Edward J. Goodman Life Income v. Jabil Circuit

• Decision Date: 19 January 2010
• Docket Number: No. 09-10954.,09-10954.
• Parties: EDWARD J. GOODMAN LIFE INCOME TRUST, on behalf of itself and all others similarly situated, et al., Plaintiffs, Laborers Pension Trust Fund for Northern California and Pension Trust Fund for Operating Engineers, Plaintiff-Appellant, v. JABIL CIRCUIT, INC., Forbes I.J. Alexander, Scott D. Brown, Laurence S. Grafstein, Mel S. Lavitt, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

594 F.3d 783

EDWARD J. GOODMAN LIFE INCOME TRUST, on behalf of itself and all others similarly situated, et al., Plaintiffs, Laborers Pension Trust Fund for Northern California and Pension Trust Fund for Operating Engineers, Plaintiff-Appellant, v. JABIL CIRCUIT, INC., Forbes I.J. Alexander, Scott D. Brown, Laurence S. Grafstein, Mel S. Lavitt, et al., Defendants-Appellees.

No. 09-10954.

United States Court of Appeals, Eleventh Circuit.

January 19, 2010.

Susan K. Alexander, Sanford Svetcov, Coughlin, Stoia, Geller, Rudman & Robbins, LLP, San Francisco, CA, for Plaintiff-Appellant.

Matthew J. Lang, William K. Dodds, Dechert, LLP, New York City, Michele E. Rose, Kevin H. Metz, Lori Alvino McGill, Latham & Watkins, PA, Washington, DC, Stacy D. Blank, Holland & Knight, LLP, Tampa, FL, Peter W. Deveraux, Latham & Watkins, LLP, Los Angeles, CA, for Defendants-Appellees.

Appeal from the United States District Court for the Middle District of Florida.

Before DUBINA, Chief Judge, and BIRCH and BLACK, Circuit Judges.

DUBINA, Chief Judge:

Appellants Laborers Pension Trust Fund for Northern California and Pension Trust Fund for Operating Engineers ("the shareholders") appeal the district court's order dismissing their class action securities law claims against Jabil Circuit, Inc. ("Jabil") and its officers and directors (collectively "Appellees") under Fed.R.Civ.P. 12(b)(6). We affirm the district court order dismissing the complaint and all of the claims included because its allegations fail to meet the heightened pleading standards imposed by the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4 (2006), and Fed.R.Civ.P. 9(b).

I. BACKGROUND

The shareholders represent a class of investors who purchased publicly traded Jabil stock from September 19, 2001, to December 21, 2007 (the "class period"). Jabil is a publicly traded electronics and technology company headquartered in St. Petersburg, Florida. The remaining individual Appellees held a directorship or officership at Jabil for some portion of the class period, including Appellee Timothy Main, who served as CEO, President, and a director of the company.

Part of Jabil's compensation program during the class period involved issuing stock options to officers, directors, and employees of the company. Jabil's own corporate policy required the exercise price of these options to be "at least equal to fair market value." The shareholders allege in their complaint that Jabil violated this policy by issuing backdated options. The issue price of backdated options comes from a day where the trading price was lower than that on the actual date it is issued, resulting in an instant paper gain to the issuee. The specific allegations of backdating in the complaint rely almost exclusively on circumstantial evidence (analyst commentary and comparative graphs) to show that stock option grants to executives were backdated. At no point does the complaint identify any particular transaction or scheme of backdating or specific recipients of such a scheme.

Backdating options is not itself illegal under the securities laws, nor is it improper under accounting principles. Under Generally Accepted Accounting Principles ("GAAP") Board Opinion No. 25 ("APB 25"), however, backdated options must be recorded as a compensation expense to the corporation because they effectively give recipients immediate compensation in the form of options redeemable in the marketplace for profit. A corporation that fails to follow APB 25 and record backdated options as a compensation expense will necessarily misstate its expenses and income in its financial reports.

During the class period, Jabil represented in several financial reports that it had followed APB 25 in constructing its periodic accounting statements. Furthermore, in requesting approval of its employee compensation practices via proxy solicitations during the class period, Jabil represented in those proxy statements that (1) the policy for which it sought approval included granting stock options only at fair market value, and (2) in the past, all stock options were granted at fair market value.

