In Re Fossil Inc.

713 F.Supp.2d 644

In re FOSSIL, INC., Derivative Litigation. This Order Relates To: All Actions.

Case No. 06-cv-1672-F.

United States District Court,

N.D. Texas,

Dallas Division.

May 19, 2010.

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Brian J. Robbins, Caroline A. Schnurer, Shane P. Sanders, Steven J. Simerlein, Robbins Umeda LLP, Benny C. Goodman, III, Darren J. Robbins, James I. Jaconette, Mary Lynne Calkins, Robert R. Henssler, Jr., Travis E. Downs, III, Robbins Geller Rudman & Dowd LLP, San Diego, CA, Aelish M. Baig, Maria V. Morris, Monique C. Winkler, Shawn A Williams, Robbins Geller Rudman & Dowd LLP, San Francisco, CA, Cynthia J. Billings, Sullivan Ward Asher & Patton, Southfield, MI, Joe Kendall, Karl A. Rupp, Kendall Law Group LLP, Willie Briscoe, Preston Commons West, Dallas, TX, Jeffrey A. Berens, Dyer & Berens LLP, Kip B. Shuman, Shuman & Berens LLP, Denver, CO, for Plaintiff.

Terence J. Hart, Bracewell & Giuliani LLP, Patrick K. Craine, Financial Regulatory Authority, Andrew W. Yung, John B. Scott, Scott Yung, E. Lawrence Vincent, Law Office of Joe H. Staley PC, Dallas, TX, for Defendant.

Geoffrey S. Harper, Andrew R. Graben, Scott Cashion Thomas, Steven H. Stodghill, Fish & Richardson, Dallas, TX, for Plaintiff and Defendant.

ORDER DENYING DEFENDANTS' MOTION TO DISMISS

ROYAL FURGESON, Senior District Judge.

Before the Court is Defendants' Motion to Dismiss Second Amended Consolidated Verified Shareholder Derivative Complaint (Docket No. 157), filed on December 9, 2009. A hearing in this matter was held on January 19, 2010. Having considered the oral argument, the filings and record, and applicable law the Court DENIES Defendants' Motion to Dismiss (Docket No. 157).

I. Background

A. Procedural Background

The original Verified Shareholder Derivative Complaint in this case was filed on September 13, 2006, and assigned to the docket of the Honorable Jorge Solis. A similar complaint was filed October 26, 2006 Minich v. Kartsotis, No. 3:06-cv-1977-M (N.D.Tex.), and assigned to the Honorable Barbara M.G. Lynn. In November 2006, Judge Solis considered the question of consolidation and ordered that the cases be consolidated into the above-captioned case. On February 12, 2007, Plaintiffs filed their Consolidated Verified Shareholder Derivative Complaint. See Docket no. 26. After obtaining extensions, Defendants filed their first motion to dismiss on April 6, 2007.

On June 29, 2007, Plaintiffs filed their First Amended Consolidated Verified Shareholder Derivative Complaint (“the FAC”). See Docket no. 42. On July 6, 2007, certain Defendants moved to dismiss the FAC; the first motion to dismiss was denied as moot on July 30, 2007.¹ In December 2007, the case was transferred to the docket of the Honorable Reed O'Connor. On December 15, 2008, the case was again transferred to the docket of the undersigned.

On July 15, 2009, the Court heard the parties regarding the then-pending motions to dismiss. On July 17, 2009, the Court denied all three motions to dismiss for the reasons stated in open court. Additionally, the Court ordered Plaintiffs to re-plead their Rule 10b-5 and Section 14(a) claims. On October 13, 2009, Plaintiffs filed their Second Amended Consolidated Verified Shareholder Derivative Complaint (the “SAC”). On December 9, 2009, Defendants again moved to dismiss. The SAC is the subject pleading of the instant motion.

B. Second Amended Consolidated Verified Shareholder Derivative Complaint

Plaintiffs are shareholders of Fossil, Inc.² who have owned stock in the corporation at all times relevant to this action. They derivatively complain that Defendants, who are members of Fossil's Board of Directors or current or former officers or directors, backdated stock option grants to themselves, to other top Fossil executives, and to Fossil employees. ³ Plaintiffs allege that Defendants concealed the “backdating option scheme” or refused to take advantage of Fossil's legal rights to require insiders to disgorge illicitly obtained incentive proceeds since 1996. SAC, at 1.

Plaintiffs set forth facts alleging securities violations and stated eleven enumerated causes of action: violations of sections 14(a), 10(b), and 29(b) of the Securities Exchange Act of 1934, breach of fiduciary duties, corporate waste, gross mismanagement, unjust enrichment, abuse of control, insider selling and misappropriation, rescission, and accounting.

