CLAIMSARISING FROM DEFENDANTS PRE-MERGERSTATEMENTS TO SHAREHOLDERS CONCERNING PRICES

A. Violations of Section 10(b) of the Securities Exchange Act

4 Moreover, where the evidentiary matter in support of the motion does not establish theabsence of a genuine issue, summary judgment must be denied even if no opposing evidentiarymatter is presented. Adickes v. S.H. Kress & Co., 398 U.S. 144, 160 (1970) (citation omitted);see also,In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2005 WL 638268, at *3(S.D.N.Y. Mar. 21, 2005) (same).

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To support a derivative claim with respect to a corporate transaction for which

shareholder approval was sought under Section 10(b), 15 U.S.C. 78j(b), plaintiff must prove

the defendants made material misstatements of fact, with scienter, and that the corporation was

harmed thereby. Frankel v. Slotkin, 984 F.2d 1328, 1332 (2d Cir. 1993) (Section 10(b) derivative

claims); accordIn re Bank of Am. Corp. Sec., Deriv., & Emp. Ret. Income Sec. Act (ERISA)

Litig., 757 F. Supp. 2d 260, 320 (S.D.N.Y. 2010), recon. denied, No. 09-MD-2058 (PKC), 2010

WL 4237304 (S.D.N.Y. Oct. 8, 2010). Here, Defendants have failed to foreclose the possibility

that Plaintiff would be able to establish the existence of each of these elements at trial. Cf.

Adickes, 398 U.S. at 157. Summary judgment must be denied.

5

1. Material MisstatementsA misrepresentation or omission is material within the meaning of Section 10(b) if there

is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the

reasonable investor as having significantly altered the total mix of information made

available. Basic Inc. v. Levinson, 485 U.S. 224, 231 (1988) (quoting TSC Indus., Inc. v.

Northway, Inc., 426 U.S. 438, 449 (1976)). With regard to misrepresentations contained within

proxy statements or related materials, [o]nly when the proxy statement fully and fairly furnishes

all the objective material facts as to enable a reasonably prudent stockholder to make an

informed investment decision is the federal purpose in the securities laws served. Mendell v.

Greenberg, 927 F.2d 667, 674, amended, 938 F.2d 1528 (2d Cir. 1990). The point of a proxy

statement ... should be to inform, not to challenge the readers critical wits. Virginia

5 While Defendants deny that there is sufficient evidence to satisfy any element ofSection 10(b), Def. Br. at 30, they make no argument concerning reliance or transactioncausation. See id. at 30-34. Those defenses are therefore waived. Ocean Partners, LLC v. N.River Ins. Co., 546 F. Supp. 2d 101, 106 (S.D.N.Y. 2008); Playboy Enters., Inc. v. Dumas, 960F. Supp. 710, 720 n. 7 (S.D.N.Y. 1997);Am. Hotel Intl Grp., Inc. v. OneBeacon Ins. Co., 611 F.Supp. 2d 373, 375 (S.D.N.Y. 2009), affd, 374 F. Appx 71 (2d Cir. 2010).

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Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1097 (1991). Materiality is typically a jury

question. See TSC Indus., 426 U.S. at 450;RMED Intl, Inc. v. Sloans Supermarkets, Inc., 185

F. Supp. 2d 389, 400 (S.D.N.Y. 2002) (denying summary judgment) (collecting cases).

Here, there is sufficient evidence from which a reasonable jury could conclude that

Defendants made material misstatements to shareholders in the joint Merger Proxy Statements

and other public statements before shareholders voted whether to approve the Sirius-XM merger

on November 13, 2007. Defendants repeatedly issued broad, affirmative, and unqualified

representations to shareholders, regulators, Congress, and the public alike that the Sirius-XM

Merger would result in lower prices for consumers. P 56.1 173-182. These statements

were not limited by their terms to the prices to be offered for new services which were only a

subset of Siriuss satellite radio channels, P 56.1 173-182, nor did Defendants leave open the

possibility that the prices for any existing services could be raised. To the contrary, Defendants

denied the possibility that prices for existing services would increase as a result of the Merger,

and they were emphatic that the price of existing core services such as basic subscriptions and

multi-receiver subscriptions would notincrease. P 56.1 173-182. Emblematic of these claims

was defendant Sirius CEO Mel Karmazins assurances to Congress that I am telling you today

that we are committed, we are committed to not raising prices and committed to in fact lowering

the price. P 56.1 173(a). (emphases added).

A reasonable jury could find that Defendants statements that the Merger would lead to

lower prices or at least stable prices were false or had no reasonable basis when made.

Defendants have admittedthrough their submission on report prepared by their expert, Michael

Baye, Ph.D., in this litigationthat Sirius, before the Merger, had plans to raise prices due to

continuing cash flow problems and mounting losses:

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[b]oth [Sirius and XM] had plans to increase the basic subscription price from$12.95 to at least $14.99 per month. Sirius and XM also had pre-merger plans toincrease multi-radio rates/family rates, Sirius had plans to increase internetstreaming rates and XM had plans to impose a royalty fee in the absence of themerger.

P 56.1 186(a)-(e).6 And even apart from this admission, there is abundant evidence that

beginning in 2005 and continuing until well after the Merger was announced, the Board had in

place concrete plans to raise the monthly price of a basic subscription (from $12.95 to $14.95 or

more), to raise the monthly price of a multi-receiver subscription (from $6.95 to $7.95 or more),

and to raise the monthly price for an Internet streaming subscription (from $0 to $2.99 or more).

