Police and Fire Retirement System v. Safenet
| Decision Date | 05 August 2009 |
| Docket Number | No. 06 Civ. 5797(PAC).,06 Civ. 5797(PAC). |
| Citation | 645 F.Supp.2d 210 |
| Parties | POLICE AND FIRE RETIREMENT SYSTEM OF The CITY OF DETROIT, Plymouth County Retirement System, State-Boston Retirement System, and Michael Golde, On Behalf of Themselves and All Others Similarly Situated, Plaintiffs, v. SAFENET, INC., Anthony A. Caputo, Kenneth A. Mueller, Carole D. Argo, Thomas A. Brooks, Ira A. Hunt, Jr., Bruce R. Thaw, Arthur L. Money, Shelley A. Harrison, and Andrew E. Clark, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Douglas M. McKeige, Gerald Harlan Silk, Joel H. Bernstein, Samuel Jay Lieberman, William Curtis Fredericks, Bernstein Litowitz Berger & Grossmann LLP, Nicole M. Zeiss, Jonathan Gardner, Lawrence Alan Sucharow, Labaton Sucharow, LLP, New York, NY, Matthew P. Siben, Bernstein Litowitz Berger & Grossmann LLP, San Diego, CA, for Plaintiffs.
Jordan Toumey Razza, Richard Howard Klapper, Thomas R. Leuba, Andrew Hunter Reynard, Sullivan & Cromwell, LLP, Anthony D. Boccanfuso, Arnold & Porter, LLP, Catherine A. Torell, Cohen, Milstein, Sellers & Toll, P.L.L.C., New York, NY, John Arak Freedman, Joshua P. Wilson, Arnold & Porter, LLP, Christian J. Mixter, Morgan Lewis & Bockius, LLP, Washington, DC, Jill M. Baisinger, Jason Harold Wilson, Morgan Lewis & Bockius, LLP, Philadelphia, PA, for Defendants.
Emily C. Komlossy, Labaton Sucharow, LLP, New York, NY, David Avi Rosenfeld, Coughlin Stoia Geller Rudman & Robbins, LLP, Melville, NY, for Movants.
The Police and Fire Retirement System of Detroit, Plymouth County Retirement System, the State-Boston Retirement System, and individual plaintiff Michael Golde ("Plaintiffs") instituted this securities-fraud class action against SafeNet Inc., six of the company's former directors, and three of its former officers ("Defendants"). The Consolidated Amended Class Action Complaint ("Complaint" or "CAC"), which is 349 paragraphs and 151 pages long, alleges that SafeNet repeatedly issued financial, proxy, and registration statements which were materially false with regard to stock-options backdating and non stock-options revenue recognition. Plaintiffs claim that the stock-option and revenue-recognition frauds inflated the value of SafeNet's shares, until the news of the improper accounting practices emerged, which caused the share price to plummet. Plaintiffs bring nine causes of action, which include claims under: (1) Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5; (2) Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a); (3) Section 14(a) of the Exchange Act, 15 U.S.C. § 78n(a), and Rule 14a-9, 17 C.F.R. § 240.14a-9(a); (4) Sections 11 and 12(a)(2) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77k & 77l; and (5) Section 15 of the Securities Act, 15 U.S.C. § 77o. Defendants move to dismiss the Complaint under Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure. For the reasons that follow, the Defendants' motions to dismiss are GRANTED in part and DENIED in part.
Plaintiffs purportedly represent all persons or entities that purchased or acquired SafeNet stock during an extended 37-and-one-half month period running from March 31, 2003 through May 18, 2006 (the "class period"). Plaintiffs include three public pension funds which purchased nearly 264,000 shares of SafeNet common stock during the class period, plus one individual Plaintiff, Michael Golde, who purchased shares of common stock in Rainbow Technologies, Inc. ("Rainbow"), and exchanged his Rainbow shares for SafeNet stock when SafeNet acquired Rainbow (the "Rainbow acquisition") on March 15, 2004. (See CAC ¶¶ 20-24.) Golde also purchased additional shares of SafeNet stock following the Rainbow acquisition.
Defendant SafeNet develops, markets, and sells hardware and software information security products and services used to protect digital communications and identities. During the class period SafeNet was a publicly traded company, but in April 2007 it was acquired by Stealth Acquisition Corporation and is now privately held. (Id. ¶ 25.)