In March 2006, the Wall Street Journal reported on various technology companies whose executive officers received stock options that seemed consistently timed to grant the executives stock options at a low price in the period, followed by a run-up in the stock price. The timing aroused the author's suspicions, raised the possibility of backdated options, and led an expert to conclude that the likelihood of the options granted to Appellee Main occurring randomly was "one in one million."

The Securities and Exchange Commission launched an informal investigation of Jabil's stock option practices, and the company itself assembled a special committee to review the allegations. Though the committee found no evidence that high-level employees had been issuing themselves backdated options, it did conclude that Jabil had misapplied APB 25 to many of the stock options it had granted for fiscal years 1996 through 2005. This misapplication resulted in an overstatement of earnings by $54.3 million during that period, forcing Jabil to restate its earnings for each of those years.

The company explained that the restatement resulted from misdating stock options, not backdating them. Specifically, Jabil cited three primary causes of the accounting errors: (1) changes to groups of people receiving grants, though the initial measurement date was not changed correspondingly; (2) new grants issued after initial grants had gone "underwater" but not properly accounted; and (3) improperly accounted stock option grants to a non-employee director for consulting services. The company denied, and continues to deny, that it ever purposely backdated stock options to its directors. Of the restated amount, $48.9 million actually resulted from increased compensation expense for non-executive employees.

Shortly after the allegations of backdating appeared in the Wall Street Journal, Jabil issued a press release raising projections for the third quarter in fiscal year 2006. The shareholders allege that Jabil raised these forecasts in order to divert attention from the allegations concerning backdating, and that Jabil knew that the factual bases for its improved forecasts were false even at the time it made the projections. The complaint relies on the testimony of several confidential witnesses described to have access to corporate information at the time of the revised projections. The witnesses allege that the Appellees must have known that the factual bases for the improved forecasts were false. Only one of those witnesses, however, identifies a single individual Appellee, Main, as having any specific knowledge.

The shareholders allege that the Appellees' securities law violations caused them economic loss during the class period. After the first voluntary amendment, the district court dismissed the complaint without prejudice on April 9, 2008. Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc., 560 F.Supp.2d 1221 (M.D.Fla. 2008). The shareholders amended and refiled their complaint, which the district court dismissed with prejudice, Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc., 595 F.Supp.2d 1253 (M.D.Fla. 2009) ("Goodman"), leading to the instant appeal.

II. STANDARD OF REVIEW

We review the dismissal of a complaint for failure to state a claim de novo. Rosenberg v. Gould, 554 F.3d 962, 965 (11th Cir.2009).

III. DISCUSSION

A. Section 10(b) and Rule 10b-5 Claims: Policy Statements and Financial Reports

To state a fraud claim under section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, a plaintiff must allege: (1) the existence of a material misrepresentation or omission, (2) made with scienter, (3) in connection with the purchase or sale of a security, (4) on which the plaintiff relied, and (5) which was causally connected to (6) the plaintiff's economic loss. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S.Ct. 1627, 1631, 161 L.Ed.2d 577 (2005). As with any fraud claim, a plaintiff must plead the circumstances of the conduct with particularity. See Fed.R.Civ.P. 9(b); Garfield v. NDC Health Corp., 466 F.3d 1255, 1262 (11th Cir.2006). Complaints alleging falsity "shall specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading." 15 U.S.C. § 78u-4(b)(1). Additionally, a complaint must present facts from which "a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324, 127 S.Ct. 2499, 2510, 168 L.Ed.2d 179 (2007); see also 15 U.S.C. § 78u-4(b)(2).

The district court held that the shareholders failed to adequately plead that Jabil's statements about its stock-option practices during the class period were fraudulent under section 10(b) and Rule 10b-5. Goodman, 595 F.Supp.2d at 1265-66. Specifically, the district court held that the shareholders failed to adequately plead falsity of the allegedly fraudulent statements, failed to raise a sufficient inference of scienter on the part of the Appellees, and failed to plead enough facts to show loss causation. Id. at 1266-79. Because we agree with the district court's conclusion about the insufficient inference of scienter raised by the complaint, we need not address its conclusion on loss causation.

1. Falsity

The district court viewed the complaint as an attempt to construct a narrative based on a scheme of backdating options and granting them to corporate officers. As a result, the district court concluded that the speculative allegations in the complaint "fail[] to adequately allege backdating" because they detail "neither any particular defendant's role in the backdating scheme nor when or how any particular...