Case 3:06-cv-01083 Document 11-1 Filed 07/27/2006 Page 1 of 48
UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF TEXAS DALLAS DIVISION
ALBERT HULLIUNG, Derivatively and on Behalf of § Civil Action No 3:06-CV-01083 Nominal Defendant MICHAELS STORES, INC.,
Plaintiff, vs.
DAVID E . BOLEN , JACK E . BUSH , LAWRENCE FINE, RICHARD E. HANLON, DUANE HIEMENZ, KRISTEN L. MAGNUSON, RICHARD C. MARCUS , JOHN C. MARTIN, DONALD R. MILLER, JR., LIZ MINYARD, R. DON MORRIS , JOHN H . RITTENHOUSE, R. MICHAEL ROULEAU , ROBERT H. RUDMAN , EDWARD M . SADLER, CECE SMITH , COLBY SPRINGER , DOUGLAS B. SULLIVAN , CHARLES J . WYLY, JR., SAM WYLY, BRYAN M . DECORDOVA, THOMAS DECARO, JAMES F . TUCKER, ROBERT M . SPENCER, and ELIZABETH VANSTORY, § DEMAND FOR JURY TRIAL Defendants.
MICHAELS STORES, INC.,
Nominal Defendant.
VERIFIED AMENDED DERIVATIVE AND CLASS ACTION COMPLAINT
Plaintiff, by his attorneys, submits this Verified Amended Derivative and Class
Action Complaint (the "Complaint") against the defendants named herein.
NATURE OF THE ACTION
1. This is a shareholder's derivative action brought for the benefit of Nominal
Defendant Michaels Stores, Inc. ("Michaels" or the "Company") against certain current and former members of its Board of Directors (the "Board") and Company officers
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seeking to remedy Defendants' breaches of fiduciary duties owed to Michaels during the period from January 1990 thorough the present (the "Relevant Period").'
2. Defendants refuse to comply with their fiduciary obligations by ignoring the Company' s interests and arranging to extinguish Michaels as a public company by selling Michaels to Bain Capital and The Blackstone Group (the "Buyout Group"), for the unfair price of $44 per share, allowing Defendants to reap vast rewards for the immediate vesting of all outstanding Company stock options and their change in control agreements (the "Acquisition"). Defendants also knew that selling Michaels was the only way to avoid liability for their breaches of fiduciary duty as alleged in the instant shareholder derivative action.
3. In addition, during the Relevant Period, certain of the Defendants sold more than $20.3 million worth of their personally held Michaels common stock while in possession of material non-public adverse information. In fact, the Chief Executive
Officer ("CEO") and President of the Company, Defendant R. Michael Rouleau
("Rouleau"), sold over 125,000 shares of his privately held Company shares during the
Relevant Period to reap over $5.8 million in illegal profits. Certain senior officers and/or directors also sold 100% of their Michaels holdings during this short period of time - the very time the Company was regularly appearing at analysts' and investor conferences and relentlessly issuing press releases telling investors that Michaels was not affected by adverse market conditions which were already negatively affecting Michaels' competitors.
1 Because Defendants have failed to take action to remedy the breaches of fiduciary duties that occurred between January 1, 1990 (the time period Defendants began to back date stock options) and June 30, 2006, the Relevant Period continues through this day instead of ceasing on June 30, 2006, the day before the public became aware of the wrongdoing of Defendants. 2 Case 3:06-cv-01083 Document 11-1 Filed 07/27/2006 Page 3 of 48
JURISDICTION AND VENUE
4. This Court has jurisdiction over this action pursuant to 28 U.S.C. §1331 in that this Complaint states a federal question. This Court has supplemental jurisdiction over the state law claims asserted herein pursuant to 28 U.S.C. §1367(a). This action is not a collusive one to confer jurisdiction on a court of the United States which it would not otherwise have.
5. Venue is proper in this district because a substantial portion of the transactions and wrongs complained of herein, including the Defendants' primary participation in the wrongful acts detailed herein, occurred in this district. One or more of the Defendants either resides in or maintains executive offices in this district, and
Defendants have received substantial compensation in this district by engaging in numerous activities and conducting business here, which had an effect in this district.
PARTIES
6. Plaintiff Albert Hulliung is , and was at all relevant times , a shareholder of
Nominal Defendant Michaels.
7. Nominal Defendant Michaels is a Delaware corporation with its principal executive offices located at 8000 Bent Branch Drive, Irving, Texas 75063. According to its public filings, Michaels is the world's largest specialty retailer of arts, crafts, framing, floral, wall decor, and seasonal merchandise for the hobbyist and do-it-yourself home decorator.
8. Defendant Charles J. Wyly, Jr. ("C. Wyly") is the Chairman of the Board and a co-founder of Michaels. C. Wyly became a director in 1984 and served as Vice
Chairman of the Board from 1985 until 2001 when he was elected Chairman of the
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Board. C. Wyly served as member of the Company's compensation committee (the
"Compensation Committee") until 2000.
9. Defendant Sam Wyly ("S. Wyly") is the Vice Chairman of the Board and a co-founder of Michaels. S. Wyly became a director in 1984 and served as Chairman of the Board from 1984 until 2001. S. Wyly served as a member of the Compensation
Committee until 2000.
10. Defendant Richard E. Hanlon ("Hanlon") currently serves as a director of the Company and has served as a director of Michaels since April 1990. Hanlon currently serves as a member of the Compensation Committee and has done so since
2000, and served as a member of the Company's audit committee (the "Audit
Committee") from 1990 until 2002 and as a member of the Company's 1997 Stock
Option Committee (the "SO Committee") from 1996 until 2000.
11. Defendant Richard C. Marcus ("Marcus") currently serves as a director of the Company and served as a director of Michaels since July 1999. Marcus currently serves as a member of the Audit Committee and has done so since 2000, and served as a member of the Compensation Committee from 2000 until 2004 and as a member of the SO Committee from 1999 until 2000. During the Relevant Period, Marcus sold
50,000 shares of Michaels stock for proceeds of over $2.1 million.
12. Defendant Liz Minyard ("Minyard") currently serves as a director of the
Company and has served as a director of Michaels since March 2002. Minyard currently serves as a member of both the Audit Committee and Compensation
Committee, and has done so since 2002.