P 56.1 180-181. Indeed, the Board of Directors approved a final 2007 budget for Sirius on

January 23, 2007, which, at the Boards request, was premised upon substantial increases in the

prices of all three of these core services. P 56.1 180(f), 180(h).7

Defendants protest that their statements did not promise that the post-merger company

would lower all prices and then maintain them in perpetuity, and they suggest that lower

prices referred merely to new, partial-channel and other subscription plans involving fewer than

all of Siriuss existing satellite radio channels. Def. Br. at 31. However, a reasonable jury could

find that Defendants statementsthough sometimes discussing new, partial-channel plans

6 See Fed. R. Evid. 801(d)(2)(B);In re Chicago Flood Litig., No. 93 C 1214, 1995 WL437501, at *11 (N.D. Ill. July 21, 1995) (denying in limine motion to exclude expert evidence;opposing partys expert report constituted admission which would be strongly probative);Envtl. Conserv. Org. v. Bagwell, No. 4:03-CV-807-Y, 2005 WL 2415957, at *1 n.1 (N.D. Tex.Sept. 28, 2005). Of course, there can be no hearsay objection to Plaintiffs reliance onDefendants own expert. Samaritan Health Ctr. v. Simplicity Health Care Plan, 459 F. Supp. 2d786, 799 (E.D. Wis. 2006).7 The evidence indicates that the plan to increase prices for these core services was put onhold after the Merger was announced, but that this was done, in part, to avoid regulatoryscrutiny. P 56.1 188. Indeed, almost as soon as the Merger was approved in July 2008, theplans to increase on core services were reactivated. P 56.1 191, 195-196.

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nowhere stated that the lower prices referred only to such plans. See P 56.1 173-182.8

Moreover, a reasonable jury similarly could find that Defendants repeated assurances of lower

prices foreclosed the possibility that Karmazin and the Board were, as was in fact the case,

planning to increase the prices for core services.

Similarly, Defendants urge that the statements concerning lower prices merely

constituted projections which cannot be actionable under the securities laws. Def. Br. at 32.

However, there is a difference between enthusiastic statements amounting to general puffery and

opinion-based statements that are anchored in misrepresentations of existing facts. Novak v.

Kasaks, 216 F.3d 300, 315 (2d Cir. 2000). See alsoBank of Am., 757 F. Supp. 2d at 310. Thus,

even if deemed to be opinions or projections, a jury could find Defendants assurances of lower

prices lacked a reasonable basis in fact. See Novak, 216 F.3d at 315; Goldman v. Belden, 754

F.2d 1059, 1068-69 (2d Cir. 1985);Bank of Am., 757 F. Supp. 2d at 290 (S.D.N.Y. 2010). Even

prospective or contingent statements, if reasonably unlikely to occur, are actionable. See

Wilson v. Great Am. Inds., Inc., 855 F.2d 987, 992 (2d Cir. 1988); San Leandro Emergency Med.

Grp. Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 810 (2d Cir. 1996).9

8 The sole statement which arguably links the representation of lower prices to new,partial-channel plans, is contained within Sirius and XMs Joint Opposition to Petitions to Denyand Reply Comments of Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc. (JointOpposition), filed with the FCC on July 24, 2007. See P 56.1 178. However, there is noevidence that the Joint Opposition was disclosed to shareholders. P 56.1 173,174. See UnitedPaperworkers Intl Union v. Intl Paper Co., 985 F.2d 1190, 1199 (2d Cir. 1993) (merely filingwith a regulatory agency documents containing factual information material to a proposal forwhich proxy votes are sought does not constitute adequate disclosure). Moreover, the JointOpposition affirmatively represented that the prices of basic and multi-receiver subscriptionswould not increase. P 56.1 179,180.9 Plaintiffs argument, of course, does not depend on Defendants having had anindependent duty to disclose internal plans to raise prices on core services. However, wheresuch plans existed, Defendants were under a duty to speak truthfully or abstain from speaking inan unqualified way that post-Merger prices would be lower or stable. See Caiola v. Citibank,N.A., 295 F.3d 312, 331 (2d Cir. 2002);In re Credit Suisse First Boston Corp. Sec. Litig., No. 97

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2. ScienterThe evidence could also lead a reasonable jury to conclude that Defendants acted with

scienter in this case. Scienter can be established either: (a) by alleging facts to show that

defendants had both motive and opportunity to commit fraud; or (b) by alleging facts that

constitute strong circumstantial evidence of conscious misbehavior or recklessness. Press v.

Chem. Inv. Servs. Corp., 166 F.3d 529, 538 (2d Cir.1999). Scienter is quintessentially a jury

question. Anderson v. AT & T Corp., 07 Civ. 5913 (MGC), 2010 WL 1780953, at *2 (S.D.N.Y.

May 4, 2010) (denying motion for summary judgment on securities claim; [d]efendants rely on

testimony, but the credibility of the deponents is not an undisputed fact). Moreover, [t]he

Second Circuit has been lenient in allowing scienter issues to withstand summary judgment

based on fairly tenuous inferences. Whether a given intent existed is generally a question of

fact, appropriate for resolution by the trier of fact. Press, 166 F.3d at 538 (2d Cir. 1999)

(citation omitted). See alsoIn re Kidder Peabody Sec. Litig., 10 F. Supp. 2d 398, 415 (S.D.N.Y.

1998);In re Columbia Secs. Litig., 155 F.R.D. 466, 479 (S.D.N.Y. 1994) (scienter generally

requires examination of a witnesss demeanor and credibility).

Finally, recklessness may be established where it is proven that the defendants knew

facts or had access to information suggesting that their public statements were not accurate, as

long as the plaintiff specifically identifies the sources of the defendants access to contrary facts.

Novak, 216 F.3d at 309, 311; see also Bank of Am., 757 F. Supp. 2d at 323. Under such

circumstances, the defendants knew or, more importantly, should have known that they were

misrepresenting material facts related to the corporation. Novak, 216 F.3d at 308. Moreover, as

this Court has previously observed,

Civ. 4760 (JGK), 1998 WL 734365, at *6 (S.D.N.Y. Oct. 20, 1998);Bank of Am., 757 F. Supp.2d at 295, 297-98 (same).

