In re Verisign, Inc., Derivative Litigation, No. C 06-4165 PJH.

• Court: United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Northern District of California
• Writing for the Court: Phyllis J. Hamilton
• Citation: 531 F.Supp.2d 1173
• Decision Date: 14 September 2007
• Docket Number: No. C 06-4165 PJH.
• Parties: In re VERISIGN, INC., DERIVATIVE LITIGATION. This Order Applies to: All Actions.

531 F.Supp.2d 1173 In re VERISIGN, INC., DERIVATIVE LITIGATION.
This Order Applies to: All Actions. No. C 06-4165 PJH. United States District Court, N.D. California. September 14, 2007.

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Betsy Carol Manifold, Francis M. Gregorek, Marisa C. Livesay, Rachele R. Rickert, Wolf Haldenstein Adler Freeman & Herz LLP, San Diego, CA, for Ruthy Parnes in the Right of and for the Benefit of "Verisign Inc.".

Edward F. Mannino, Esq., Akin Gump Strauss Hauer & Feld LLP, Philadelphia, PA, for D. James Bidzos.

Steve Shea Kaufhold, Akin Gump Strauss Hauer & Feld LLP, San Francisco, CA, for D. James Bidzos, William L. Chenevich, David J. Cowan, Dana L. Evan, Quentin P. Gallivan, Michelle Guthrie, Diana S. Keith, Robert J. Korzeniewski, Scott G. Kriens, Len J. Lauer, Roger H. Moore, Edward A. Mueller, Anil H.P. Pereira, Gregory L. Reyes, William A. Roper, Jr., Arnold Schaeffer, Stratton D. Sclavos, Louis A. Simpson and Richard A. Yanowitch.

ORDER GRANTING MOTIONS TO DISMISS; ORDER GRANTING MOTION TO COMPEL ARBITRATION

PHYLLIS J. HAMILTON, District Judge.

The motions of nominal defendant VeriSign, Inc. ("VeriSign") and the twenty-two individual defendants for an order dismissing the consolidated amended complaint, and the motion of defendant KPMG LLP ("KMPG") for an order compelling arbitration came on for hearing before this court on May 23, 2007. Plaintiffs appeared by their counsel Francis M. Gregorek, Marisa C. Livesay, Stephen R. Basser, and John L. Haurssler; VeriSign appeared by its counsel Christopher H. McGrath, Brian Davis, and Thomas Zaccaro; the individual defendants appeared by their counsel Steven Kaufhold; and KPMG appeared by its counsel Dale E. Barnes and Stephanie L. Thomases. Having read the parties' papers and carefully considered their arguments and the relevant legal authority, and good cause appearing, the court hereby GRANTS VeriSign's motion and KMPG's motion, and GRANTS the individual defendants' motion in part and DENIES it in part.

BACKGROUND

This is a shareholder derivative action brought on behalf of nominal defendant VeriSign ("the Company") against certain, former and current officers and directors of VeriSign and against its independent auditor, asserting violations of state and federal law, based on alleged backdating of stock option grants.

VeriSign, which was founded in April 1995, is a Delaware corporation with its principal place of business in California. VeriSign provides Internet-related digital infrastructure, including communications services and content services, as well as products and services that protect online and network interactions. VeriSign is also the authoritative directory provider of all .com, .net, .cc, and .tv domain names. According to its website, VeriSign processes as many as 18 billion Internet interactions and supports more than 100 million, phone calls a day.

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Named plaintiffs Ruthy Parnes and Port Authority of Allegheny County Retirement and Disability Allowance Plan for Employees Represented by. Local 85 of the Amalgamated Transit Union allege that defendants granted millions of dollars' worth of backdated options on ten dates between October 30, 1998, and February 21, 2002, to certain high-level VeriSign executives, in violation of the Company's shareholder-approved stock option plans.

A stock option granted to an employee or director of a company allows the employee or director to purchase company stock at a specified "exercise" or "strike" price, for a specified period of time. When an employee or director exercises an option, he or she purchases stock from the company at the exercise price, regardless of the market price of the stock on the date the option is exercised. Such stock options are generally granted in order to create incentives for employees and directors to boost profitability and the company's stock value.

If the persons responsible for the pricing and/or approval of a stock option grant retroactively base the exercise price for the option on a day when the market price was lower than the price on the day the option is actually granted, the employee or director pays less and the company gets less money for the stock when the option is exercised. Backdating option grants is not per se illegal, assuming it is permitted under the tax laws and the company's bylaws and/or shareholder-approved stock option plans. What may be unlawful is a company's failure to disclose the backdating or to report the proper compensation expense in its financial statements and other public filings.