Defendant Anthony Caputo was SafeNet's Chief Executive Officer and Chairman of the Board of Directors. He resigned from all company positions on October 18, 2006. Defendant Carole Argo was Senior Vice President and Chief Financial Officer of SafeNet from June 1999 through June 2004. From June 2004 through the end of the class period, she also was SafeNet's President and Chief Operating Officer, and beginning in April 2006 Argo was the acting interim Chief Financial Officer. Argo also resigned from all company positions on October 18, 2006. Defendant Kenneth Mueller was SafeNet's Senior Vice President, Chief Financial Officer and Treasurer for approximately 22 months from June 2004 until April 6, 2006, when he resigned from the company. (Id. ¶¶ 26-28.) The Complaint collectively refers to Caputo, Argo, and Mueller as the "Officer Defendants."
The Complaint also groups together various members of SafeNet's Board of Directors. Defendant Thomas Brooks was a SafeNet director and a member of the Compensation Committee and Audit Committee. Ira Hunt was a director and a member of the Audit Committee and Compensation Committee until 2004. Bruce Thaw was a director and a member of the Compensation Committee since 2004. Arthur Money joined the Board of Directors as part of the Rainbow acquisition and was a member of the Audit Committee and Compensation Committee after March 16, 2004. (Id. ¶¶ 31-34.) The Complaint collectively refers to Brooks, Hunt, Thaw, and Money as the "Compensation Committee Defendants." Defendants Shelley Harrison and Andrew Clark were not on the Compensation Committee, but signed various proxy and registration statements as SafeNet directors. The Compensation Committee Defendants, together with Harrison and Clark, are collectively referred to as the "Director Defendants."
Finally, the Complaint also groups the individuals who signed the registration statement related to the Rainbow acquisition. These Defendants—Caputo, Argo, Brooks, Thaw, Hunt, Harrison, and Clark—are referred to as the "Rainbow Acquisition Defendants." (Id. ¶ 40.)
The Complaint, although it stretches an extraordinary 151 pages, essentially alleges that Defendants made false and misleading statements in filings with the Securities and Exchange Commission ("SEC") and in registration, prospectus, and proxy statements.2 Those false statements related to: (1) SafeNet's accounting practices for backdated stock-options grants; (2) SafeNet's accounting practices for recognizing revenue in product sales, unrelated to the stock-options backdating practices.
The Complaint contains nine counts naming different combinations of defendants:
Count One: Against SafeNet, the Officer Defendants, and the Compensation Committee Defendants for stock-option misrepresentations in violation of Section 10(b) of the Exchange Act and Rule 10b-5.
Count Two: Against the Officer Defendants and the Compensation Committee Defendants for violations of Section 20(a) of the Exchange Act, relating to stock-options misrepresentations.
Count Three: Against SafeNet and the Officer Defendants for misrepresentations related to non stock-options revenue-recognition practices in violation of Section 10(b) of the Exchange Act and Rule 10b-5.
Count Four: Against the Officer Defendants for violations of Section 20(a) of the Exchange Act, relating to non stock-options revenue-recognition practices.
Count Five: Against SafeNet and the Director Defendants for misrepresentations in SafeNet proxy statements in violation of Section 14(a) of the Exchange Act and Rule 14a-9.
Count Six: Against SafeNet and the Rainbow Acquisition Defendants for misleading statements in the Rainbow proxy in violation of Section 14(a) of the Exchange Act and Rule 14a-9.
Count Seven: Against SafeNet and the Rainbow Acquisition Defendants for violations of Section 11 of the Securities Act.
Count Eight: Against SafeNet, Caputo, and Argo for violations of Section 12(a)(2) of the Securities Act.
Count Nine: Against the Rainbow Acquisition Defendants for violations of Section 15 of the Securities Act.
The Complaint alleges that SafeNet, through its officers and the Compensation Committee Defendants, issued hundreds of thousands of improperly accounted-for stock options grants. Under the accounting rules in effect prior to 2006, public companies could grant stock options to employees without recording the grant as a compensation expense, as long as the exercise price of the stock options was at or above the market closing price for the stock on the day the options were granted (so-called "at the money" options). If the exercise price for the stock options on the date selected was lower than the stock price on the award date (called "in the money" options), then the difference had to be recorded as a compensation expense. (Id. ¶ 43.) Accurate accounting of the compensation expense reduces the company's net income. (Id.) Backdating to an earlier date when the stock price was lower than the price on the record date has two results. First, the company's compensation expenses are lower than they ought to be, which has the effect of artificially inflating income. Second, the recipient of the backdated—in the money—options has a jump start on the market because of the low exercise price.
The Compensation Committee administered SafeNet's stock option plans and had the ultimate authority to grant the option awards. (Id. ¶ 48.) The plans provided that the Compensation Committee determined the exercise price of an option grant, which "in no event shall be...
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