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13. Defendant Cece Smith ("Smith") currently serves as a director of the
Company and has served as a director of Michaels since October 2002. Smith currently serves as a member of the Audit Committee, and has done so since 2002.
14. Defendant David E. Bolen ("Bolen") formerly served as an Executive Vice
President ("EVP") of the Company.
15. Defendant Jack E. Bush ("Bush") formerly served as the Company's
President.
16. Defendant Lawrence Fine ("Fine") formerly served as the Company's
EVP-General Merchandise Manager.
17. Defendant Duane Hiemenz ("Hiemenz") formerly served as the
Company's EVP-Store Operations. During the Relevant Period, Hiemenz sold 61,668 shares of Michaels stock for proceeds of over $2.8 million.
18. Defendant Kristen L. Magnuson ("Magnuson") formerly served as the
Company's Vice President ("VP") -Finance and Business Planning.
19. Defendant John C. Martin (" Martin") formerly served as the Company's
President and Chief Operating Officer ("COO")
20. Defendant Donald R. Miller, Jr. ("Miller") formerly served as a director of the Company and as the Company's VP-Market Development. Miller is the son-in-law of Defendant C. Wyly.
21. Defendant R. Don Morris ("Morris") formerly served as the Company's
EVP.
22. Defendant John H. Rittenhouse ("Rittenhouse") formerly served as the
Company's VP-Distribution.
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23. Defendant R. Michael Rouleau ("Rouleau") served as the Company's
President and Chief Executive Officer until March 15, 2006. Rouleau served as Chief
Executive Officer since April 1996, and as President from April 1997 until June 1999, and again from March 2001 until his retirement in March 2006. During the Relevant
Period, Rouleau sold 125,000 shares of Michaels stock for proceeds of over $5.8 million.
24. Defendant Robert H. Rudman ("Rudman") formerly served as the
Company's EVP.
25. Defendant Edward M. Sadler ("Sadler") currently serves as the
Company's Executive Vice President - Store Operations, and has held such position from October 1999. During the Relevant Period, Sadler sold 20,000 shares of Michaels stock for proceeds of over $920,000.
26. Defendant Colby Springer (" Springer") formerly served as the Company's
VP-Information Services.
27. Defendant Douglas B. Sullivan ("Sullivan") formerly served as the
Company's President and COO.
28. Defendant Bryan M. DeCordova ("DeCordova") served as the Executive
Vice President and Chief Fiancial Officer of the Company until his retirement from the
Company on or about October 31, 2002.
29. Defendant Thomas C . DeCaro (" DeCaro") is, and at all times relevant hereto was Senior Vice President-Merchandise Planning and Control of Michaels.
During the Relevant period, DeCaro sold 34,999 shares of Michaels stock for proceeds of over $1.5 million.
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30. Defendant James F. Tucker ("Tucker") at all relevant times served as the
Executive Vice President-Chief Information Officer of Michaels. During the Relevant
Period, Tucker sold 33,333 shares of Michaels stock for proceeds of over $1.5 million.
31. Defendant Robert Spencer ("Spencer") was at all times relevant hereto
Executive Vice President-General Merchandise Manager of Michaels until his resignation on December 14, 1997. During the Relevant Period, Spencer sold 10,166 shares of Michaels stock for proceeds of over $480,889.
32. Defendant Elizabeth A. VanStory ("VanStory") was a director of Michaels at all relevant times, until October 2002. During the Relevant Period, VanStory sold
25,000 shares of Michaels stock for proceeds of over $1.1 million.
33. Defendants Bolen, Bush, Magnuson, Morris, Miller, Rittenhouse, Rudman,
Sullivan, Springer, C.Wyly and S. Wyly are referred to herein as the "Option Recipient
Defendants." Defendants DeCaro, Hiemenz, Rouleau, Spencer, Marcus, Sadler,
Tucker and VanStory are referred to herein as the "Insider Selling Defendants."
Collectively, Defendants Bolen, Bush, Fine, Hiemenz, Magnuson, Martin, Miller, Morris,
Rittenhouse, Rouleau, Rudman, Sadler, Springer, DeCordova, DeCaro, Tucker,
Spencer, VanStory , and Sullivan, Marcus, Minyard , Hanlon , C. Wyly , and S . Wyly are referred to herein as the "Individual Defendants."
DUTIES OF THE INDIVIDUAL DEFENDANTS
34. By reason of their positions as officers and/or directors of the Company and because of their ability to control the business and corporate affairs of the
Company, the Individual Defendants owed the Company and its shareholders the fiduciary obligations of good faith, trust, loyalty, and due care, and were and are required to use their utmost ability to control and manage the Company in a fair, just,
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honest, and equitable manner. The Individual Defendants were and are required to act in furtherance of the best interests of the Company and its shareholders so as to benefit all shareholders equally and not in furtherance of their personal interest or benefit.
Each director and officer of the Company owes to the Company and its shareholders the fiduciary duty to exercise good faith and diligence in the administration of the affairs of the Company and in the use and preservation of its property and assets, and the highest obligations of fair dealing.
35. The Individual Defendants , because of their positions of control and authority as directors and/or officers of the Company, were able to and did, directly and/or indirectly, exercise control over the wrongful acts complained of herein.
36. To discharge their duties, the officers and directors of the Company were required to exercise reasonable and prudent supervision over the management, policies, practices and controls of the Company. By virtue of such duties, the officers and directors of the Company were required to, among other things:
a. exercise good faith in ensuring that the affairs of the Company were conducted in an efficient, business-like manner so as to make it possible to provide the highest quality performance of their business;
b. exercise good faith in ensuring that the Company was operated in a diligent, honest and prudent manner and complied with all applicable federal and state laws, rules, regulations and requirements, including acting only within the scope of its legal authority;
c. exercise good faith in supervising the preparation, filing and/or dissemination of financial statements, press releases, audits, reports or other information required by law, and in examining and evaluating any reports or examinations, audits, or other financial information concerning the financial condition of the Company;
d. exercise good faith in ensuring that the Company's financial statements were prepared in accordance with Generally Accepted Accounting Principles ("GAAP"); and 8 Case 3:06-cv-01083 Document 11-1 Filed 07/27/2006 Page 9 of 48
e. refrain from unduly benefiting themselves and other Company insiders at the expense of the Company.
