Teamsters Local 617 Pension v. Apollo Group
| Decision Date | 31 March 2009 |
| Docket Number | No. 2:06-CV-2674-PHX-RCB.,2:06-CV-2674-PHX-RCB. |
| Citation | 633 F.Supp.2d 763 |
| Parties | TEAMSTERS LOCAL 617 PENSION AND WELFARE FUNDS, on behalf of itself and all other similarly situated, Plaintiff, v. APOLLO GROUP, INC.; John G. Sperling; Todd S. Nelson; Kenda B. Gonzales; Daniel E. Bachus; John Blair; John R. Norton III; Hedy Govenar; Brian E. Mueller; Dino J. DeConcini; Peter Sperling; and Laura Palmer Noone, Defendants. |
| Court | U.S. District Court — District of Arizona |
Jay P. Saltzman, Schoengold Sporn Laitman & Lometti PC, New York, NY, Michael Salcido, James W. Barnhouse, Buckley King LPA, Robert O. Dyer, Polsinelli Shughart PC, Robert D Mitchell, Joshua Ray Forest, Susan Joan Martin, Martin & Bonnett PLLC, Phoenix, AZ, Patrick V. Dahlstrom, Pomerantz Haudek Block Grossman & Gross LLP, Chicago, IL, Ramzi Abadou, Coughlin Stoia Geller Rudman & Robbins LLP, San Diego, CA, Lauren S. Antonino, Motley Rice LLC, Atlanta, GA, Samuel H. Rudman, Lerach Coughlin Stoia Geller Rudman & Robbins LLP, Melville, NY, for Plaintiffs.
Brian A. Herman, Morgan Lewis & Bockius LLP, New York, NY, Joseph E. Floren, Morgan Lewis & Bockius LLP, San Francisco, CA, Michael J. Farrell, Steven Charles Lawrence, Jennings Strouss & Salmon PLC, Phoenix, AZ, Peter B. Morrison, Virginia F. Milstead, Eric S. Waxman, Skadden Arps Slate Meagher & Flom LLP, Los Angeles, CA, for Defendants.
Since the publication of a series of Wall Street Journal articles in March 2006, "reporting academic research suggesting that various companies were suspiciously lucky in selecting their option grant dates[,]" In re MIPS Technologies, Inc., 2008 WL 3823726, at *2 (N.D.Cal. Aug.13, 2008), countless lawsuits have been filed across the country alleging backdating of stock options. This is one such lawsuit.
Lead plaintiff, Pension Trust Fund for Operating Engineers ("plaintiff"), "a $3.17 billion pension fund[,]" First Amended Complaint ("FAC") (doc. 71) at ¶ 16, brings this lawsuit against Apollo Group, Inc. ("Apollo"), "the largest accredited post secondary education institution in the United States[.]" Farrell Decl'n (doc. 80), exh. 2 thereto at 9. Also named as defendants are various individuals who were Apollo officers and directors between November 28, 2001, and October 18, 2006 ("the Class Period").
Basically, plaintiff alleges that defendants "intentionally manipulated stock option grants to [Apollo's] officers, directors and employees ... to provide the[m] ... with a more profitable exercise price and to under-report [Apollo's] expenses and thereby overstate [Apollo's] earnings." FAC (doc. 71) at ¶ 2. That allegedly fraudulent backdating occurred in three ways. First, defendants "violate[d] the terms of [Apollo's] stock option plan[.]" Id. at ¶ 5(a). Second, they "misrepresent[ed] how the options [we]re priced[.]" Id. at ¶ 5(b). Third, defendants "fail[ed] to properly record expenses associated with these option grants under GAAP [Generally Accepted Accounting Principles]." Id. at ¶ 5(c).
As a result of this alleged backdating "scheme, Apollo [was] forced to restate its previously filed financial statements for fiscal years 2001 through the second quarter of 2006 by over $59 million[.]" Id. at ¶ 2. That "scheme" likewise purportedly "caused" Apollo to issue "materially false and misleading" financial statements during the Class Period, "resulting in an artificial inflation of [Apollo's] stock price, the disclosure of which caused investors to lose hundreds of millions of dollars." Id. Through this "scheme," defendants also supposedly "concealed that Apollo was not recording material compensation expenses and was materially overstating its net income and earnings per share, in violation of ... [GAAP]." Id. During the Class Period plaintiff purchased Apollo stock which, in light of the foregoing, it alleges was purchased at artificially inflated prices.
Plaintiff alleges violations of §§ 10(b) and Rule 10b-5, 20(A) (a), and 20(a) of the Securities and Exchange Act of 1934 ("Exchange Act"), as amended by the Private Securities Litigation Reform Act of 1995 ("the PSLRA"), against all defendants. It further alleges that all defendants violated a host of fiduciary duties under Arizona state common law "and/or aided and abetted" in the violation of those duties. Id. at 94. Lastly, plaintiff alleges that defendants Nelson, Blair, Norton, Gonzales, Bachus and Mueller engaged in a "civil conspiracy to commit fraud[.]" Id. at 95.
Currently pending before the court is Apollo's motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) (doc. 81), and the individual defendants'1 motions to dismiss on that same basis (doc. 82). Additionally, Apollo and the individual defendants have each filed a "Request for Judicial Notice" ("RJN") (docs. 79 and 83), which plaintiff does not oppose.2
As the court in In re New Century, 588 F.Supp.2d 1206 (C.D.Cal.2008), astutely observed, "in the securities class action context, the stringent pleading requirements appear to invite both parties to throw everything and the kitchen sink into their respective pleadings and motions to dismiss." Id. at *9. This case is no different. In an effort to separate the wheat from the chaff, at the outset the court will summarize plaintiff's allegations. It will then go on to consider each of defendants' numerous dismissal arguments.