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a number of courts have found that officers and directors recklessly disregardedthe truth when their companies made, and they failed to correct, statements thatcontradicted reasonably available data and that concerned major transactions ortouched upon the heart of their companies businesses.

Shenk v. Karmazin, No. 11 CIV. 2943 (JSR), 2011 WL 5148667, at *7 (S.D.N.Y. Oct. 28, 2011)

(citing cases). Defendants do not dispute that the Sirius-XM Merger was the most significant

transaction in Siriuss history.

Plaintiff has identified strong circumstantial evidence of conscious misbehavior or

recklessness. When they made statements that the Merger would result in lower prices and

would in no event result in price increases, Defendants were well aware that Sirius had been

working for years on plans to implement price increases for its core services; the Board itself

even approved a final budget for 2007 which, at its request, had included increased revenues

premised upon such price increases. P 56.1 186(d)-(f). Thus, a reasonable jury could find that

Defendants knew of facts specifically controverting their public statements about prices. See,

e.g., RMED, 185 F. Supp. 2d at 403-04 (genuine issue of material fact existed as to whether

corporation and its chief executive officer had requisite scienter to commit fraud, given evidence

that defendants knew of FTC investigation and misrepresented and omitted this information from

SEC filings), recon. denied, 207 F. Supp. 2d 292, 299 (S.D.N.Y. 2002) (same);In re Pfizer Inc.

Sec. Litig., 584 F. Supp. 2d 621, 639-40 (S.D.N.Y. 2008) ([h]aving established the sufficiency

of Plaintiffs allegations as to materiality as well as the Individual Defendants knowledge, the

question of scienter is implicitly resolved).

Additional circumstances support a finding of recklessness by each of the Section 10(b)

Defendants here. For example, the scienter of Karmazin is especially in issue because several of

the statements concerning prices were made directly by him, including statements in the Merger

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Proxy Statement, which he signed. P 56.1 171(a), (c), (h), (j), (l), (n), (p), (r), (t), (u); 174. 10

Similarly, Parsons admitted in private e-mail correspondence to a family member that were

basically waffling when asked specifically about price decreases. P 56.1 187 (emphasis

added).

As for the overall Board of Directors (including Karmazin)at the precise times during

2007 when it was making sweeping statements to shareholders, the FCC, and Congress

guaranteeing that prices for core services would not increase and that the Merger would

unqualifiedly lead to lower pricesSirius was being investigated by the FCC for knowingly

and repeatedly failing to comply with the Commissions requirements concerning FM

modulators and terrestrial repeaters. P 56.1 205. The FCC investigation was only resolved

when Sirius and XM jointly agreed to pay a $19.4 million fine in July 2008the second largest

in FCC historywith the FCC severely reprimanding Sirius for the apparently intentional

nature of many of the violations. P 56.1 46.11 In addition, there is evidence that Karmazin

and other Sirius directors, while well aware of a FCC order requiring the Company to develop

and commercialize an interoperable radio unit (and notwithstanding the fact that the FCC later

10 Further, Karmazin had a material and personal financial interest in the Merger thatmaterially exceeded that of any shareholder. For example, if Mr. Karmazins employmentcontract were renewed in November 2009 when his previous contract expired, he stood to gainsignificantly in the form of higher salary and options grants from a combined company that wastwice the size of legacy Sirius, as in fact happened. P 56. 1 231-233.11 The Complaint alleged that the FCC fine was for $17.4 million and that the fineconcerned Siriuss failure to market an interoperable radio receiver. Ex. 10 64-67. Discoveryhas disclosed that the fine, imposed on both Sirius and XM, did not concern interoperable radiobut rather issues concerning the location of terrestrial repeaters (ground units) and the frequencyemissions of certain modulators within Sirius radio units. However, this does not change the factof the gargantuan amount of the fine or the intentional nature of the FCC rule violation, whichthis Court previously held imposed upon Defendants a good faith obligation to investigatewhether, by repeatedly claiming that the merger would result in the same price or lowerprices, . . . the company was once again committing a serious infraction in its dealings with theFCC. Shenk, 2011 WL 5148667, at *5. Thus, Defendants argument that Defendants priordealings with the FCC do not support a finding of bad faith (Def. Br. at 20-21) is wrong.

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declined to impose a fine in connection with Defendants actions concerning it12), consciously

failed to comply with that order. P 56.1 205. SeeShenk,2011 WL 5148667, at *6 (Given

Sirius history of false statements to the FCC, and the inherent unlikelihood that it could fulfill

its new promises to the FCC and its shareholders, the complaint adequately alleges bad faith on

the part of the members of the board who approved the merger.).

3. Loss Causation and InjuryDefendants do not dispute that, for a plaintiff to maintain a derivative action for damages

under Rule 10b5 he must show damage to the corporation by the fraud as required by section

28(a) of the Act, 15 U.S.C. 78bb(a) (1982). See Bank of Am., 757 F. Supp. 2d at 293-92; J.I.

Case Co. v. Borak, 377 U.S. 426, 432 (1964). Here, Plaintiff has come forward with evidence

that Sirius XM was injured because Defendants actual pricing decisions after the Merger

exposed the Company to antitrust liability. See infra, part III. There is also evidence

establishing that as a direct consequence of the Merger, Sirius XM suffered damages resulting

from financial distress (see P 56.1 234) in addition to increased internal and external costs to

obtain such approvalincluding legal fees, advisory fees, diverted internal staff resources, and

the likearising from Defendants prevarications concerning prices. See P 56.1 201.

a. $193 Million in Antitrust Liability

Defendants do not and cannot contest that Sirius XM settled theBlessing action, which

was premised precisely upon the pricing decisions set forth in the instant Complaintor that the

Blessing settlement ascribes a value of at least $196 million (inclusive of attorneys fees to be

paid in cash) to the consideration provided by Sirius XM in that settlement. See P56.1 236; see

also D56.1 81. The parties, through their respective experts, vigorously dispute the amount of

12 See supra n. 11.

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damages to which this gives rise. Compare P56.1 236 with Def. Br. at 23-24. Accordingly, at

a minimum, there is a genuine dispute as to the issue and amount of such damages.

