Pedroli ex rel. Microtune, Inc. v. Bartek

• Decision Date: 31 March 2008
• Docket Number: No. 4:07-CV-43.,4:07-CV-43.
• Citation: 564 F.Supp.2d 683
• Parties: Peter A. PEDROLI, derivatively on Behalf of MICROTUNE, INC., Plaintiff, v. Douglas J. BARTEK, et al., Defendants, and Microtune, Inc., a Delaware corporation, Nominal Defendant.
• Court: U.S. District Court — Eastern District of Texas

564 F.Supp.2d 683

Peter A. PEDROLI, derivatively on Behalf of MICROTUNE, INC., Plaintiff, v. Douglas J. BARTEK, et al., Defendants, and Microtune, Inc., a Delaware corporation, Nominal Defendant.

No. 4:07-CV-43.

United States District Court, E.D. Texas, Sherman Division.

March 31, 2008.

Mitchell A. Toups, Weller Green Toups & Terrell LLP, Beaumont, TX, James E. Miller, Karen M. Leser, Nathan C. Zipperian, Shepherd Finkelman Miller & Shah, Chester, CT, for Plaintiff.

David R Woodcock, Jr., Vinson & Elkins, Paul Richard Bessette, Akin Gump Strauss Hauer & Feld, Austin, TX, Karen Lee Hirschman, Vinson & Elkins, Nicholas Even, Barrett Reid Howell, Haynes and Boone, Jim L. Flegle, Loewinsohn Flegle Deary LLP, Wilson E. Wray, Jr., Bruce William Collins, Christopher Shawn Cleveland, Sharon Julie Shumway, Carrington Coleman Sloman & Blumenthal LLP, Timothy W. Mountz, Mary L. Scott, Baker Botts, Dallas, TX, Jason L. Krajcer, Orrick Herrington & Sutcliffe LLP, Los Angeles, CA, Susan D. Resley, Orrick Herrington & Sutcliffe, Menlo Park, CA, Clyde Moody Siebman, Siebman Reynolds Burg & Phillips LLP, Sherman, TX, for Defendant.

MEMORANDUM OPINION AND ORDER

RICHARD A. SCHELL, District Judge.

The following motions are pending before the court:

1. Defendant Everett Roger's motion to dismiss Plaintiff's complaint and supporting brief (docket entry # 40);

2. Defendant William L. Housley's motion to dismiss shareholder derivative complaint and joinder in the motion to dismiss of certain directors and officers (docket entry # 43);

3. Defendant Rob-Roy J. Graham's motion to dismiss and brief in support thereof (docket entry # 44);

4. Motion to dismiss verified shareholder derivative complaint as against Defendant Nancy A. Richardson (docket entry # 47);

5. Microtune's motion to dismiss shareholder derivative complaint (docket entry # 49);

6. Motion to dismiss of certain directors and officers (docket entry # 50);

7. Motion to dismiss verified shareholder derivative complaint by Defendant Douglas J. Bartek (docket entry # 62); and

8. Defendant Martin Englmeier's motion to dismiss shareholder derivative complaint and joinder in certain directors and officers' motion to dismiss and reply in support of the motion to dismiss (docket entry # 96).

Peter Pedroli filed this derivative suit against twenty-seven current and former officers and directors of Microtune over the alleged former practice by corporate insiders of backdating stock options. The complaint alleges that these practices date back to 1999. Pedroli contends that certain Microtune insiders changed their respective stock option grant dates to take advantage of lower exercise prices than those that were available on the actual dates specified for the stock options. Pedroli claims that this practice violated Microtune's two stock option plans which restricted the exercise of stock options under the plans to the fair market price of the option on the date of the grant. Pedroli alleges that in 2006, Microtune disclosed that an internal investigation revealed the practices for which he now brings suit. Pedroli claims this practice has severely impacted Microtune's bottom line.

As expected, defendants have filed a number of motions to dismiss for failure to state a claim upon which relief may be granted. Fed.R.Civ.P. 12(b)(6). There are no challenges to this court's jurisdiction or venue. Pedroli brings a number of pendent state claims in his complaint. For federal jurisdiction, he alleges violations of Section 304 of the Sarbanes-Oxley Act of 2002 ("SOX") against Fontaine, Richardson, Graham and Kupp in Count I. 15 U.S.C. § 7243 (2006). All director defendants are sued for violation of Section 14(a) of the Securities Exchange Act of 1934 ("Exchange Act") in Count II. 15 U.S.C. § 78n (2006). All defendants are sued for violation of § 10(b) of the Exchange Act, 15 U.S.C. § 78j (2006), and Rule 10(b)(5), 17 C.F.R. § 240.10b-5 (2007), promulgated thereunder.

Dismissal under Rule 12(b)(6) is appropriate when the plaintiff has failed to allege "enough facts to state a claim to relief that is plausible on its face" and fails to "raise a right to relief above the speculative level." Bell Atl. Corp. v. Twombly, ___ U.S. ___, 127 S.Ct. 1955, 1965, 1974, 167 L.Ed.2d 929 (2007).