37. The Individual Defendants , particularly the Audit Committee Defendants, were responsible for maintaining and establishing adequate internal accounting controls for the Company and to ensure that the Company's financial statements were based on accurate financial information. According to GAAP, to accomplish the objectives of accurately recording, processing, summarizing, and reporting financial data, a corporation must establish an internal accounting control structure. Among other things, the Individual Defendants were required to:
(1) make and keep books , records , and accounts , which , in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; and
(2) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that-
(a) transactions are executed in accordance with management's general or specific authorization; and
(b) transactions are recorded as necessary to permit preparation of financial statements in conformity with [GAAP].
38. Michaels' Audit Committee Charter provides that the Audit Committee shall, among other things:
a. Review and Discuss Financial Statements and Disclosures . The Committee shall meet to review and discuss with appropriate officers of the Company and the independent auditors the annual audited and quarterly financial statements of the Company, including reviewing the Company's specific disclosures under "Management's Discussion and Analysis of Financial Condition and Results of Operations";
b. Review and Discuss Financial Press Releases . The Committee shall review and discuss earnings and other financial press releases (including any use of "pro forma" or "adjusted" non-GAAP information), as well as financial information and earnings guidance 9 Case 3:06-cv-01083 Document 11-1 Filed 07/27/2006 Page 10 of 48
provided to analysts and rating agencies (which review may occur before or after issuance and, as appropriate, may include a review of the types or substance of information to be disclosed and the form of presentation to be made);
c. Review and Discuss internal Audit Reports . The Committee shall review and discuss with the senior executive responsible for the internal audit function and appropriate members of his or her staff the annual report of the audit activities, examinations and results thereof;
d. Review and Discuss the Systems of Internal Accounting Controls . The Committee shall review and discuss with the independent auditor, the senior executive responsible for the internal audit function and, if and to the extent deemed appropriate by the Committee Chairman, members of their respective staffs or representatives of any person or entity to which the internal audit function has been outsourced the adequacy of the Company's internal accounting controls, the Company's financial, auditing and accounting organizations and personnel, and the Company's policies and compliance procedures with respect to business practices which shall include (1) the disclosures regarding internal controls and matters required to be reported to the Committee by Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 and all rules promulgated thereunder by the SEC, and (2) a review with the independent auditors of their opinion on the effectiveness of management's assessment of internal controls over financial reporting and the independent auditor's analysis of matters regarding modification to management's certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and all rules promulgated thereunder by the SEC; and
e. Obtain reports Regarding Conformity with Legal Requirements and the Company's Code of Business Conduct and Ethics . The Committee shall periodically obtain reports from management, the Company's senior executive responsible for the internal audit function and the independent auditor that the company and its subsidiary/foreign affiliated entities are in conformity with applicable legal requirements and the Company's Code of Business Conduct and Ethics. The Committee shall review and discuss reports and disclosures of insider and affiliated party transactions. The Committee shall advise the Board with respect to the Company's policies and procedures regarding compliance with applicable laws and regulations and with the Company's Code of Business Conduct and Ethics.
MATERIALLY FALSE AND MISLEADING STATEMENTS ISSUED DURING THE RELEVANT TIME PERIOD 10 Case 3 :06-cv-01083 Document 11-1 Filed 07/27/2006 Page 11 of 48
39. On August 8, 2002, the Individual Defendants caused or allowed the
Company to issue a release announcing that July sales had surged a purported 20% and, as a result of the Company's continued financial success, Michaels was increasing its second quarter estimates , as follows:
Michaels Stores , Inc. July Sales Surge 20% - Same-Store Sales Up 11 % - Company Raises 2nd Quarter Earnings Estimates
Michaels Stores, Inc. today reported that total sales for the month of July increased 20% to $191.4 million from $159.4 million for the same period last year. Same-store sales for the month increased 11%, three percentage points higher than previously forecast. Total sales for the second quarter increased 19% to $576.7 from $486.1 for the same period last year....
[Defendant] Rouleau ... said, We are very pleased with our continuing performance. The investments we have made in our systems and infrastructure are really starting to pay off, and we're in great shape as we enter the fall and holiday seasons. We remain very optimistic and we have considerable momentum as we head into the third quarter."
On the strength of these higher sales, the Company has raised its earnings estimates per dilutes share by $.02 to $.18 for the second quarter and $1.94 for the full fiscal year. This increase comes on the heels of a $.05 increase in earnings guidance made last month. The Company also repurchased 392,000 share of its Common Stock during the past month.
In addition to the foregoing, the Individual Defendants also used this release to condition investors to believe that the Company was in compliance with all of its reporting obligations and that is financial statements conformed with Generally
Accepted Accounting Principles ("GAAP") and that its guidance was reasonable, as follows:
Pursuant to a recent directive of the Securities and Exchange Commission relating to public companies with annual revenues greater than $1.2 billion, senior officers of the Company will be required to file written statements, under oath, regarding the accuracy of the Company's financial statements and their consultation with the Company's Audit Committee. In light of the 11 Case 3 :06-cv-01083 Document 11-1 Filed 07/27/2006 Page 12 of 48
company's fiscal calendar, the Company is required to and will file such statements with the Commission by the close of business on September 17, 2002.
40. After the publication of the Company' s market-reassuring August 8, 2002 release , the price of Michaels common stock surged from a close of $34.10 per share on August 7, 2002, to a high of $37.50 per share on August 8, 2002, and within five trading sessions shares of Michaels' stock traded at over $41.50 in reaction to this extremely favorable news.
41. On August 28, 2002, the Individual Defendants caused or allowed the
Company to issue a release which purported to announce a record setting second quarter 2002, with "record" second quarter earnings . Net income soared an amazing
359%. EPS climbed a remarkable 329%. Purported earnings were $0.11 per share above consensus estimates. In addition, this release stated, in part, the following:
Michaels Stores, Inc. today reported record financial results for its second quarter and the six months ended August 3, 2002. Net income for the quarter was $21.5 million, a 359% increase compared to net income of $4.7 million in the same period last year. Earnings per share were $30, 329% or $.23 higher than last year's $.07 and $.11 higher than analysts' consensus.