Instead, Defendants argue that, as a matter of law, this Court must find that it was not

the Section 10(b) Defendants pre-merger statements but the Sirius XM Boards post-merger

business decisions that allegedly created the risk of antitrust liability. Def. Br. at 33 (citing,

inter alia,Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161, 174 (2d Cir. 2005)). Defendants

cases do not support their argument. UnderLentell, the risk that caused injury, price increases in

violation of the antitrust laws, wasprecisely within the zone of risk concealed by the

misrepresentations, namely, that Sirius XM had concrete plans to increase prices on core

services. See id. at 173. In these circumstances, loss causation and damages are very much at

issue and inappropriate for resolution by the Court as a matter of law. See Exxon Co., U.S.A. v.

Sofec, Inc., 517 U.S. 830, 840-41 (1996) ([t]he issues of proximate causation and superseding

cause involve application of law to fact, which is left to the factfinder, subject to limited

review); Wortley v. Camplin, 333 F.3d 284, 295 (1st Cir. 2003).

b. $42 Million in Financial Distress

Plaintiff has set forth evidence in the form of expert testimony that the Merger resulted in

at least $56 million in damages to Sirius XM in the form of costs of financial distress that arose

largely from the assumption, through the Merger, of $2.1 billion in debt of its cash-poor

competitor, legacy XM. See P56.1 235. Defendants summarily dismiss Plaintiffs expert and

merely cite their own evidence that reductions in operating expenses for the combined company

since the Merger have resulted in $825 million in efficiencies that exceed any costs such as

financial distress. Def. Br. at 34 (citing El-Hage Report and D56.1 48); D56.1 48.

The Court should reject this argument and preserve this issue for jury determination. To

begin with, it relies in substantial part on the veracity of the expert report of Defendants own

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expert Nabil N. El-Hage, Ph.D. See Def. Br. at 34 (citing El-Hage Report). Dr. El-Hages report

is unsworn and is inadmissible on a motion for summary judgment. See Fed. R. Civ. P. 56(c);

U.S. v. All Right, Title & Interest in Real Prop. & Appurtenances, 77 F.3d 648, 657-58 (2d Cir.

1996). Even were it admissible, Dr. El-Hages report merely offers a competing interpretation of

the costs and benefits resulting from the Merger. SeeIn re Joint E. & S. Dist. Asbestos Litig., 52

F.3d 1124, 1135 (2d Cir. 1995) (Trial courts should not abrogate the jurys role in evaluating

the evidence and the credibility of expert witnesses by simply choosing sides in the battle of the

experts) (internal quotation marks and alterations omitted). Indeed, both Defendants and their

expert reach their conclusions regarding cost savings resulting from the Merger by reference to

evidence that need not be taken at face value by a jury.

For example, Defendants cite the Declaration of Sirius XMs Corporate Controller,

Thomas D. Barry for evidence of the supposed $825 million in savings. Def. Br. at 34. All that

Mr. Barry has done, however, is to create a table containing some, but not all, of Siriuss, XMs,

and Sirius XMs publicly-reported operating expenses from 2008 to 2011, and perform a simple

subtraction of the total of the selected expenses in 2011 from the total of the same expenses in

2008. See Ex. 45 & exhibit thereto (discussing Selected post-merger cost savings). There are

at least three infirmities with this procedure. First, the submission of evidence through Mr. Barry

violates Fed. R. Civ. P. 37(c)(1), which provides, in relevant part, that: If a party fails to

provide information or identify a witness as required by Rule 26(a) or 26(e), the party is not

allowed to use that information or witness to supply evidence on a motion, unless the failure

was substantially justified or is harmless. See Haber v. ASN 50th Street, LLC, 272 F.R.D. 377,

381 (S.D.N.Y. 2011) (failure to disclose the identity of witnesses during discovery may result in

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the court precluding those witnesses from being presented at trial).13 Indeed, Defendants,

despite an interrogatory requesting the identity of all witnesses with knowledge or information

relating to the allegations of the Complaint or your defenses thereto, did not identify Mr. Barry

See P Ex. 14. Second, Defendants rely on Sirius XMs own calculations for these line item

operating expenses, which is inappropriate where, as here, the Boards truthfulness (including in

its publicly-filed financial reports) has been put in issue. Third, Mr. Barry does not aver (nor is

appropriate for anyone but a jury to decide) how much, if any, of the selected cost savings

arose as the result of Merger as opposed to othercauses, such as (to name but one) the severe

recession that began immediately after the Merger closed on July 31, 2008 and imposed cost

constraints on Sirius XM and every other U.S. company. D 56.1 86

.

s of

Similar infirmities attend the evidence relied upon by Defendants expert in forming his

opinion concerning cost savings arising from the Merger. See P. Ex. 170 (El-Hage Report)

13, 20-22, 25-26, 28-29. Like Mr. Barry, Dr. El-Hage relies, in part, on the differences, pre-

and post-Merger, in selected costs reported by Sirius XM itself in SEC filings. See id. Ex. 1

thereto. Notably, Dr. El-Hage selects a different set of line items to include than the set chosen

by Mr. Barry, which alone is enough to suggest that an issue for the jury to determine.

