Edward J. Goodman Life Income Trust v. Jabil Cir.

• Citation: 560 F.Supp.2d 1221
• Decision Date: 09 April 2008
• Docket Number: No. 8:06-cv-01716-T-23EAJ.,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

560 F.Supp.2d 1221

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

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

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

April 9, 2008.

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Denis F. Sheils, Kern & Wooley, LLP, Palm Beach Gardens, FL, Jonathan H. Rosenthal, Myles H. Malman, Malman, Malman & Rosenthal, Fort Lauderdale FL, Joseph C. Kohn, William E. Hoese, Kohn, Swift & Graf, P.C., Philadelphia, PA, for Plaintiffs.

Donald J. Enright, Finklestein, Thompson & Loughran, Washington, DC, Jonathan L. Alpert, The Alpert Law Firm, Michael L. Chapman, Holland & Knight, LLP, Tampa, FL, Patrick B. Calcutt, Calcutt, Calcutt & Jayson, PA, St. Petersburg, FL, Matthew J. Lang, William K. Dodds, Dechert LLP, New York, NY, Tracy A. Nichols, Holland & Knight, LLP, Miami, FL, for Defendants.

ORDER

STEVEN D. MERRYDAY, District Judge.

The plaintiffs assert claims against Jabil Circuit, Inc., ("Jabil") 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 Rules 10b-5 and 14a-9. The defendants move (Doc. 75) to dismiss the amended complaint (the "complaint") (Doc. 73) for failure to state a claim pursuant to Rule 12(b)(6), Federal Rules of Civil Procedure, and failure to satisfy the pleading requirement of Rule 9(b), Federal Rules of Civil Procedure, and the Private Securities Litigation Reform Act of 1995 ("PSLRA"). The plaintiffs respond (Doc. 79) in opposition.

Factual Background

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

I. The Parties

A. The Plaintiffs

Appointed the lead plaintiffs in a January 18, 2007, order (Doc. 57), Laborers Pension Trust Fund for Northern California ("Laborers") and Pension Trust Fund for Operating Engineers ("Pension") bring this action 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. 73, ¶¶ 1, 51) 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. 73, ¶ 3) Each individual defendant held a directorship or officership at Jabil for all or part of the class period. (Doc. 73, ¶ 72) Timothy L. Main ("Main") served as the company's chief executive officer and president and as a director. (Doc. 73, ¶ 55) 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. 73, ¶ 64) Mark T. Mondello ("Mondello") was appointed chief operating officer in 2002. (Doc. 73, ¶ 56) Ronald J. Rapp ("Rapp") served as chief operating officer from 2000 through 2002. (Doc. 73, ¶ 66) Chris A. Lewis ("Lewis") acted as chief financial officer from August, 1999, through September, 2004. (Doc. 73, ¶ 65) Scott D. Brown ("Brown") was appointed executive vice-president in November, 2002. (Doc. 73, ¶ 57) Wesley B. Edwards ("Edwards") served as a senior vice-president (Doc. 73, ¶ 67), and Robert L. Paver ("Paver") as general counsel. (Doc. 73, ¶ 68) William D. Morean ("Morean") served as chairman of the board of directors. (Doc. 73, ¶ 53). 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. 73 at 33, 36-40)

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. 73, ¶ 80) 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. 73, ¶ 80) A stock option grants the recipient an option to purchase company stock at a specified price, called the "exercise price." (Doc. 73, ¶ 4) The 1992 and 2002 Plans require the exercise price "to be at least equal to the fair market value¹ of shares of common stock on the date of the grant." (Doc. 73, ¶¶ 92, 111) Thus, when exercising an option, the recipient purchases stock at the market price on the day of the grant, rather than the price on the day of purchase. (Doc. 73, ¶ 4)