SARBANES-OXLEY ACT OF 2002

Pedroli asserts that the Sarbanes-Oxley Act of 2002 creates a private cause of action and has sued Fontaine, Richardson, Graham and Kupp for disgorgement. He argues that one court has implicitly recognized a cause of action under § 304 citing In re AFC Enters. Inc. Derivative Litig., 224 F.R.D. 515, 521 (N.D.Ga.2004), ignoring the predominant holdings across the country that the Act does not create a private cause of action under § 304 as well as other sections of the Act. See Wuliger v. Sewell, 363 F.Supp.2d 940, 950-51 (N.D.Ohio 2005) ("This provision states that it is not meant to create any new private cause of action, but only to govern already existing private causes of action under federal securities laws.) S.Rep. No. 107-146 at *12 (2002). Moreover, the additional views of several committee members commented on the existence of private rights of action: We agree that Section 4 of this bill is not intended to create a new private right of action or to broaden any existing private right of action. Id. at *29."; Mehlenbacher ex. rel Asconi Corp. v. Jitaru, 2005 WL 4585859 (M.D.Fla.2005) (after conducting an exhaustive analysis of Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975), the court found no "clear evidence" that Congress intended to create a private cause of action); In re BISYS Group Inc. Derivative Action, 396 F.Supp.2d 463 (S.D.N.Y.2005); Neer v. Pelino, 389 F.Supp.2d 648 (E.D.Pa.2005); Kogan v. Robinson, 432 F.Supp.2d 1075 (S.D.Cal.2006); In re Digimarc Corp., 2006 WL 2345497 (D.Or.2006); In re Whitehall Jewellers, Inc., 2006 WL 468012 (N.D.Ill.2006); In re Intelligroup Securities Litigation, 468 F.Supp.2d 670 (D.N.J. 2006).

As Pedroli points out, the Fifth Circuit has not decided whether the Act creates a private cause of action. However, the court notes that the Fifth Circuit applies the Cort factors in analyzing whether a private cause of action is provided in an Act. The Fifth Circuit has also declined to create a private cause of action when Congress has not manifested its intent that one should exist. See Wright v. Allstate Ins. Co., 500 F.3d 390 (5th Cir.2007). Pedroli has advanced no theory or argument as to why the. Fifth Circuit would depart from its position that Congress, in drafting legislation, must clearly manifest its intent to create a private cause of action. The court declines to address the issue in any more detail and believes that the cases cited conclusively mandate a dismissal of Count I against the four Defendants named in that count for violations of the Sarbanes-Oxley Act.

SECTION 14(a)

Pedroli also sues the various director defendants for violations of Section 14(a) of the Exchange Act. Pedroli alleges that Microtune's proxy statements of March 13, 2002, March 26, 2004 and April 27, 2005 contain false and misleading statements. The proxies failed to disclose that Microtune's executives were engaging in improper backdating and that the Board was approving those options as backdated. Pedroli claims that the proxies also falsely portrayed the compensation presented and did not take into account the backdated options.

Rule 14a-9 provides that "[n]o solicitation subject to this regulation shall be made by means of any proxy statement ... which, at the time ... it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading." An omitted fact is material "if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." General Elec. Co. v. Cathcart, 980 F.2d 927, 932 (3d Cir.1992), quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976). SOX does not extend limitations or repose for § 14(a) claims. In re Exxon Mobil Corp. Securities Litigation, 500 F.3d 189 (3d Cir.2007). Therefore, any claims involving the 2002 Proxy statement are barred by the three year period of repose.

To be liable in the first place, a director would have had to have held a position as director when the proxy was issued. The following individuals were not directors at the time any proxies were issued and, therefore, could not be liable for a 14(a) violation: Bernard Marren, Douglas Bartek (although a director in 2002, any action is barred by repose), Martin Englmeier, John P. Norsworthy, Harvey B. Cash (according to Pedroli's complaint, Cash was not a director at the time of the March 2004 proxy), Jack K. Furst, Kenneth Langone, Eric Lindberg, Lawrence D. Stuart, Jr., and Philippe von Stauffenberg. Therefore, as to the above-named directors, Pedroli's 14(a) claim is dismissed with prejudice.

As to the remaining directors, to establish a claim under section 14(a) of the Exchange Act, Pedroli need only allege that some part of a proxy statement "contain[s] any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not misleading ..." 15 U.S.C. § 78n. To state a claim under section 14(a), a plaintiff must allege that: "(1) a proxy statement contained a material misrepresentation or omission, which (2) caused plaintiffs injury, and (3) that the proxy solicitation itself, rather than the particular defect in the solicitation materials, was an essential link in the accomplishment of the transaction." Bond Opp'ty Fund v. Unilab Corp., 2003 WL 21058251, *3 (internal quotation marks and citation omitted). "Omission of information from a proxy...