Winters v. Stemberg, Civil Action No. 07-10193-WGY.
| Decision Date | 04 January 2008 |
| Docket Number | Civil Action No. 07-10193-WGY. |
| Citation | 529 F.Supp.2d 237 |
| Parties | Ann WINTERS and Labor International Union of North America National (Industrial) Pension Fund, derivatively on behalf nominal defendant Staples, Inc., Plaintiffs, v. Thomas G. STEMBERG, Martin E. Hanaka, John B. Wilson, Louis R. Pepi, Joseph S. Vassalluzzo, Demos Parneros, Ronald L. Sargent, Patrick Hickey, John J. Mahoney, Susan S. Hoyt, Jeffery L. Levitan, Richard R. Gentry, Jeanne B. Lewis, Edward C. Harsant, John C. Bingleman, David B. Crosier, James C. Peters, Brian T. Light, Joseph G. Doody, Jacques Levy, Jack Vanwoerkom, Robert J. Moore, Deborah G. Ellinger, Robert K. Mayerson, Jeffrey E. Nachbor, Basil L. Anderson, Brenda C. Barnes, Arthur' M. Blank, Mary Elizabeth Burton, Rowland T. Moriarity, Robert C. Nakasone, Martin Trust and Paul F. Walsh, Defendants. |
| Court | U.S. District Court — District of Massachusetts |
Ashley R. Altschuler, Jonathan D. Polkes, James W. Quinn, Weil, Gotshal & Manges, New York, NY, Thomas C. Frongillo, Patrick J. O'Toole, Jr., Weil, Gotshal & Manges, Boston, MA, for Arthur M. Blank, Basil L. Anderson, Brenda C. Barnes, Brian T. Light, David B. Crosier, Deborah G. Ellinger, Demos Parneros, Edward C. Harsant, Jack Vanwoerkom, Jacques Levy, James C. Peters, Jeanne B. Lewis, Jeffrey L. Levitan, Jeffrey E. Nachbor, John C. Bingleman, John J. Mahoney, John B. Wilson, Joseph G. Doody, Joseph S. Vassalluzzo, Louis R. Pepi, Martin E. Hanaka, Martin Trust, Mary Elizabeth Burton, Patrick Hickey, Paul F. Walsh, Richard R. Gentry, Robert K. Mayerson, Robert C. Nakasone, Ronald L. Sargent, Rowland T. Moriarity, Susan S. Hoyt, Thomas G. Sternberg, Robert J. Moore and Staples, Inc.
James L. Messenger, Weil, Gotshal & Manges LLP, Boston, MA, for Arthur M. Blank, Basil L. Anderson, Brenda C. Barnes, Brian T. Light, David B. Crosier, Demos Parneros, Jack Vanwoerkom, James C. Peters, Jeffrey L. Levitan, John J. Mahoney, John B. Wilson, Joseph G. Doody, Joseph S. Vassalluzzo, Louis R. Pepi, Martin E. Hanaka, Martin Trust, Mary Elizabeth Burton, Patrick Hickey, Paul F. Walsh, Robert K. Mayerson, Robert C. Nakasone, Ronald L. Sargent, Rowland T. Moriarity, Susan S. Hoyt and Thomas G. Stemberg.
Meredith B. Parenti, Weil Gotshal & Manges, LLP, Austin, TX, for Arthur M. Blank, Basil L. Anderson, Brenda C. Barnes, Brian T. Light, David B. Crosier, Deborah G. Ellinger, Demos Parneros, Edward C. Harsant, Jack Vanwoerkom Jacques Levy, James C. Peters, Jeanne B. Lewis, Jeffrey L. Levitan, Jeffrey E. Nachbor, John C. Bingleman, John J. Mahoney, John B. Wilson, Joseph G. Doody, Joseph S. Vassalluzzo, Louis R. Pepi, Martin E. Hanaka, Martin Trust, Mary Elizabeth Burton, Patrick Hickey, Paul F. Walsh, Richard R. Gentry, Robert K. Meyerson, Robert C. Nakasone, Ronald L. Sargent, Rowland T. Moriarity, Susan S. Hoyt, Thomas G. Stemberg and Robert J. Moore.
Alathea E. Brush, Paul V. Kelly, Kelly, Libby & Hoopes, PC, Boston, MA, Gilchrist Sparks, HI, Morris Nicholas Arsht & Tunnell, LLP, Wilmington, DE, for Staples, Inc.
Michael J. Hynes, Eric L. Zagar, Schiffrin Barroway Topaz & Kessler LLP, Radnor, PA, David Pastor, Gilman and Pastor, LLP, Boston, MA, for Ann Winters.