Moreover, Dr. El-Hage uncritically ascribes the entirety of the cost-savings differential to

efficiencies resulting from the Merger. See id. 23. The remainder of Dr. El-Hages evidence

consists of internal documents and the report of an independent market analyst. Id. 22. A

13As the Southern District has expressly recognized, [t]his preclusionary rule applies on

motions for summary judgment. Fleming v. Verizon New York, Inc., No. 03 Civ. 5639 (WHP),2006 WL 2709766, at *7 (S.D.N.Y. Sept. 22, 2006). See also Ebewo v. Martinez, 309 F. Supp.2d 600, 607 n.2 (S.D.N.Y. 2004) (declining to consider an affidavit submitted in summaryjudgment briefing because the affiant was not listed on Rule 26(a) disclosures). The rationale forthis Rule is obvious: to prevent sandbagging an opposing party with new evidence.Fleming, 2006 WL 2709766, at *7.

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jury, not the Court, should decide the weight to be given to these sources and Dr. El-Hages

testimony.

c. Additional Costs to Obtain Merger Approval

Defendants misrepresentations to the FCC that the Merger would lead to lower prices

caused the Merger regulatory approval process to be substantially prolonged. From the

beginning, the FCC questioned the accuracy of Defendants statements concerning lower

prices. P 56.1 201. Only in June and July 2008, after a nearly 18-month review process, did

Sirius and XM capitulated to make voluntary commitments to the FCC not to raise prices on

these core services. P 56.1 199-200. FCC approval was expressly conditioned upon these

voluntary commitments, as well as upon Sirius and XMs promises to pay a combined

contribution to the United States Treasury of $17.5 million. P 56.1 199. Siriuss CFO David

Frear admitted that the FCC extracted from us, in order to secure its approval of the merger, a

voluntary commitment to not increase the basic price of $12.95 for three years following the

merger. P 56.1 200 (emphasis added).

The prolongation of the FCC approval process due to the implausibility of Defendants

statements concerning lower prices and the necessity of negotiating and furnishing voluntary

commitments not to raise prices had tangible, out-of-pocket effects on XM, including over $20

million in additional G&A expenses due to the FCC voluntary contributions and merger related

expenses as of August 8, 2008. P 56.1 201. The same was likely true at Sirius, and Plaintiff

should be afforded to adduce this evidence at trial. See id.

B. Breach of the Delaware Duty of Full Disclosure to ShareholdersDelaware law imposes upon a Board of Directors the fiduciary duty to disclose fully and

fairly all material facts within its control that would have a significant effect upon a stockholder

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vote. Turner v. Bernstein, No. 16190, 1999 WL 66432, at *5 (Del. Ch. Feb. 9, 1999); Stroud v.

Grace, 606 A.2d 75, 84 (Del. 1992);Eisenberg v. Chicago Milwaukee Corp., 537 A.2d 1051,

1059 (Del. Ch. 1987);Bershad v. CurtissWright Corp., 535 A.2d 840, 846 (Del. 1987) (the

defendants retain the burden of proving complete disclosure of all material facts relevant to the

merger vote). The duty of disclosure is breached when a materially false statement is made. In

re Santa Fe Pac. Corp. Sholder Litig., 669 A.2d 59, 66 (Del. 1995). To determine whether a

director has satisfied the fiduciary duty of disclosure, the question is one of materiality.

Bershad, 535 A.2d at 846; Smith v. Van Gorkom, 488 A.2d 858, 890 (Del. 1985); Caruso v.

Metex Corp., No. CV 89-0571, 1992 WL 237299 (E.D.N.Y. July 30, 1992).

As Defendants concede, the Delaware duty of disclosure fully applies to the claims in this

case, where Plaintiff has alleged misstatements by Defendants concerning prices for its core

satellite radio services in connection with seeking shareholders approval of the Merger. See

Def. Br. at 17. As Defendants also concede, the duty of disclosure is breached when a

materially false statement is made. Id. Finally, Defendants recognize that, although there are

circumstances in which Defendants are exculpated by Siriuss Certificate of Incorporation for

breach of the duty of care, if they are shown to have acted in bad faith or engaged in intentional

misconduct or knowing violation of law, they may not avoid liability. See id. To establish

liability, Plaintiff must prove that Defendants knowingly or deliberately failed to disclose facts

that they knew were material. Frank v. Arnelle, No. CIV. A. 15642, 1998 WL 668649, at *10

(Del. Ch. Sept. 16, 1998).

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Here, there is evidence from which a jury could conclude that Defendants repeatedly

disseminated materially false statements concerning lower prices (and especially prices for

basic and multi-receiver subscriptions that would not increase) in connection with seeking

regulatory and shareholders approval of the Merger. See supra, part II(A)(1)-(2). At the time

these statements were made, Defendants knew that they had been planning for several years to

increase prices for basic, multi-receiver, and other subscription services by significant amounts,

and the Board had directed that a budget be prepared premised upon such price increases. P 56.1

186(d)-(f).14 Although these price increases were put on hold until after the Merger was

announcedin part to avoid additional regulatory scrutiny of the Mergerthe price-increase

plans were resumed virtually as soon as Merger approval was obtained and have since been put

into effect. P 56.1 189,191-196. Defendants knowledge of these facts is directly contrary to

their public statements thus establishing not only a jury issue regarding material falsity of these

statements but also a jury issue regarding whether Defendants caused the statements to be made

knowingly, willingly, or in bad faith despite the material falsity of those statements. See In re

Transkaryotic Therapies, Inc., 954 A.2d 346, 356 (Del. Ch. 2008) (for breach of the duty of

disclosure claims, Delaware courts have adopted the federal standard for materiality).