Net income for the six months ended August 3, 2002 was $42.1 million, a 252% increase compared to net income of $12.0 million last year. Earning per share were $.60, an increase of 233% over last year's $.18 per share.
Total sales for the second quarter increased 19% to $576.6 million from $486.1 million for the same period last year. Year-to-date sales of $1.180 billion increased 17% from $1.011 billion for the same period last year. Same-store sales were up 9% for the quarter and 7% year-to-date.
[Defendant] Rouleau ... said, We are very, very pleased with our second quarter record sales and profit performance. We continue to build upon the momentum that we have generated over the last five years. And, as we have consistently stated in the past, while
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we are very pleased with our current financial performance, the real sales and profit benefits of the significant investments we have made in our infrastructure are still ahead of us and give us great confidence in our future."
The Individual Defendants also used this release to condition investors to believe that the Company was on track to meet third quarter guidance and that August sales were
"much stronger than expected." In addition to the foregoing, the release stated:
The Company also reported that August sales are coming in much stronger than expected, and it is now projecting a same- store sales increase of 5% to 6% for the month, up from their prior guidance for flat same-store sales.
43. The materially false and misleading statements issued by the Defendants in the quarterly earnings announcement had their intended effect. Again shares of
Michaels rallied, trading up over $5 per share, to close trading on August 29, 2002 at
$45.21 per share.
44. On September 5, 2002, the Individual Defendants caused or allowed the
Company to issue another press release. This release purported to announce that
Michaels' August sales improved an additional 12% with the same-store sales increase of 6%. For the month of August 2002, purported sales increased 12%, to $174.1 million, from $155.4 million for the same period in 2001. Year-to-date sales of $1,354 billion for fiscal 2002 increased 16% from 41.166 billion for the same period that year while same-store sales were up 7% year-to-date.
45. The same day the Individual Defendants caused or allowed the company to release these excellent monthly sales results, Smart Money.com published a report on the Company entitled, We love a Surprise ." This story highlighted the fact that
Michaels had seemingly outperformed otherwise negative market conditions to achieve very positive results, in part, as follows:
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If you've any kind of market watcher, you know how it's been to whistle a chipper tune lately. Tuesday's 355-point, or 4.1 % drop in the Dow Jones Industrials certainly didn't inspire any spontaneous renditions of "Happy Days Are Here Again." And after Thursday's 141-point drop, the Dow sat 17.5% lower for the year. As for the other broad indexes, well, they aren't faring much better.
But despite the recent dreariness, a few companies have sounded some delightfully cheery notes. Take arts-and-crafts retailer Michael's Stores. Last Wednesday it posted a 12-cent- per-share earnings surprise for the second quarter, 67% better than Wall Street expected. Michaels' stock? It jumped 13.7% on the news.
46. At the same time the SmartMoney.com report was published, CBS
Marketwatch also issued a similar report which stated that August was a "slow" month for U. S. retailers , with "decidedly lackluster sales results reported by many of the nation's retailers" and most department store chains [coming] in with August same- store sales results below Wall Street's consensus, as did retailing giant Wal-Mart Stores and the majority of apparel retailers." CBS Marketwatch too, highlighted the fact that
Michael's Stores was one of the "few bright spots ... amid the retailing gloom."
47. On September 12, 2002, the Individual Defendants caused or allowed the
Company to issue a release which announced that they had increased the Company's stock repurchase program, which would authorize Defendants to purchase an additional
1.55 million shares of Michael's common stock in the open market. This release also stated the following:
Michaels Stores, Inc. announced today that its Board of Directors has approved a repurchase of up to an additional one million shares of the Company's Common Stock under its Stock Repurchase Program. This brings to total shares available to be repurchased to 1.558 million. These repurchases will be made from time to time, as market conditions warrant, in the open market or in negotiated transactions, and will be funded from available working capital and cash flow from operations.
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[Defendant] Rouleau ... said, We are pleased to announce the continuance of our repurchase program. We do not currently expect share repurchases to be made prior to the fourth quarter of this fiscal year, unless, of course, market conditions encourage us to act sooner."
Since July 1999 the company has repurchased approximately 11.4 million shares of its Common Stock and currently has approximately 66.5 million shares outstanding.
48. Immediately after this release was issued by the Company, on September
12, 2002, TheStreet. com Senior Columnist Herb Greenberg published his reaction, which was that, ostensibly, Michaels picked an "odd time for a buyback," in addition to stating the following:
Thursday thwack:
Messing with Michaels: Michaels Stores, an active buyer of its own stock, today authorized the repurchase of an additional 1 million shares from time to time, on the open market or in negotiated transactions. The additional buybacks, Michaels said, won't take place until the fourth quarter (starting in November), unless market conditions change.