The plaintiffs, Ann Winters ("Winters") and Laborers' International Union of North America National (Industrial) Pension Fund ("LIUNA") (collectively, "Plaintiffs"), bring a shareholder's derivative action for the benefit of Staples, Inc. ("Staples") against the defendants, Thomas G. Stemberg, Martin E. Hanaka, John B. Wilson, Louis R. Pepi, Joseph S. Vassalluzzo, Demos Parneros, Ronald L. Sargent, Patrick Hickey, John J. Mahoney, Susan S. Hoyt, Jeffery L. Levitan, Richard R. Gentry, Jeanne B. Lewis, Edward C. Harsant, John C. Bingleman, David B. Crosier, James C. Peters, Brian T. Light, Joseph G. Doody, Jacques Levy, Jack Vanwoerkom, Robert J. Moore, Deborah G. Ellinger, Robert K. Meyerson, Jeffrey E. Nachbor, Basil L. Anderson, Brenda C. Barnes, Arthur M. Blank, Mary Elizabeth Burton, Rowland T. Moriarity, Robert C. Nakasone, Martin Trust, and Paul F. Walsh (collectively, "Defendants"). The Plaintiffs assert common law claims of breach of fiduciary duty, unjust enrichment, and waste as well as claims pursuant to the Securities and Exchange Act of 1934 ("Exchange Act") based upon allegedly fraudulent and unlawful actions taken by the officers and directors of Staples. Specifically, the Plaintiffs allege that between 1994 and 2003, corporate officers and directors engaged in a scheme to "backdate" stock options in violation of corporate stock option policies.
The Defendants move to dismiss the complaint, asserting (1) that the Plaintiffs lack standing to bring claims for stock options granted before February 1999; (2) that the statutory claims are time-barred under sections 10(b), 14(a), and 20(a) of the Securities and Exchange Act; (3) that the Plaintiffs have not complied with the demand requirement for shareholder derivative suits' delineated by Federal Rule of Civil Procedure 23.1; and (4) that the Plaintiffs fail to satisfy the heightened pleading standards required for claims that allege securities fraud, rendering the complaint insufficient under Federal Rule of Civil Procedure 9(b) and 12(b)(6).
Because the Plaintiffs allege violations of the Securities and Exchange Act of 1934, the Court here has federal question jurisdiction pursuant to 28 U.S.C. § 1331. The Court has supplemental jurisdiction pursuant to 28 U.S.C. § 1367(a) over the remaining claims, insofar as they are part of the same case or controversy from which the federal claim arises.
For the purposes of a motion to dismiss, this Court accepts allegations in the complaint as true and draws all inferences in favor of the plaintiff. Garrett v. Tandy Corp., 295 F.3d 94, 97 (1st Cir.2002). The facts below are recited in light of this standard.
A stock option is the right to purchase stock in a corporation for a specified period of time at a fixed price (the "exercise price"). Am. Compl. [Doc. 35] ¶ 3. When the market price exceeds the exercise price, an option holder can profit by exercising his option, purchasing stock from the corporation, and reselling it at the (higher) market price. See id. The exercise price generally equals the stock's market price on the date that the stock option is granted. Id. In order to increase the value of stock options, however, "backdating" is sometimes used. Instead of recording the date on which the option was actually granted, the corporation manipulates the option by listing an earlier date on which the market price of the stock was lower, which accordingly sets a lower (and more advantageous for the option holder) exercise price. See id. ¶¶ 3-4.
Staples, a Delaware corporation with its principal executive offices in Framingham, Massachusetts, id. ¶ 23, grants stock options to strengthen its ability to attract and retain key officers, senior managers, and employees who are expected to contribute to the company's growth and success. Id. ¶¶ 9, 12, 75. It does so pursuant to two stockholder-approved plans: the 1987 Stock Option Plan and the 1992 Equity Incentive Plan (collectively, "the Plans"). Id. ¶ 74. The Plans state that the exercise price of a stock option "may not be less than 100% of the fair market value of the Company's Common Stock" on the date of the grant. Id. ¶¶ 77, 80. Fair market value is defined as "the last reported sale price per share of such series of Common Stock on the Nasdaq National Market on the date of grant." Id ¶ 80. Staples's Compensation Committee has the sole authority to select the date on which a stock option is granted.1 Id. ¶ 87. Its decisions are made with the knowledge and approval of the Board of Directors ("Board"). Id. ¶ 83. Between 1994 to 2003, the Compensation Committee approved fifty-one stock option grants. Id. ¶ 85. Of these, eleven coincided with dates having particularly low stock prices.2 Id.
In 2006, the practice of backdating stock options was publicly identified, spurring the Securities and Exchange Commission ("SEC") to investigate the phenomenon. See id. ¶¶ 5, 10. Staples was not a target of any government inquiry, but it, like many other companies, decided to conduct an internal review of its accounting procedures. See id. ¶ 13, 70. On November 14, 2006, Staples released the results of its review of stock option granting practices from 1997 to the third quarter of 2006. Id. ¶ 13. As a result of the audit, Staples "recorded a $10.8 million expense ($8.6 million net of taxes) . . . to reflect the cumulative impact of accounting errors due to the use of incorrect measurement dates" with regard to stock-based compensation. Id. Staples, however, "concluded that the use of incorrect measurement dates was not the result of intentional wrongdoing and has taken steps to improve the controls over its option granting processes." Id.
The Plaintiffs allege that this report, along with the fact that eleven stock option grants coincided with particularly low stock prices, demonstrates that the officers and directors of Staples engaged in intentional backdating.3 See id. ¶ 13, 109. Additionally, the Plaintiffs allege that Staples understated its compensation expenses and overstated its net income because it did not report the backdated stock options when the Board approved or signed Staples's proxy statements and annual and quarterly reports, which were filed with the SEC and distributed to shareholders and the public, during the relevant period. Id. ¶¶ 113, 121.
Furthermore, the Plaintiffs allege that the Defendants' backdating scheme calmed Staples to violate well-settled accounting principles (GAAP), leading to material false and misleading statements. Id. ¶ 155, 158, 162. Specifically, although Staples need not record an expense for stock options granted to employees at the current market price, it is required to...
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