Finally, contrary to their argument (Def. Br. at 17-18), Defendants are not

exculpated from liability for breach of fiduciary duties in this case, notwithstanding a provision

in Siriuss Certificate of Incorporation tracking Section 102(b)(7) of the Delaware General

Corporation law. First, by its terms, Section 102(b)(7) does not immunize directors if they are

14 For example, an increase in the price of a basic subscription from $12.95 to $14.95 wouldconstitute a 15.5 percent increase, and an increase in the price of a multi-receiver subscriptionfrom $6.99 to $8.99 would constitute a 28.6 percent increase.

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shown to have acted in bad faith or engaged in intentional misconduct or knowing violation of

law. Malpiede v. Townson, 780 A.2d 1075, 1094 (Del. 2001). Moreover, Section 102(b)(7) bars

a claim only if there is an unambiguous, residual due care claim and nothing else. See id. Here,

Defendants actions, if proven, would constitute both breaches of the duty of loyalty (including

the duty of good faith) and breaches of the duty of care. See Shenk, 2011 WL 5148667, at *4.

To establish liability, Plaintiff must prove that Defendants knowingly or deliberately failed to

disclose facts that they knew were material. Frank v. Arnelle, 1998 WL 668649, at *10. As

shown above, a jury question is presented concerning whether Defendants misstatements

concerning post-Merger prices were made knowingly, willingly, or in bad faith.

In all events, the duty of disclosure claim can go forward against Karmazin on a simple

duty of care basisi.e., without evidence of disloyalty or bad faith. This is because Section

102(b)(7) does not exculpate defendants who are both officers and directors for actions taken

solely in their capacity as officers. See Arnoldv. Socy for Sav. Bancorp, 650 A.2d 1270, 1288

(Del. 1994); R. Franklin Balotti & Jesse A. Finkelstein,Delaware Law of Corp. & Business Org.

4.19, at 4-335 (Supp. 1992). The evidence indicates that Karmazinwho signed the joint

Merger Proxy Statement and the Merger Agreement solely as Chief Executive Officer, and not

a director, of Siriuswas acting in his role as an officer only. P 56.1 173(p).15

15 Defendants remaining arguments concerning the duty of disclosure claims involveidentical causation and damages issues raised with respect to the Section 10(b) claim. Def. Br. at21. These arguments were addressed supra, part II(A)(3).

22

http://www.westlaw.com/Link/Document/FullText?findType=Y&serNum=2001749798&pubNum=162&originationContext=document&vr=3.0&rs=cblt1.0&transitionType=DocumentItem&contextData=(sc.UserEnteredCitation)#co_pp_sp_162_1094http://www.westlaw.com/Link/Document/FullText?findType=Y&serNum=2001749798&pubNum=162&originationContext=document&vr=3.0&rs=cblt1.0&transitionType=DocumentItem&contextData=(sc.UserEnteredCitation)#co_pp_sp_162_1094http://www.westlaw.com/Link/Document/FullText?findType=Y&serNum=2001749798&pubNum=162&originationContext=document&vr=3.0&rs=cblt1.0&transitionType=DocumentItem&contextData=(sc.UserEnteredCitation)#co_pp_sp_162_1094


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III. GENUINE ISSUES OF MATERIAL FACT PRECLUDE SUMMARYJUDGMENT ON PLAINTIFFS CLAIMS ARISING FROM DEFENDANTSPOST-MERGER PRICE INCREASES

A reasonable jury could find that Defendants breached their fiduciary duties by causing

Sirius, once the Merger was actually approved premised upon misrepresentations to regulators,

to abuse its monopoly power and raise prices and fees charged to its subscribers in the absence of

competition. Defendants make a number of straw-man arguments, founded chiefly upon the

supposed protections of the business judgment rule.

A. The Business Judgment Rule and its LimitationsWhile true under Delaware law that directors, in making a business decision, are

presumed to have acted on an informed basis . . . and in the honest belief that the action was

taken in the best interests of the company,In re Walt Disney Co. Deriv. Litig., 907 A.2d 693,

747 (Del. Ch. 2005), the business judgment rule is not absolute and can be rebutted by a

showing that the board violated one of its fiduciary duties[.] Id. To do so, a plaintiff need only

show that directors acted with gross negligence, not that they knowingly or willfully breached

their fiduciary duties. Auburn Chevrolet-Oldsmobile-Cadillac, Inc. v. Branch, No. 5:06-CV-

0362 (GTS/GJD), 2009 WL 667430, at *13 (N.D.N.Y. Mar. 10, 2009). Moreover, knowing

failure to act in the best interests of shareholders negates application of business judgment

protection. SeeDisney, 907 A.2d at 755.

B. The Business Judgment Rule does not Immunize Defendants Conduct

There is substantial evidence from which a jury could conclude that Defendants acted in

bad faith or otherwise consciously disregarded their duties to act in the best interests of Sirius

and its shareholders as a result of their misrepresentations to the FCC, improperly raising prices

contrary to what they represented to the FCC and, consequently, being sued in a class action for

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violations of the antitrust laws. Therefore, Defendants should not be afforded protections under

the business judgment rule.

1. Defendants Lies to the FCC in Order to Secure Approval for the

Merger

To effectuate the merger, Defendants caused Sirius to file a Joint Application and a Joint

Opposition with the FCC for permission transfer control of the FCC licenses held by Sirius and

XM or their subsidiaries. D Ex. 36, at 1. These documents, however, were replete with

misrepresentations about Sirius inability and unwillingness to raise prices despite Defendants

knowledge that the Company would have to do so to. See supra, part II; P 56.1 173(e)-(i),

175-180, 183-190.