49. At the same time the Individual Defendants were causing Michaels to announce an expanded Company share buy-back, during the first two weeks of
September, certain Insider Selling Defendants were dumping their own shares into the market while in possession of the knowledge that gross margins had been artificially inflated in the second quarter and that this margin improvement could not be maintained. Such illicit insider stock sales included the following:
Name Date Shares Price Proceeds DeCaro 09/03/02 34,999 $ 45.210 $ 1,582.305 34,999 $ 1 , 582,305
Hiemenz 09/04/02 1,000 $ 46.050 $ 46,050 09/04/02 49,002 $ 46.000 $2,254.092 09/04/02 11-,6661 $47.000 1 $ 548,302 61,668 1 1 $ 2,848,444
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Rouleau 09/04/02 4,200 $ 46.100 $ 193,620 09/04/02 21,900 $ 46.000 $1,007,400 09/04/02 2,000 $ 46.090 $ 92,180 09/04/02 3,600 $ 46.070 $ 165,852 09/04/02 2,000 $ 46.140 $ 92,280 09/04/02 3,000 $ 46.200 $ 138,600 09/04/02 500 $ 46.060 $ 23,030 09/04/02 4,100 $ 46.010 $ 188,641 09/04/02 200 $ 46.020 $ 9,204 09/04/02 1,000 $ 46.110 $ 46,100 09/04/02 2,800 $ 46.080 $ 129,024 09/04/02 2,200 $ 46.040 $ 101,288 09/04/02 2,500 $ 46.030 $ 115,075 09/06/02 7,500 $ 48.450 $ 363,375 09/06/02 1,200 $ 48.370 $ 58,044 09/06/02 4,900 $ 48.010 $ 235,249 09/06/02 2,200 $ 47.510 $ 104,522 09/06/02 2,500 $ 48.170 $ 120,425 09/06/02 5,000 $ 48.250 $ 241,250 09/06/02 10,100 $ 48.000 $ 484,800 09/06/02 100 $ 47.580 $ 4,758 09/06/02 200 $ 47.530 $ 9,506 09/06/02 3,200 $ 48.350 $ 154,720 09/06/02 2,500 $47.750 $ 119,375 09/06/02 10,000 $ 47.950 $ 479,500 09/06/02 600 $ 48.360 $ 29,016 100,000 $ 4, 706,844
Spencer 09/03/02 2,000 $ 45.270 $ 90,540 09/05/02 2,000 $ 46.250 $ 92,500 09/06/02 27000 $ 47.250 $ 947500 09/09/02 27000 $ 48.250 $ 967500 09/11/02 2,166 $ 49.330 $ 106,849 10,166 $ 480,889
Van Story 09/13/02 100 $ 48.160 $ 4,816 09/13/02 17800 $ 48.040 $ 867472 09/13/02 900 $ 48.090 $ 43,281 09/13/02 12,200 $ 48.000 $ 585,600 09/27/02 57000 $ 47.010 $ 235.050 09/27/-2 5_,000 $ 47.000 $ 235,000 25,000 $ 1,190,219
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50. On September 17, 2002 , Individual Defendants caused or allowed the
Company to issue a release in which it announced the certification of the company's financial results. This release stated that the company's CEO, Defendant Rouleau, and its Chief Financial Officer, Defendant DeCordova, had submitted certifications to the
SEC stating that they had complied with both the SEC Order 4-460 and the Sarbanes-
Oxley Act of 2002. Compliance with this Act demanded that the financial statements submitted to the SEC were true, accurate and correct.
51. The same day, September 17, 2002, the Individual Defendants caused or allowed the Company to file with the SEC its financial results for second quarter 2002, the period ended August 3, 2002. This filing reiterated much of the same financial information previously announced on August 28, 2002. In addition, however, buried in the notes to the Company's financial statements, for the first time, the second quarter
2002 Form 10-Q revealed that Defendants had substantially inflated the company's second quarter gross margins by including in its financial results for the second quarter
2002 at least $14.8 million in "reserve reversals" related to a reserve for impaired inventory taken at the end of the prior year, as follows:
Cost of sales and occupancy expense, as a percentage of net sales, for the second quarter of fiscal 2002 was 63.9%, a decrease of 3.3% compared to the second quarter of fiscal 2001. This decrease was primarily attributable to improved merchandise margins and a leveraging of store occupancy expense on higher average net sales per store compared to the second quarter of fiscal 2001.
In addition, in the second quarter of fiscal 2002, we fully utilized the $14.8 million markdown reserve originally recorded in the fourth quarter of fiscal 2001 to offset the liquidation of certain merchandise that did not conform to each store's specific plan-o- gram SKU program.
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52. On October 10, 2002, Individual Defendants caused or allowed the
Company to issue a release which purported to announce that September same-store sales climbed 10%, with total sales up 25%. This release also increased third quarter
2002 and full year EPS estimates, and stated the following:
Michaels Stores, Inc. today reported that same-store sales for the month of September increased 10%, four percentage points higher than previous expectations. Total sales for the month increased 25% to $296.1 million from $236.3 million for the same period last year. Same-store sales were up 7% year-to-date while total sales of $1.650 billion for fiscal 2002 increased 18% from $1.402 billion for the same period last year.
[Defendant] Rouleau said, We are extremely pleased with our performance in September. While we are sensitive to current concerns about consumer spending, we believe that the significant improvements we continue to make in our operations will continue to propel our same-store sales and profit growth. We expect same- stores sales for October to increase between 4% to 6% and third quarter same-store sales to increase 6% to 7%. We have also raised our earnings estimates per diluted share to $.40 for the third quarter and $2.10 for the full fiscal year."
As previously reported, the Company's Executive vice President - Chief Financial Officer, Bryan DeCordova, has announced his resignation effective October 31, 2002. The company continues a nationwide search for a new CFO. Until a new Chief Financial Officer has been appointed, all financial inquiries should be directed to Chris Holland, Vice President - Finance.
53. In addition to their prior stock sales, at the same time Defendants were guiding the market higher and artificially inflating the price for Michaels shares, certain of the Insider Selling Defendants continued liquidating their personally held Company shares. These sales included the following:
Name Date Shares Price Proceeds Marcus 10/15/02 4,500 $42.800 $192,600 10/15/02 20,000 $42.900 $858,000 10/15/02 500 $42.820 $21,410 10/16/02 200 $42.000 $8,400
18 Case 3:06-cv-01083 Document 11-1 Filed 07/27/2006 Page 19 of 48
10/17/02 5,000 $42,600 $213,000 10/17/02 6,100 $42.300 $258,030 10/17/02 5,000 $42.620 $213,100 10/17/02 4,800 $42.990 $206,352 10/17/02 3,900 $42.340 $165,126 50,000 $2, 136,018
Rouleau 10/18/02 400 $45.050 $18,020 10/18/02 5,800 $45.100 $261,580 10/18/02 1,500 $45.150 $67,725 10/18/02 1,000 $45.160 $45,160 10/18/02 400 $45.110 $18,044 10/18/02 1,500 $45.120 $67,680 10/18/02 9,400 $45.020 $423,188 10/18/02 5,000 $45.040 $225,200 25,000 $1,126,597
Sadler 10/21/02 2,500 $46.200 $115,500 10/21/02 100 $46.120 $4,612 10/21/02 600 $46.010 $27,606 10/21/02 100 $46.150 $4,615 10/21/02 15,700 $46.000 $722,200 10/21/02 300 $46.140 $13,842 10/21/02 300 $46.130 $13,839 10/21/02 400 $46.050 $18,420 20,000 $920,634
Tucker 10/21/02 33, 333 $45.540 $1, 517, 985 33,333 $1 , 517,985
MICHAELS' TRUE FINANCIAL CONDITION IS BELATEDLY DISCLOSED
54. On November 7, 2002, only seventeen days after the insider selling had ceased, the Individual Defendants caused the Company to issue a release which disclosed for the first time that the Company was operating well below the guidance issued less than one month before and that Michaels would substantially reduce estimates going forward, in part, as follows:
Michaels Stores, Inc. today reported that total sales for the month of October increased 6% to $234.5 million from $220.4 million for the same period last year. Same-store sales for the month increased 2%. Total sales for the third quarter increased 15% to 19 Case 3 :06-cv-01083 Document 11-1 Filed 07/27/2006 Page 20 of 48
$704.6 million from 612.10 million for the same period last year. Same-store sales for the quarter increased 6%. Year-to-date sales of $1.884 billion for fiscal 2002 increased 16% from $1.623 billion for the same period last year while same-store sales were up 7% year-to-date.
