In re Maxim Integrated Products, Inc., Deriv. Lit.

Page 1046

574 F.Supp.2d 1046

In re MAXIM INTEGRATED PROUCTS, INC., DERIVATIVE LIIGATION.

No. C 06-03344 JW.

United States District Court, N.D. California, San Jose Division.

August 27, 2008.

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John Mark Potter, Scott Gregory Lawson, Susan Germer, Christina Leigh Wu, Elizabeth B. Wydra, Patrick C. Doolittle, Susan Germer, Quinn, Emanuel, Urquhart, Oliver & Hedges, LLP, San Francisco, CA, Shaunt Toros Arevian, David Siegel, John Charles Hueston, Irell & Manella, LLP, Ofer Bleiweiss, Los Angeles, CA, Lita Monique Verrier, Ropers, Majeski, Kohn & Bentley, San Jose, CA, Steven Bauer, David Michael Friedman, Heather Lynn Thompson, Patrick C. Doolittle, Rees Ferriter Morgan, Latham & Watkins, Risha Nickelle Jamison, Attorney at Law, San Francisco, CA, for Defendants.

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTIONS TO DISMISS; DENYING PLAINTIFF'S MOTION TO STAY DISCOVERY

JAMES WARE, District Judge.

I. INTRODUCTION

This is a shareholders' derivative action brought on behalf of Nominal Defendant Maxim Integrated Products, Inc. ("Maxim" or the "Company") against current and former officers and directors of the Company (collectively, "Individual Defendants")¹ for, inter alia, alleged violations of §§ 10(b), 14(a), and 20(a) of the Securities Exchange Act. Plaintiffs² allege that the Individual Defendants engaged in a scheme to manipulate stock option grant dates so as to maximize profits to themselves at the expense of the Company.

Presently before the Court are Motions to Dismiss by various Defendants and a Motion to Stay Discovery in related state court actions by Plaintiffs. The Court conducted a hearing on February 1, 2008. Based on the papers submitted to date and oral argument, the Court GRANTS in part and DENIES in part Defendants' Motions to Dismiss and DENIES Plaintiffs' Motion to Stay Discovery.

II. BACKGROUND

A. Factual Allegations

In a Second Amended Complaint filed on August 31, 2007, Plaintiffs allege as follows:

From 1994 through 2006, Defendants backdated stock option grants to coincide with historically and relatively low closing prices of Maxim's common stock. (Corrected Second Amended Verified Consolidated Shareholder Derivative Complaint ¶ 12, hereafter, "SAC," Docket Item No. 132.) Defendants did not properly account for the compensation expenses associated with these options grants. (Id. ¶ 4.) Defendants issued false and misleading financial statements which misrepresented the true state of Maxim's financial performance. (Id. ¶ 6.)

Defendants' illegal and fraudulent options backdating practices were revealed on May 22, 2006, when Merrill Lynch published a report concerning the option grants at several semi-conductor companies, including Maxim. (Id. ¶ 171.) The Merrill Lynch report showed that the option grants suspiciously coincided with historical or relative lows in the Company's stock, a result that would not be expected if options grants were not backdated. (SAC, Ex. B, Docket Item No. 137.)

After the report was released, the SEC and the United States Attorney for the Northern District of California launched investigations into Maxim's stock option granting practices. (SAC ¶¶ 172-173.) Additionally, Maxim appointed a special committee to conduct an internal investigation into the Company's stock option granting practices. (Id. ¶ 174.) As a result of the investigation, Maxim did not file its annual or quarterly reports in 2006. (Id. ¶¶ 174-175.) In January 2007, Maxim announced the results of its investigation. (Id. ¶ 180.) The Special Committee found that grants to officers were properly granted, but that grants to directors and other employees were not properly accounted for. (Id.) Maxim announced that it would restate its results for 2000 through 2006, but that it had not determined by how much. (Id.) On August 30, 2007, Maxim announced that it had not yet determined the amount of its restatement and that it would not file its annual report for 2007.(Id.)

On the basis of the allegations outlined above, Plaintiffs allege ten causes of action:

Cause of Action Defendants
(1) Fraud in violation of         Bergman, Byrd, Gifford
§ 10(b) and Rule 10b-5 of    Hagopian, Karros, Sampels
the Securities Exchange           and Wazzan
Act
(2) Issuance of false             Bergman, Byrd, Gifford
proxy statements in violation     Hagopian, Karros, Sampels

of § 14(a) of the            and Wazzan
Securities Exchange Act
(3) Control person liability      Bergman, Byrd, Gifford
under § 20(a) of the         Hagopian, Jasper, Karros
Securities Exchange Act           Sampels, and Wazzan
(4) Accounting                    All Defendants
(5) Breach of Fiduciary           All Defendants
Duty and/or Aiding and
Abetting
(6) Unjust Enrichment             All Defendants
(7) Rescission                    All Defendants
(8) Insider Selling and           Beck, Bergman, Boyacigiller,
Misappropriation                  Byrd, Doluca, Georges,
                                  Ghaffaripour, Gifford,
                                  Gilbert, Hagopian, Hale,
                                  Hood, Huening, Jasper,
                                  Levin, Neil, Parvarandeh,
                                  Rigg, Sampels, Scheer, Ullal,
                                  Wazzan, and Zekeriya
(9) Insider trading in violation  Beck, Bergman, Boyacigiller,
of California Corporations        Byrd, Doluca, Georges,
Code §§ 25402           Ghaffaripour, Gifford,
and 25502.5                       Gilbert, Hagopian, Hale,
                                  Hood, Huening, Jasper,
                                  Levin, Neil, Parvarandeh,
                                  Rigg, Sampels, Scheer, Ullal,
                                  Wazzan, and Zekeriya
(10) Breach of Fiduciary          Beck, Bergman, Boyacigiller,
Duty in connection with           Byrd, Doluca, Georges,
insider trading                   Ghaffaripour, Gifford,
                                  Gilbert, Hagopian, Hale,
                                  Hood, Huening, Jasper,
                                  Levin, Neil, Parvarandeh,
                                  Rigg, Sampels, Scheer, Ullal,
                                  Wazzan, and Zekeriya

B. Stock Option Granting, Dating and Pricing

A stock option granted to an employee of a corporation allows the employee to purchase at some future date a specified number of shares of corporate stock at a specified price, called the "exercise price." If the exercise price is the same as the market price of the stock on the date the option is granted, the option is said to be "at-the-money." Under Generally Accepted Accounting Principles ("GAAP"), a company that grants an option "at-the-money" is not required to record the grants as compensation expenses. On the other hand, if the exercise price of the option is less than the market price of the stock on the date the option is granted, the options is said to be "in-the-money." Under GAAP, the company must record a compensation expense for the "in-the-money" option grant, equal to the difference between the exercise price and the market price of the stock on the date the option is granted. Walter L. Lukken and James A. Overdahl, Financial Product Fundamentals: A Guide for Lawyers § 18:2 (5th ed.2004).

C. Stock Option Backdating

"Stock option backdating" is a phrase that describes a practice in which the record of the option grant deviates from the actual grant date. A stock option is said to have been "backdated" if it was actually granted on one date, but the option itself is dated and is "recorded" on the books of the company as granted on an earlier date. Backdating a stock option is not necessarily improper. Backdating may be improper, however, if the practice misleads shareholders. For example, if the grant date of a stock option to an employee is backdated to a date when the market price was lower than the market price on the actual grant date, the option would be "in-the-money." If the company does not record and report a compensation expense as required by GAAP, any subsequently issued financial statement would be misleading. See 6 Bromberg & Lowenfels on Securities Fraud § 17:1 (2d ed.2007).

D. Procedural History

On May 22, 2006, Robert J. Mckinney filed a shareholder derivative action in the Northern District. (See Docket Item No. 1.) On June 1, 2006, the Court related Horkay v. Beck, et al., C 06-03395 RMW to Mckinney's action. (See Docket Item No. 22.) On June 14, 2006, by stipulation of the parties, the Court consolidated the actions. (See Docket Item No. 23.) On August 21, 2006, the Court related City of Pontiac Policemen and Firemen's Retirement System v. Gifford, et al., C 06-03754 JF, and Corey v. Gifford, et al., C 06-03755 RMW to the consolidated action. (See Docket Item No. 43.) On October 25, 2006, the Court consolidated the various actions and appointed Pontiac Retirement System and Eugene Horkay Lead Plaintiffs. (See Docket Item No. 51.)

On December 13, 2006, Plaintiffs filed a Consolidated Verified Shareholder Derivative Complaint. (See Docket Item No. 53.) On March 5, 2007, Plaintiffs filed an Amended Consolidated Verified Shareholder Derivative Complaint. (See Docket Item No. 76.) On July 25, 2007, the Court dismissed the Amended Complaint with leave to amend. (See Docket Item No. 128.) On August 31, 2007, Plaintiffs filed a Second Amended Complaint.

Presently before the Court are the following motions:

(1) Maxim's Motion to Dismiss Plaintiffs' Second Amended Complaint, (hereafter, "Maxim's Motion," Docket Item No. 144);

(2) Defendant John F. Gifford's Motion to Dismiss the Second Amended Complaint, (hereafter, "Gifford's Motion," Docket Item No. 146);

(3) Defendant Carl W. Jasper's Motion to Dismiss Plaintiffs' Second...