The following facts, which the court must "accept[] as true" on these motions to dismiss, are derived from the FAC. See South Ferry LP, No. 2 v. Killinger, 542 F.3d 776, 782 (9th Cir.2008) (citation omitted). Additionally, as explained below, these facts are also derived from various documents which the FAC either incorporates by reference or of which the court may properly take judicial notice. From these documents, the following general picture emerges of Apollo's stock option grant process during the Class Period. More details will be provided herein as necessary to resolve these motions to dismiss.
Defendants vigorously deny that they engaged in fraudulent backdating of stock options. Rather, as Apollo depicts it, the Company merely "failed ... to dot all `i's and cross all `t's when completing the paperwork necessary to grant stock options." Mot. (doc. 81) at 7. The individual defendants similarly maintain that at most "innocent accounting errors[ ]" were made. Mot. (doc. 82) at 13. Given these widely divergent views of Apollo's stock option grant practices, before turning to the specific allegations in the FAC, an overview of stock option grants in general is warranted.
In re CNET Networks, Inc., 483 F.Supp.2d 947 (N.D.Cal.2007), provides a succinct description of "the mechanics of stock-options backdating[,]" from which this court will heavily borrow. See id. at 949. When a company grants a stock option to an employee, that employee has "the right to purchase the stock at the exercise price at a later date after the option vests." Id. at 949. The "exercise price" is simply a pre-determined or designated price at which the underlying security may be purchased. See FAC (doc. 71) at 1, ¶ 3. Due to that later vesting date, "[i]f the stock price rises, the employee stands to make a profit." CNET Networks, 483 F.Supp.2d at 949. Conversely, "[i]f the stock price falls below the exercise price, the option is worthless to the employee." Id.
So-called "at-the-money" options are those "where the exercise price is at the market price as of the date of the grant[.]" Id. On the other hand, "in-the-money" options, which the FAC alleges were the type granted here, are those "where the exercise price is lower than the market prices as of the grant date[.]" Id. The distinction between these two types of options is significant for financial reporting purposes. Companies must "record compensation costs for granting in-the-money options because the company effectively receives a lower price than it could get for the shares on the open market[.]" Id. Not recording such options, as the FAC alleges, results in overstating a company's net income. See FAC (doc. 71) at 4, ¶ 8. On the other hand, there is no need to record compensation costs "for at-the-money options because the exercise price is the same as the market price." CNET Networks, 483 F.Supp.2d at 949. Consequently, "[t]he company is not foregoing any revenue." Id. "Backdating occurs when the option's grant date is altered to an earlier date with a lower, more favorable price to the recipient." Id. at 950. This "[b]ackdating is done to avoid compensation expenses." Id. at 956.
Like many publicly held companies, as part of its compensation plan, Apollo granted stock options to its executives and employees. Plaintiff alleges that Apollo engaged in impermissible stock option backdating under two separate compensation plans whereby it awarded "Management Grants"—the Long Term Incentive Plan ("LTIP") and the 2000 Stock Incentive Plan. See FAC (doc. 71) at ¶ 41. Under the LTIP, between June 1994 to March 24, 2000, "Apollo issued stock option grants to Section 16 officers[.]" Id. at ¶ 42. The LTIP expressly required that the exercise price of "Incentive Stock Option[s]" [("ISO) ]" thereunder could "not be less than the Fair Market Value of a share of [s]tock on the date of [the] grant[.]" Id. at ¶ 42 (internal quotation marks and citation omitted). That limitation on the exercise price pertained only to ISOs, however. As to other stock options, the LTIP allowed the Compensation Committee to determine the exercise price, with no mention of fair market value. Id., exh. B thereto at ¶ 7.1(a). The LTIP also required that both members of that Committee, defendants Norton and Blair, approve all grants made thereunder. Id. at ¶¶ 42; 22...
To continue reading
Request your trial
-
In Re Remec Incorporated Securities Litigation. This Document Relates To All Actions.
...disclosure that does not reveal anything new to the market is, by definition, not corrective.’ ” Teamsters Local 617 Pension & Funds v. Apollo Group, Inc., 633 F.Supp.2d 763, 818 (D.Ariz.2009) (citations omitted). Plaintiffs rely on the testimony and report of an expert witness, Dr. Blaine ......
-
Nat'l Junior Baseball League v. Pharmanet Dev. Group Inc.
...also insufficient to show loss causation as these reports were vague and speculative. See Teamsters Local 617 Pension and Welfare Funds v. Apollo Group, Inc., 633 F.Supp.2d 763, 820 (D.Ariz.2009) (analyst report questioning defendants' stock option was not a corrective disclosure because “s......
-
In re Novatel Wireless Sec. Litig.
...disclosure that does not reveal anything new to the market is, by definition, not corrective.’ ” Teamsters Local 617 Pension & Funds v. Apollo Group, Inc., 633 F.Supp.2d 763, 818 (D.Ariz.2009) (citations omitted).b. Plaintiffs Claims of Loss Causation for February 21, 2008 On February 20, 2......
-
Pension v. Apollo GROUP INC.
...which this court previously dismissed or found insufficient as a matter of law in Teamsters Local 617 Pension & Welfare Funds v. Apollo Group, Inc., 633 F.Supp.2d 763 (D.Ariz. 2009) ("Apollo I").2 Oral argument will not aid the court's decisional process, hence the court denies the parties'......