The Company also reported that it has revised its outlook for the fourth quarter. Noting that the consumer confidence index had fallen to a nine year low, [Defendant] Rouleau said, "While we feel we have never been better prepared for the Holiday season, a shift in the retail environment in general and waning consumer confidence has caused us to modify our sales and earnings expectations for the balance of this year. We are now looking for same-store sales in the fourth quarter to be up one percent versus our previous guidance of up two to three percent. Based on this revised forecast, we expect earnings for the full year to be five cents less per diluted share than our previous guidance of $2.10 per diluted share."
55. Immediately following the publication of this release which reported same- store sales gains for October that were one-third to one-half expectations and lowered guidance, Michaels' stock shares plummeted over 30%, or over $11.18 per share, more than wiping out all gains made during the Relevant Period, after reporting same-store sales gains for October that were one-third to one-half expectations. According to CBS
Marketwatch, during the conference call held after the publication of the November 7,
2002 release, Defendants blamed a variety of factors for the purported sudden decline, including that: (i) sales were negatively affected by the Maryland-area sniper attacks;
(ii) as a result of the media attention over the sniper in Maryland, and because the
Company's name was mentioned in the media at the same time and in the same context, this somehow impacted results nationally; (iii) consumers were shifting their shopping resources to winter apparel, rather than arts and crafts; and (iv) customer store traffic fell sharply through October due to restrained consumer spending amid an uncertain U.S. economy - the Company's first decline in customer traffic in any month this year. 20 Case 3 :06-cv-01083 Document 11-1 Filed 07/27/2006 Page 21 of 48
56. Furthermore, in the conference call that accompanied this release, for the first time the Individual Defendant publicly commented on the Company's July 2002
$14.8 million reserve reversal , for a reserve originally taken in January 2002, utilized in the second quarter of fiscal 2002. During the call, however, Defendants dismissed the significance of this accounting mechanization, claiming that the "profit and loss impact" on Michaels was zero. At least one analyst who called into the conference call vehemently disagreed, and directly accused Company insiders of trading their Michaels shares while in possession of material adverse non-public information. The analyst,
Dan Farb of Highfield Capital, first said it raised serious questions that Defendant had taken such a "reserve reversal" in the second quarter 2002 and had not even mentioned it until the conference call which followed the insiders' sale of over $20.3 million of Company stock. More specifically, Farb stated that his undisclosed reversal of the prior accrual would have had the effect of artificially inflating the gross margins of goods during the second quarter, since the margin on the incremental piece of inventory which was liquidated to offset the reserve effectively had a zero cost basis, and this added 100% to margin improvement. This was improper because it allowed
Defendants to create the materially false impression that the Company had achieved record results in the fiscal second quarter, when, at that time, Michaels was already suffering form the same adverse market conditions as were most, if not all, retailers.
57. The Individual Defendants had no secret formula for success in a down market, other than misrepresenting the financial condition of the Company for at least one fiscal quarter, so that the insiders could bail out with huge cash cushions. The
Insider Selling Defendants' motive for selling their stock were expiration of their options within months, and since there were only certain periods when Company insiders could
21 Case 3:06-cv-01083 Document 11-1 Filed 07/27/2006 Page 22 of 48
sell their stock, Defendants did everything possible to inflate and maintain the price of
Michaels' stock at artificial levels throughout the Relevant Period so as to allow them to liquidate their private holdings before the price of the Company's stock deteriorated and eroded, and while Defendants could reap millions of dollars more in exchange for their
Company shares.
DEFENDANTS ' STOCK OPTION MANIPULATIONS
58. At all times relevant hereto the Compensation Committee and/or the SO
Committee approved grants under and supervised the administration of the Company's stock option plans.