According to plaintiffs, VeriSign had three stock option plans in effect during the time that the allegedly backdated options were granted. The 1998 Equity Incentive Plan ("the 1998 Plan"), as amended, "provides for the granting of incentive stock options (`ISOs') to employees as administered by the Board." The 1998 Plan specifies that "the Exercise Price of an ISO will be not less than 100% of the Fair Market Value of the share on the date of the grant." CAC ¶ 66(a). The 1998 Plan is "administered by the Compensation Committee, which `determines the persons who are to receive Awards, the number of shares subject to each Award and the terms and conditions of each such Award." CAC ¶ 67.

The 1998 Directors Stock Option Plan ("the 1998 Directors Plan"), as amended, "provides for the granting of non-qualified stock options ... to certain non-employee members of the VeriSign Board of Directors, as administered by the Board." The 1998 Directors Plan specifies that "[t]he exercise price of an Option shall be the Fair Market Value ... of the shares, at the time that the Option is granted." CAC ¶ 66(b).

The 2001 Stock Incentive Plan ("2001 Plan") "provides for the granting of non-qualified stock options to officers, consultants, independent contractors and advisors of, the Company as administered by the Board, or a Committee thereof." The 2001 Plan provides that "[t]he exercise price of an Option ... may not be less than the par value of the shares on the date of the grant." CAC ¶ 66(c).

In the period between late 2005 and June 2006, a series of articles appeared in major U.S. publications including The Wall Street Journal and Forbes, regarding the backdating of options granted to senior executives, directors, and employees at public companies. The articles reported the unusually high returns received on those options, and noted that a suspiciously large number of options were ostensibly granted at times when stock prices were at periodic lows, followed by sharp increases in price.

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On June 26, 2006, VeriSign received a grand jury subpoena from the United States Attorney for the Northern District of California requesting documents relating to VeriSign's stock option grants and practices. The following day, VeriSign issued a press release stating that the Company intended to cooperate with the U.S. Attorney's office in connection with the subpoena. VeriSign also reported that it had received an informal inquiry from the Securities and Exchange Commission requesting documents relating to the Company's stock option grants and practices, and that it was voluntarily responding to the request' and intended to cooperate fully with the SEC. VeriSign added, however, that prior to receiving either of those requests, its Board of Directors, assisted by independent legal counsel, had commenced an internal review and analysis of the Company's historical stock option grants, which internal review was continuing.

The first complaint in the present consolidated shareholder derivative action was filed on July 5, 2006. Plaintiffs did not make a demand on VeriSign's Board of Directors before filing suit. The Verified, Consolidated Amended Shareholder Derivative Complaint ("CAC"), filed November 20, 2006, alleges nineteen causes of action, sixteen of which (first through thirteenth, and seventeenth through nineteenth) assert claims against, some or all of the twenty-two individual defendants, and three of which (fourteenth through sixteenth) assert claims against VeriSign's outside auditor, KPMG.

Plaintiffs divide the twenty-two individual defendants into two groups — nine "option defendants," alleged to have received backdated options; and thirteen "director defendants," members of VeriSign's Board of Directors at various times during the period 1998 to the present. Plaintiffs assert that the director defendants, at the behest of the option defendants, improperly backdated the option grants to make it appear as though the grants had been made on dates when the market price of VeriSign stock was lower than the market price on the actual grant dates. Plaintiffs assert that options purportedly granted on three dates in 1998 (October 30, December 15, and December 18), on two dates in 2000 (August 1 and December 29), on four dates in 2001 (March 15, May 2, August 1, and September 6), and on one, date in 2002 (February 21) were backdated.

Plaintiffs assert that the alleged backdating violated the terms of the Company's shareholder-approved option plans, and also resulted in option grants With lower exercise prices, which improperly increased the value of the options granted, and improperly reduced the amount the defendants had to pay the Company upon exercise of the options. They also claim that VeriSign failed to record the proper compensation expense, and now faces potential tax and accounting consequences.

The option defendants are Stratton D. Sclavos, Quentin P. Gallivan, Richard A. Yanowitch, Dana L. Evan, Arnold Schaeffer, Diana S. Keith, Robert J. Korzeniewski, Anil H.P. Pereira, and. F. Terry Kremian.

Stratton D. Sclavos ("Sclavos") served as President and Chief Executive Officer ("CEO") and as a director of VeriSign from July 1995 until May 2007.¹ In...