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. 73, ¶ 5) "`Backdating' is a practice by which a stock option is reported as being granted on one date, but ... actually had been backdated weeks or months to a date when the stock was trading at a lower price." (Doc. 73, ¶ 6) The exercise price of a backdated option is less than the fair market value of a share of common stock on the day of the grant, resulting in an "instant paper gain." (Doc. 73, ¶¶ 8, 117)

Although not unlawful per se, backdating requires attention to Generally Accepted Accounting Principles ("GAAP"). Accounting Principles Board Opinion No. 25 ("APB 25"),² titled "Accounting for Stock Issued to Employees," requires the recording of the "intrinsic value" of a fixed stock option on its "measurement date."³ (Doc. 73, ¶ 211) A backdated option has intrinsic value on the measurement date and "the difference between its exercise price and the quoted market price must be recorded as compensation expense to be recognized over the vesting period of the option." (Doc. 73, ¶ 211) Because a stock option that is not backdated has no intrinsic value on the measurement date, a company need not record any employee compensation. (Doc. 73, ¶ 211) 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. 73, ¶¶ 107, 112)

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. 73, ¶ 143) The article questions the timing of options granted to executives of several technology companies. (Doc. 73, ¶ 143) The article identifies six stock options granted to Jabil's chief executive officer, Main, at "suspicious" times between 1998 and 2001. (Doc. 73, ¶ 144) A statistical analysis performed at the behest of the newspaper calculates the supposed odds of Main's six grants occurring at such auspicious moments as "roughly one million to one." (Doc. 73, ¶ 44) In the days and weeks following publication, Main and other Jabil executives denied that Jabil had engaged in backdating. (Doc. 73, ¶¶ 146-47, 168-69, 180)

Allegedly "diverting `investors' focus from backdating allegations," on March 22, 2006, Jabil issued a press release announcing favorable financial results for the second quarter of fiscal year 2006, as well as an improved forecast for the third quarter and entire fiscal year. (Doc. 73, ¶ 15) Main attributed Jabil's success to "burning on fire demand." (Doc. 73, ¶ 151) In response to the positive news, Jabil's stock reached the class period high of $43.31 per share on March 27, 2006. (Doc. 73, ¶ 233) However, as backdating concerns rose, Jabil's stock price "began to decline precipitously" between April 6 and May 1, 2006. (Doc. 73, ¶ 158) Notwithstanding the decline, in April and early May, 2006, analysts at several prominent institutions expressed their confidence in Jabil and its stock option practice. (Doc. 73, ¶¶ 159-60)

On May 3, 2006, Jabil disclosed that the Securities and Exchange Commission ("SEC") had initiated an informal inquiry into Jabil's stock option practice. (Doc. 73, ¶ 163) Jabil disclosed also that shareholders had initiated a derivative action in state court against Jabil executives and directors who had allegedly breached their fiduciary duty to Jabil in connection with the stock option practice. (Doc. 73, ¶ 163) Jabil's board of directors formed the Special Review Committee to review the allegations in the derivative suit and other suits that would follow. (Doc. 73, ¶¶ 34, 36, 163, 179) 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. 73, ¶¶ 165, 168) Main's statements failed to forestall the decline of Jabil's stock price. Between May 3 and 10, 2006, the stock price fell from $40.78 to $38.21 per share. (Doc. 73, ¶ 164)

On June 12, 2006, Jabil announced a failure to meet the earnings forecast for the third quarter of fiscal year 2006. (Doc. 73, ¶ 27) During a conference call with analysts and investors, Main attributed the shortfall to (1) mechanical tooling operation losses, (2) a failure to fulfill contract obligations, and (3) higher costs in the warranty and repair division. (Doc. 73, ¶ 29) On June 21, 2006, the United States Attorney for the Southern District of New York issued Jabil a subpoena, requesting material concerning the stock option practice. (Doc. 73, ¶ 32)

After completion of an internal review, Jabil concluded on November 7, 2006, that its 2005 financial statement and disclosure "should no longer be relied upon" and that it "will need to restate" the information. (Doc. 73, ¶ 190)...