Defendants try to recharacterize the FCC submissions as having made only marginal

promises regarding new, partial-channel subscriptions. See Def. Br. at 7, 15, 18. In so doing,

they ask the Court to construe every inference in their favor, rather than in favor of Plaintiff as

the non-moving party. The bottom line is that Sirius emphatically assured the FCC that no

satellite radio subscriber will have to pay moreas a result of the merger. D Ex. 43, at 11-12

(FCC Approval Order) (emphasis added). Given Defendants specific plans to raise prices on

basic subscriptions well after the Merger was announced, given their decision to raise prices at

the earliest opportunity after the Merger, and given Defendants repeated instances of

disregarding FCC mandates (see P 56.1 186(a)-(g), 187, 191-198, 204-206), a reasonable jury

could well find that Defendants dissembled to the FCC concerning post-Merger prices and

otherwise acted in bad faith and against the Companys best interests.

Defendants, however, contend that Sirius complied with the letter of the voluntary

restrictions because Sirius subsequently offered partial-channel packages at a lower price than

the basic subscription price and a best of package at a premium to basic, while not raising the

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price of basic. Def. Br. at 8, 22. While Defendants harp on the fact that the basic subscription

fee was not raised until January 2012, it was only the express commitment in the FCC approval

process (and, later, theBlessing settlement) that apparently kept this one price stable.

Defendants effectively treat the Voluntary Commitments as an upper bound, or ceiling, on

price commitments. Yet, as the FCC Approval Order makes clear, Sirius also promised to keep

the multi-receiver subscription price stable, and did not do so. D Ex. 38, at 14. Moreover,

Defendants other price increases violated the spirit of the Order because the FCC had

specifically premised it upon the Merger incentivizing lower prices overall. D Ex. 43 at 44-47,

88, 91. Defendants merely offer one interpretation of the reasonable bounds for complying with

the FCC Order that need not be believed by a jury.

Moreover, the Board cannot claim ignorance of the mandates issued in the FCC Order.

To the contrary, there is significant evidence that Board members were well aware of the

requirements imposed on the combined Company through the FCC Order. Karmazin advised the

Board about the conditions contained in the FCCs order and how those conditions affect,

and are likely to affect, the Corporations operations. D Ex. 58 at *6030; see also P Ex.99 at

116:12-118:13. In response, the Directors themselves raised the possible results of a pass-

through price increase and a decrease in the discount for multi-subscriber units in 2009 as to

subscribers and the Corporations cash position. D Ex. 58 at *6030. In other words, after being

advised about the FCC Order, Sirius Board immediately sought to circumvent the price cap.

2. Causal Link Between Defendants Lies to the FCC and SubsequentPrice Increases

A jury similarly could find that Defendants misrepresentations played a causal role in

securing approval for the Merger, in attaining monopoly power, and in raising prices. FCC

approval for the Merger was, by its terms, conditioned on Siriuss observance of the so-called

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Voluntary Commitments not to raise certain prices. D Ex. 43 at 5, 81. The order also was

conditioned on Siriuss representations that the price of basic and multi-receiver subscriptions

($12.95 per month) would not be raised. Id. at 46, 99, 91; see also D Ex. 38 at 14. In fact, as

part of its ploy to secure FCC approval of the merger, Defendants caused Sirius to specifically

represent that [s]ubscribers will be able to continue their $6.99 multi-receiver subscriptions. D

Ex. 38, at 14. Despite these commitments, Sirius customers experienced backdoor price hikes

through higher fees and through the reduction of certain discounts.

Defendants instituted price increases practically as soon as the Merger was consummated.

No later than September 17, 2008approximately six weeks after the MergerSirius executives

worked through a plan to include a $2.99 streaming charge and a $2 increase in the price for a

multi-receiver subscription. See P 56.1 191; P Ex. 59; P Ex. 67, at 11, 21; P Ex. 96, at 122. In

addition, less than three weeks later, on October 1, 2008, Sirius confirmed it already had a plan

in place for several price increases, including the Internet streaming charge to become effective

March 1, 2009. P 56.1 191, 195-197; see also P Ex. 62. These price increases and new fees,

while in play within months after the merger was approved, were never disclosed to the FCC

during the merger approval process. As such, within a mere six months after the merger, Sirius

began announcing increases to several of its prices and imposing new fees, especially on newly

acquired XM customers, such as a hike on multi-subscriber accounts from $6.99 to $8.99,

charging $2.99 for all subscribers accessing Sirius or XM programming via the Internet, a $75

cancellation fee for XM subscribers who cancelled a one-year or longer subscription during the

first year of service, a $15 transfer fee to most XM subscribers, a $75 transfer fee for certain

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lifetime subscribers and an increase in the price of XMRO from $7.99 to $12.95.16 See P 56.1

186 (d)-(f); 191-197.

The decision to boost prices and fees was not made in a vacuum and the Board was fully

complicit in their implementation. As such, the evidence discloses that the Board was presented

with these price hikes during Board meetings by, among others, Frear and Witz.17 This was not

disputed by Amble who stated that management from time to time if there were pricing actions

that were going to be taken we would bring it to the board and there would be a discussion. P

Ex. 97 at 114. In fact, management informed the Board about all pricing actions before they

were implemented. Id. Significantly, the Board was not only made aware of the pricing actions,

it ultimately approved them. For instance, in response to whether the Board was aware of the

reduction in the discount for multi-subscriber accounts, Mr. Parsons testified that [t]he board

approved all significant pricing actions, including this one. P Ex. 101, at 62, 63. See also P

56.1 195-97.

Defendants contend that raising fees lies within the purview of sound business judgment.