59. From 1993 to 2001, the Compensation Committee and/or the SO
Committee, granted the Option Recipient Defendants the following Michaels stock options:
Name Total Individual Date of Old New Price Effective Options Options Repricing Price Price Difference Benefit Repriced Repriced Bolen 30000 30000 8/29/1995 $30.75 $16.75 $14.00 $420,000.00 $420,000.00
Bush 210000 50000 10/26/1995 $13.13 $12.50 $0.63 $31,250.00 50000 10/26/1995 $20.50 $12.50 $8.00 $400,000.00 50000 10/26/1995 $32.13 $12.50 $19.63 $981,250.00 10000 10/26/1995 $30.75 $12.50 $18.25 $182,500.00 $2,932,500.00
Magnuson 115000 27500 8/29/1995 $20.75 $16.75 $4.00 $235,000.00 15000 8/29/1995 $22.75 $16.75 $6.00 $90,000.00 35000 8/29/1995 $27375 $16375 $11.00 $385,000.00 7500 6/6/1995 $27.00 $22.75 $4.25 $31,875.00 15000 6/6/1995 $39.25 $22.75 $16.50 $247,500.00 15000 6/6/1995 $30.75 $22.75 $8.00 $120,000.00
22 Case 3:06-cv-01083 Document 11-1 Filed 07/27/2006 Page 23 of 48
$1,029,375.00
Morris 159000 74000 8/29/1995 $20.50 $16.75 $3.75 $277,000.00 25000 8/29/1995 $27.00 $16.75 $10.25 $256,250.00 30000 8/29/1995 $39.25 $16.75 $22.50 $675,000.00 30000 8/29/1995 $30.37 $16.75 $13.62 $408,600.00 $1,617,350.00
Rittenhouse 50000 25000 8/29/1995 $22.75 $16.75 $6.00 $150,000.00 25000 6/6/1995 $34.75 $22.75 $12.00 $300,000.00 $450,000.00
Rudman 71250 6250 8/29/1995 $20.50 $16.75 $3.75 $23,437.50 5000 8/29/1995 $27.00 $16.75 $10.25 $51,250.00 30000 8/29/1998 $39.25 $16.75 $22.50 $675,000.00 30000 8/29/1995 $30.75 $16.75 $14.00 $420,000.00 $1,169,687.50
Sullivan 245000 80000 8/29/1995 $20.50 $16.75 $3.75 $300,000.00 25000 8/29/1995 $27.00 $16.75 $10.25 $256,250.00 30000 8/29/1995 $39.25 $16.75 $22.50 $675,000.00 30000 8/29/1995 $30.75 $16.75 $14.00 $420,000.00 $1,651,250.00
C. Wyly 450000 300000 9/28/1995 $20.63 $17.00 $3.63 $1,087,500.00 50000 9/28/1995 $27.88 $17.00 $10.88 $543,750.00 50000 9/28/1995 $39.25 $17.00 $22.25 $1,112,500.00 50000 9/28/1995 $30.75 $17.00 $13.75 $687,500.00 $3,431,250.00
S. Wyly 300000 100000 9/28/1995 $27.88 $17.00 $10.88 $1,087,500.00 100000 9/28/1995 $39.25 $17.00 $22.25 $2,225,000.00 100000 9/28/1995 $30.75 $17.00 $13.75 $1,375,000.00 $4,687,500.00
60. In addition to the stock option grants listed above, in 1995 and 1996 the
Compensation Committee and/or the SO Committee repriced certain Michaels stock
23 Case 3:06-cv-01083 Document 11-1 Filed 07/27/2006 Page 24 of 48
options (the "Repriced Options") that were previously granted to the Option Recipient
Defendants, thus granting to the Option Recipient Defendants a lower exercise price
than that which was awarded at the time of the original stock option grant.
61. The Repriced Options and the effective monetary benefit realized by each
of the Option Recipient Defendants, are listed as follows2:
Total Individual Options Options Date of Old New Price Effective Name Repriced Repriced Repricing Price Price Difference Benefit
Bolen 120000 30000 3/29/1996 $16.63 $14.00 $2.63 $78,750.00 90000 3/29/1996 $16.75 $14.00 $2.75 $247,500.00 $326,250.00
Magnuson 77500 5000* 3/4/1996 $16.75 $12.50 $4.25 $21,250.00 7500* 3/4/1996 $16.75 $12.50 $4.25 $31,875.00 15000* 3/4/1996 $16.75 $12.50 $4.25 $63,750.00 15000* 3/4/1996 $16.75 $12.50 $4.25 $63,750.00 35000* 3/4/1996 $16.75 $12.50 $4.25 $148,750.00 $329,375.00
Morris 277500 15900* 3/4/1996 $16.75 $12.50 $4.25 $675,750.00 100000 3/4/1996 $16.75 $12.50 $4.25 $425,000.00 18500 3/4/1996 $13.13 $12.50 $0.63 $11,562.50 $1,112,312.50
Miller 150000 150000 3/4/1996 $16.75 $12.50 $4.25 $637,500.00 $637,500.00
Rittenhouse 50000 25000* 3/4/1996 $16.75 $12.50 $4.25 $106,250.00 25000 3/4/1996 $12.88 $12.50 $0.38 $9,375.00 $115,625.00
Springer 5000
2 Repriced Options that have an asterik were repriced in 1995 and 1996.
24 Case 3:06-cv-01083 Document 11-1 Filed 07/27/2006 Page 25 of 48
5000 3/4/1996 $16.25 $12.50 $3.75 $18,750.00 $18,750.00
Sullivan 247500 245000 3/4/1996 $16.75 $12.50 $4.25 $1,041,250.00 2500 3/4/1996 $13.13 $12.50 $0.63 $1,562.50 $1,042,812.50
As indicated above, each of the Option Recipient Defendants who received Repriced
Options received an immediate benefit from such repricing. At the time of the repricing,
the exercise price of the options was above the then-current market price of the
Company's common stock, thus eliminating any profit that the Option Recipient
Defendants could derive from exercising their options. Therefore, in order to provide
the Option Recipient Defendants with profitable options, the Compensation Committee
and/or SO Committee repriced the options so that they were at or below the then-
current market price of the Company's common stock. As a direct result of being
granted the Repriced Options, the Option Recipient Defendants effectively received
62. Pursuant to the Company's stock option plan, the exercise price of each
stock option shall not be less than 100% of the fair market value of the Company's
common stock on the date the option is granted. Pursuant to the Company's annual
proxy statements in which each of the aforementioned stock option grants was
announced, all grants were purportedly made at or above 100% of the fair market value
of the Company's stock as of the date of the respective grant.
63. Pursuant to APB 25, the applicable GAAP provision at the time of the
foregoing stock option grants, if the market price on the date of grant exceeds the
exercise price of the options, the company must recognize the difference as an
expense.
25 Case 3 :06-cv-01083 Document 11-1 Filed 07/27/2006 Page 26 of 48
64. Pursuant to Section 162( m) of the Tax Code, 26 U.S.C. § 162(m)
("Section 162(m)"), compensation in excess of $1 million per year, including gains on stock options, paid to a corporation's five most highly-compensated officers is tax deductible only if: (i) the compensation is payable solely on account of the attainment of one or more performance goals; (ii) the performance goals are determined by a compensation committee comprised solely of two or more outside directors, (iii) the material terms under which the compensation is to be paid, including the performance goals, are disclosed to shareholders and approved by a majority of the vote in a separate shareholder vote before the payment of the compensation, and (iv) before any payment of such compensation, the compensation committee certifies that the performance goals and any other material terms were in fact satisfied.
65. In a striking pattern that could not have been the result of chance, each and every one of the foregoing stock option grants was dated just before a substantial rise in Michaels' stock price.
