Edward J. Goodman Life Income v. Jabil Circuit

• Decision Date: 26 January 2009
• Docket Number: Case No. 8:06-cv-01716-T-23EAJ.
• Parties: EDWARD J. GOODMAN LIFE INCOME TRUST, on behalf of itself and others similarly situated, Plaintiffs, v. JABIL CIRCUIT, INC., et al., Defendants.
• Court: U.S. District Court — Middle District of Florida

595 F.Supp.2d 1253

EDWARD J. GOODMAN LIFE INCOME TRUST, on behalf of itself and others similarly situated, Plaintiffs, v. JABIL CIRCUIT, INC., et al., Defendants.

Case No. 8:06-cv-01716-T-23EAJ.

United States District Court, M.D. Florida, Tampa Division.

January 26, 2009.

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Denis F. Sheils, Kern & Wooley, LLP, Theodore J. Leopold, Ricci Leopold, PA, Palm Beach Gardens, FL, Jonathan H. Rosenthal, Myles H. Malman, Malman, Malman & Rosenthal, Ft. Lauderdale, FL, Joseph C. Kohn, William E. Hoese, Kohn, Swift & Graf, P.C., Philadelphia, PA, Christopher M. Wood, Shawn A. Williams, Coughlin, Stoia, Geller, Rudman & Robbins, LLP, San Francisco, CA, David J. George, Paul J. Geller, Coughlin, Stoia, Geller, Rudman & Robbins, LLP, Boca Raton, FL, Andrei V. Rado, Labation Sucharow & Rudoff LLP, New York, NY, Jonathan L. Alpert, The Alpert Law Firm, Tampa, FL, Donald J. Enright, Finklestein Thompson & Loughran, Washington, DC, Patrick B. Calcutt, Calcutt, Calcutt & Jayson, St. Petersburg, FL, for Plaintiffs.

Matthew J. Lang, William K. Dodds, Dechert LLP, New York, NY, Michael L. Chapman, Holland & Knight, LLP, Brian L. Josias, David Thomas Knight, Hill Ward Henderson, Tampa, FL, Tracy A. Nichols, Holland & Knight, LLP, Miami, FL, Kevin H. Metz, Michele E. Rose, Latham & Watkins, PA, Washington, DC, for Defendants.

ORDER

STEVEN D. MERRYDAY, District Judge.

The plaintiffs assert claims against Jabil Circuit, Inc., ("Jabil"), KPMG, LLP, ("KPMG") and sixteen individual defendants (collectively, the "defendants") pursuant to Sections 10(b), 14(a), 20(a), and 20A of the Securities Exchange Act of 1934 (the "Exchange Act"), and Securities and Exchange Commission ("SEC") Rules 10b-5 and 14a-9. An April 9, 2008, order (560 F.Supp.2d 1221 (M.D.Fla.2008)) dismisses the amended complaint with leave to amend. On July 23, 2008, the plaintiffs amended the complaint (Doc. 114). The defendants move (Docs. 117, 121) to dismiss the third amended complaint (the "complaint") for failure to state a claim pursuant to Rule 12(b) (6), Federal Rules of Civil Procedure, and failure to satisfy the pleading requirements of Rule 9(b), Federal Rules of Civil Procedure, and the Private Securities Litigation Reform Act of 1995 ("PSLRA"). The plaintiffs respond (Docs. 124, 127) in opposition, and the defendants reply (Docs. 128, 129). With leave of court, the plaintiffs file a surreply (Doc. 132) in opposition to the Jabil defendants' motion to dismiss.

FACTUAL BACKGROUND

The complaint contains the following factual allegations, assumed true for the sole purpose of deciding a motion under Rule 12(b) (6).¹

I. The Parties

A. The Plaintiffs

Appointed the lead plaintiffs in a January 18, 2007, order 2007 WL 170556 (Doc. 57), Laborers Pension Trust Fund for Northern California ("Laborers") and Pension Trust Fund for Operating Engineers ("Pension") sue on behalf of themselves and a putative class of other persons and entities (collectively the "plaintiffs") who purchased Jabil publicly traded securities from September 19, 2001, through December 21, 2006, (the "class period"). (Doc. 114, ¶ 1, 62) The plaintiffs allegedly suffered financial loss as a result of the defendants' Exchange Act violations.

B. The Defendants

A Delaware corporation headquartered in St. Petersburg, Florida, Jabil provides "design, production and product management services" to electronics and technology companies. (Doc. 114, ¶ 63). Each individual defendant held a directorship or officership at Jabil for all or part of the class period. (Doc. 114, ¶ 1) Timothy L. Main ("Main") served as the company's chief executive officer and president and as a director. (Doc. 114, ¶ 66) Forbes I.J. Alexander ("Alexander") served as treasurer from November, 1996, through August, 2004, and was promoted to chief financial officer in September, 2004. (Doc. 114, ¶ 75) Mark T. Mondello ("Mondello") was appointed chief operating officer in 2002. (Doc. 114, ¶ 67) Ronald J. Rapp ("Rapp") served as chief operating officer from 2000 through 2002. (Doc. 114, ¶ 77) Chris A. Lewis ("Lewis") acted as chief financial officer from August, 1999, through September, 2004. (Doc. 114, ¶ 76) Scott D. Brown ("Brown") was appointed executive vice-president in November, 2002. (Doc. 114, ¶ 68) Wesley B. Edwards ("Edwards") served as a senior vice-president (Doc. 114, ¶ 78), and Robert L. Paver ("Paver") as general counsel. (Doc. 114, ¶ 79) William D. Morean ("Morean") served as chairman of the board of directors. (Doc. 114, ¶ 64). The other directors include Laurence S. Grafstein ("Grafstein") (beginning in April, 2002), Mel S. Lavitt ("Lavitt"), Lawrence J. Murphy ("Murphy"), Frank A. Newman ("Newman"), Steven A. Raymund ("Raymund"), Thomas A. Sansone ("Sansone"), and Kathleen A. Walters ("Walters") (beginning in July, 2005). (Doc. 114, ¶¶ 65, 69-74) Finally, the plaintiffs sue KPMG, who has audited Jabil's financial statements since 1984. (Doc. 114, ¶ 80)