Def. Br. at 22, 23. In isolation, that may be true. Here, however, Defendants conduct with

respect to lying to the FCC about offering lower prices and the subsequent price hikes that they

caused Sirius to implement are inextricably tied together in demonstrating Defendants gross

negligence and bad faith. In other words, the misrepresentations were only realized once Sirius

actually raised prices, and it was raising prices in the context of emphatic promises not to do so

that constituted, in part, the breaches of Defendants duties of due care and good faith. Disney,

907 A.2d at 750, 755.

16 See P Ex. 98 at 86-87; P Ex. 101, at 62, 63, 65; P Ex. 60; P Ex. 93 at 151:7-19; P Ex. 63.17 D Ex. 65 (Mr. Frear and Ms. Campbell spoke to the directors about the price increasesplanned in 2009, and the risks associated with the price increase and Mr. Meyer reviewed withthe directors the rate increases proposed during 2009[.]).

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Indeed, there is significant evidence from which a reasonable jury could find that

Defendants knew at the time they were seeking regulatory approval that, following the Merger,

Sirius XM would significantly increase fees and impose new fees, contrary to the representations

made to the FCC. Recklessly misrepresenting material information to the FCC which provided a

basis for not objecting to the Merger, and raising prices contrary to the representations at the

soonest possible opportunity constituted conduct falling squarely outside the boundaries of

business judgment protection. See, e.g., Disney, 907 A.2d at 755 (where the fiduciary acts

with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act

in the face of a known duty to act, bad faith is established);Metro Commcn Corp. BVI v.

Advanced Mobilecomm Techs., Inc., 854 A.2d 121, 163-64 (Del. Ch. 2004) (finding that

directors had violated their duties of loyalty if they had engaged in unlawful bribery);Miller v.

American Tel. & Tel. Co., 507 F.2d 759, 762 (3d Cir. 1974) (where directors failed to collect

debt in accordance with law, they were not insulated by the business judgment rule).

C. Defendants Conduct Arising from Their Misrepresentations to the FCC andImproperly Raising Prices Resulted in theBlessing Antitrust Matter andInjury to Sirius

As Defendants caused Sirius to pile on new fees and raise other existing fees in order to

service its huge debt resulting from the merger, Defendants knew that the Company faced

substantial liability for antitrust violations culminating in a civil suit filed in December 2009. 18

Potential liability resulting from theBlessing action was more than a hypothetical situation and

one which could, and did, cause substantial injury to the Company. The claims in theBlessing

action not only survived a motion to dismiss but the Court also certified a class and denied

summary judgment on most of antitrust claimscompelling Defendants to settle the remaining

18 See Blessing v. Sirius XM Radio Inc., Civ. No. 1:09-cv-10035-HB (S.D.N.Y.)(Blessing).

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claims in the aggregate amount of $196 million. D Ex. 44. Defendants settlement of the

Blessing suit does not immunize them for liability for the misconduct which gave rise to it.

Defendants cannot act loyally as [] corporate director[s] by causing the corporation to violate

the positive laws it is obliged to obey. Guttman v. Huang, 823 A.2d 492, 505 n.34 (Del. Ch.

2003).19

Defendants misconduct resulted in the Company being sued by customers for violations

of the federal antitrust laws in which was obliged to pay $196 million (including attorneys fees

and prejudgment interest) to obtain a release. See D Ex. 169, 26, 28; P Ex. 106. See also P

56.1 236. Contrary to Defendants insinuations throughout this litigation, therefore, Plaintiffs

allegations in this lawsuit are not simply a clone ofBlessing, and Defendants are not entitled to

shield themselves from the effects of their anticompetitive behavior on the theory that there can

be no liability simply for being sued. See Def. Br. at 22, 23.20

Finally, without any legal support, Defendants contend that their illegal conduct

benefitted Sirius financially by approximately $250 million which is more than the $193 million

19 See also Miller, 507 F.2d at 762; Wilshire Oil Co. of Tex. v. Riffe, 409 F.2d 1277, 1286(10th Cir. 1969) (holding that claims can be brought by corporation against employees whoseantitrust violations subjected it to liability);Rogers v. American Can Co., 187 F. Supp. 532, 536(D.N.J. 1960) (any derivative suit which involves antitrust violations almost necessarily mustinvolve some breach of fiduciary duty or mismanagement by officers or directors, since theyhave guided the corporation into activities which violate the law, or at the very least, haveacquiesced in such conduct);Di Tomasso v. Loverro, 293 N.Y.S. 912, 916-17 (N.Y. App. Div.1937), affd mem., 276 N.Y. 551 (N.Y. 1937) (it was proper to grant injunction and imposeliability on directors for damages, in derivative action, where they knew, or should have known,the contract was in restraint of trade).20 Defendants selectively quote language from this Courts Oct. 27, 2011, Order, whichaddressed the sufficiency of plaintiff Jeffrey Goes allegations. See Shenk, 2011 WL 5148667, at*2 (Mr. Goes reliance onBlessing, without more failed to identify the factual basis of thewrongful acts. In contrast, with respect to Mr. Shenks post-merger pricing claims, the Courtfound that [g]iven Sirius history of false statements to the FCC, and the inherent unlikelihoodthat it could fulfill its new promises to the FCC and its shareholders, [Mr. Shenks] complaintadequately alleges bad faith on the part of the members of the board who approved the merger.Id. at *6.

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value Plaintiffs expert assigns to the Blessing settlement. Def. Br. at 24.21 While Plaintiff

disputes the amount of any financial benefit to Sirius XM from Defendants conduct in violation

of the antitrust laws (see P 56.1 237) and the admissibility of Defendants evidence in this

regard (seesupra, part II(A)(3)(b)), even assuming there were such a benefit, the amount is

irrelevant as Sirius cannot justifiably claim to be entitled to profit from violating the antitrust

laws. This runs afoul of the principle under Delaware law that a fiduciary may not choose to

manage an entity in an illegal fashion, even if the fiduciary believes that the illegal activity will

result in profits for the entity. Metro Communication, 854 A.2d at 131; see also In re Syncor

Intern. Corp. Shareholders Litig., 857 A.2d 994, 997 (Del. Ch. 2004) (although the immediate

effect of the mis

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