Count One of the SAC, the section 14(a) claim, names Defendants Kercho, K. Kartsotis, T. Kartsotis, Tunnell, Gold, Anderson, Stone, and Steinberg.

Count Two of the SAC, the section 10(b) claim, names Defendants T. Kartsotis, K. Kartsotis, Kercho, Kovar, Tunnell, Barnes, Gold, Anderson, Stone, and Steinberg.

Count Three of the SAC, the section 29(b) claim, names Defendants Barnes, Kercho, Kovar, Steinberg, Shroff, and Tunnell.

Count Nine, which states violations for insider selling and misappropriate of information, names Defendants T. Kartsotis, K. Kartsotis, Barnes, Kovar, Kercho, Shroff, Gold, Anderson, Stone, and Tunnell. The remaining seven counts are stated against all Defendants.

II. Legal Standard

“To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, --- U.S. ----, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. It follows that “where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but it has not ‘show[n]’-‘that the pleader is entitled to relief.’ ” Id. at 1950 (quoting Fed.R.Civ.P. 8(a)(2)).

When alleging fraud, a party must state with particularity the circumstances constituting fraud or mistake. Fed.R.Civ.P. 9(b). “What constitutes ‘particularity’ will necessarily differ with the facts of each case.” Guidry v. Bank of LaPlace, 954 F.2d 278, 288 (5th Cir.1992). “To plead fraud with particularity, a plaintiff must, at a minimum, include the time place, and contents of the false representations, as well as identify the speaker who made the misrepresentation and what that person obtained thereby.” Shushany v. Allwaste, Inc., 992 F.2d 517, 521 (5th Cir.1993). In other words, a plaintiff must set forth the “who, what, when, where, and how” of the alleged fraud. United States ex rel. Williams v. Bell Helicopter Textron Inc., 417 F.3d 450, 453 (5th Cir.2005). Further, “general allegations, which lump all defendants together failing to segregate the alleged wrongdoing of one from those of another do not meet the requirements of Rule 9(b).” In re Urcarco Sec. Lit., 148 F.R.D. 561, 569 (N.D.Tex.1993), aff'd Melder v. Morris, 27 F.3d 1097 (5th Cir.1994).

III. Analysis

A. Section 10(b) and 10b-5 Claims

As stated above, Plaintiffs allege Section 10(b) violations against certain Defendants.⁴ See, e.g., SAC ¶¶ 274-279. In order to state a claim for fraud under Section 10(b) and Rule 10b-5 of the Securities Exchange Act, a plaintiff must allege, in connection with the purchase or sale of securities, (1) a misstatement or an omission (2) of a material fact (3) made with scienter (4) on which plaintiff relied (5) that proximately caused the plaintiff's injury. R2 Invs. LDC v. Phillips, 401 F.3d 638, 641 (5th Cir.2005).

Because Plaintiffs claim securities fraud in violation of Rule 10(b), they must satisfy the heightened pleading requirements of Fed.R.Civ.P. 9(b) and the Private Securities Litigation Reform Act (“PSLRA”). See Lormand v. U.S. Unwired, Inc., 565 F.3d 228 (5th Cir.2009). Rule 9(b) requires a plaintiff to plead fraud with particularity, including specific allegations of the time, place, and content of the misrepresentations, the identity of the persons making the misrepresentations, and what the person who made those misrepresentations gained from making the statements. Shushany, 992 F.2d at 521. The PSLRA requires Plaintiffs to “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1); see also Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp., 565 F.3d 200, 207 (5th Cir.2009). Defendants attack the sufficiency of the SAC's 10(b) claims with respect to scienter and reliance.

1. Scienter

Defendants argue that Plaintiffs have failed to adequately allege their 10(b) claims because they have not alleged facts giving rise to a strong inference of scienter. In opposition, Plaintiffs point to the allegation that Defendants approved the backdating options, and argue that allegation is sufficient to demonstrate a strong inference of scienter.

Under the PSLRA, the Court considers whether all the facts and circumstances, taken together, give rise to a strong inference of scienter. Abrams v. Baker Hughes Inc., 292 F.3d 424, 431 (5th Cir.2002); Nathenson v. Zonagen, Inc., 267 F.3d 400, 425 (5th Cir.2001). “Scienter, in the context of securities fraud, is defined as ‘an intent to deceive, manipulate, or defraud or that severe recklessness in which the danger of misleading buyers or sellers is either known to the defendant or is so obvious that the defendant must have been aware of it.’ ” Flaherty & Crumrine, 565 F.3d at 207 (quoting R2 Invs., 401 F.3d at 643). “Severe recklessness is limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care.” Id.

There is a “three step...