II. Stock Option Plan

During the class period and as part of its compensation program, Jabil granted stock options to its directors, officers, and employees. (Doc. 114, ¶ 13, 132) Jabil was required to issue the options in accord with the company's 1992 Stock Option Plan and 2002 Stock Incentive Plan (collectively the "1992 and 2002 Plans"). (Doc. 114, ¶ 133) A stock option grants the recipient an option to purchase shares at a specified price, called the "exercise price." (Doc. 114, ex. 37) The 1992 and 2002 Plans require the exercise price "to be at least equal to the fair market value² of shares of common stock on the date of the grant." (Doc. 114, ¶¶ 122, 140) Thus, when exercising an option, the recipient purchases shares at the market price on the day of the grant, rather than the price on the day of purchase. (Doc. 114, ex. 37)

The plaintiffs allege that the defendants violated the 1992 and 2002 Plans by approving "backdated" stock option grants to directors and officers during the class period. (Doc. 114, ¶ 4) "`Backdating' is a practice whereby a public company issues options on a particular date while falsely reporting that the options were issued on an earlier date when the company's stock was trading at a lower price." (Doc. 114, ¶ 5) The exercise price of a backdated option is lower than the fair market value of a common share on the day of the grant, resulting in an "instant paper gain." (Doc. 114, ¶¶ 6-7)

Although not unlawful per se, backdating requires attention to Generally Accepted Accounting Principles ("GAAP"). Accounting Principles Board Opinion No. 25 ("APB 25"),³ entitled "Accounting for Stock Issued to Employees," requires the recording of the "intrinsic value" of a fixed stock option on the "measurement date."⁴ (Doc. 114, ¶ 212) A backdated option has intrinsic value on the measurement date, and the difference between the option's "exercise price and the quoted market price must be recorded as compensation expense to be recognized over the vesting period of the option." (Doc. 114, ¶ 238) A stock option that is not backdated has no intrinsic value on the measurement date and creates neither contemporaneous employee compensation nor a requirement to recognize and report compensation expense. (Doc. 114, ¶ 238) In documents filed during the class period, Jabil reported that "[t]he Company applies APB Opinion No. 25 in accounting for its stock options, and accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements." (Doc. 114, ¶¶ 10, 122, 141)

III. Article and Aftermath

On March 18, 2006, The Wall Street Journal published an article, "The Perfect Payday—Some CEOs reap millions by landing stock options when they are most valuable; Luck—or something else?" (Doc. 114, ¶ 20) The article questions the timing of options granted to executives of several technology companies. (Doc. 114, ex. 38) The article identifies six stock option grants to Jabil's chief executive officer, Main, at "suspicious" times between 1998 and 2001. (Doc. 114, ¶ 20) A statistical analysis performed by the newspaper calculates the supposed probability of Main's six grants occurring randomly as "one in one million." (Doc. 114, ¶ 20) In the days and weeks following publication, Main and other Jabil executives denied that Jabil had engaged in backdating. (Doc. 114, ¶¶ 194-99)

Allegedly "diverting investors' focus from backdating allegations," Jabil issued on March 22, 2006, a press release announcing favorable financial results for the second quarter of fiscal year 2006, as well as an improved forecast for both the third quarter and the fiscal year. (Doc. 114, ¶¶ 22, 176) Main attributed Jabil's success to "burning on fire demand." (Doc. 114, ¶¶ 22) In response to the positive news, Jabil's shares reached the class period high of $43.31 per share on March 27, 2007. (Doc. 114, ¶ 303) However, as backdating concerns rose, Jabil's share price "began to decline precipitously" between April 6 and May 1, 2006. (Doc. 114, ¶¶ 187, 304) Notwithstanding the decline, in April and early May, 2006, analysts at several prominent institutions expressed confidence in Jabil. (Doc. 114, ¶¶ 188-91)

On May 3, 2006, Jabil disclosed that the SEC had initiated an informal inquiry into Jabil's stock option practice.⁵ (Doc. 73, ¶¶ 192, 305) Jabil also disclosed that shareholders had initiated a derivative action in state court against Jabil executives and directors who allegedly had breached their fiduciary duty to Jabil in connection with the stock option grants. (Doc. 114, ¶ 192) Jabil's board of directors formed a Special Review Committee to review the allegations. (Doc. 114, ¶ 192) The next day at the company's headquarters, Jabil hosted an analyst day during which Main rejected the backdating allegations and called The Wall Street Journal's article a "witch hunt." (Doc. 114, ¶¶ 197) Main's statements failed to halt the decline...