66. The purported grant dates set forth therein were not the actual dates on which the stock option grants were made. Rather, at the behest of the Option Recipient
Defendants, the Director Defendants improperly backdated the stock option grants to make it appear as though the grants were made on dates when the market price of
Michaels' stock was lower than the market price on the actual grant dates. This improper backdating, which violated the terms of the Company's stock option plans, resulted in option grants with lower exercise prices, which improperly increased the value of the options to the Option Recipient Defendants, and improperly reduced the amounts the Option Recipient Defendants had to pay the Company upon exercise of the options.
26 Case 3:06-cv-01083 Document 11-1 Filed 07/27/2006 Page 27 of 48
Similar to the unlikely pattern with respect to the stock options granted to the Option Recipient Defendants, each and every one of the Repriced Options was repriced just after a sharp drop in Michaels' stock price to a price that was below the original exercise price of the options, and just before a substantial rise in Michaels' stock price to a price that was well above the new exercise price of the options.
67. Furthermore, certain of the Option Recipient Defendants were granted
Repriced Options at $16.75 per share on August 29, 1995, but then, after the
Company's stock price tumbled by $4.25 per share (25.4%) to $12.50 per share on
March 4, 1996, the very same options that were repriced in 1995 were again repriced in
1996. The Option Recipient Defendants who were the beneficiaries of this double- repricing of their stock options were Magnuson (77,500 Repriced Options), Morris
(159,000), Rittenhouse (25,000), and Sullivan (245,000).
68. At the behest of the Option Recipient Defendants, the Director Defendants improperly backdated the option repricings to make it appear as though the repricings were made on dates when the market price of Michaels' stock was lower than the market price on the actual repricing dates. This improper backdating, which violated the terms of the Company's stock option plans, resulted in option grants with lower exercise prices, which improperly increased the value of the options to the Option
Recipient Defendants, and improperly reduced the amounts the Option Recipient
Defendants had to pay the Company upon exercise of the options.
Dissemination of False Financial Statements
69. As a result of the improper backdating of stock options, the Company, with the knowledge, approval, and participation of each of the Individual Defendants:
a. violated the terms of the Company's shareholder-approved stock option plans;
b. violated GAAP by failing to recognize compensation expenses incurred when the improperly backdated options were granted and/or repriced; and 27 Case 3 :06-cv-01083 Document 11-1 Filed 07/27/2006 Page 28 of 48
c. violated Section 162(m) by taking tax deductions based on stock option grants that were not payable solely on account of the attainment of one or more performance goals and violated the terms of the Company's shareholder-approved stock option plans; and
d. produced and disseminated to Michaels shareholders and the market false financial statements that improperly recorded and accounted for the backdated option grants and repricings.
70. The Company, with the knowledge, approval , and participation of each of the Individual Defendants, disseminated its false financial statements in, inter alia, the following Form 10-K filings:
a. Form 10-K405 for fiscal year ended January 30, 1994, filed with the SEC on April 29, 1994 and signed by Defendants Bush , Hanlon, Miller, Morris , C. Wyly, and S. Wyly;
b. Form 10-K405 for fiscal year ended January 29, 1995, filed with the SEC on May 1, 1995 and signed by Defendants Bush, Miller, Morris, C. Wyly, and S. Wyly;
c. Form 10-K405 for fiscal year ended January 28, 1996, filed with the SEC on April 29, 1996 and signed by Defendants Morris, Rouleau, C. Wyly, and S. Wyly;
d. Form 10-K for fiscal year ended February 1, 1997, filed with the SEC on May 2, 1997, and signed by Defendants Hanlon, Miller, Rouleau, C. Wyly, and S. Wyly;
e. Form 10-K405 for fiscal year ended January 31, 1998, filed with the SEC on May 1, 1998, and signed by Defendants Hanlon, Miller, Rouleau, C. Wyly, and S. Wyly;
f. Form 10-K for fiscal year ended January 30, 1999, filed with the SEC on April 30, 1999, and signed by Defendants Hanlon, Miller, Rouleau, C. Wyly, and S. Wyly;
g. Form 10-K for fiscal year ended January 29, 2000, filed with the SEC on April 28, 2000, and signed by Defendants Hanlon, Miller, Rouleau, C. Wyly, and S. Wyly;
h. Form 10-K405 for fiscal year ended February 3, 2001, filed with the SEC on April 30, 2001, and signed by Defendants Hanlon, Marcus, Rouleau, C. Wyly, and S. Wyly; and 28 Case 3 :06-cv-01083 Document 11-1 Filed 07/27/2006 Page 29 of 48
Form 10-K for fiscal year ended February 2, 2002, filed with the SEC on April 12, 2002, and signed by Defendants Hanlon, Marcus, Rouleau, C. Wyly, and S. Wyly.
71. Furthermore, from at least 1993 to 2001, the Company, with the knowledge, approval, and participation of each of the Individual Defendants, for the purpose and with the effect of concealing the improper option backdating, disseminated to shareholders and filed with the SEC annual proxy statements that falsely reported the dates of stock option grants and repricings.
72. Defendants Wyly, Jr. and Wyly are now the subject of investigations, by
New York Prosecutors and the SEC, related to concealed personal stock holdings held in family owned or benefiting trusts . On February 23, 2005, TheStreetcom published an article titled, "Michaels Stores Gets Grand Jury Subpoena," which stated in part: -
New York prosecutors want information from Michaels Stores about shares held in trusts that may be tied to the family of Chairman Charles Wyly.
The Securities and Exchange Commission is also investigating, Michaels said in a post-close press release.
The nation's biggest retail chain of arts and crafts supplies said some of the trusts had acquired shares and options "in transactions directly or indirectly" with Charles Wyly and his brother, Vice Chairman Sam Wyly. Some of the securities in question also were acquired through a 1999 private placement with the company.
"The Company understands that Charles and Sam Wyly and certain of their family members are direct or contingent beneficiaries of irrevocable non-U.S. trusts," the company said. "Based on information available to the Company, the Company's SEC filings have not reported those securities as beneficially owned by Charles and Sam Wyly."
In a 1996 regulatory filing about the private placement, the company said it sold 2 million shares at $12.50 apiece to "entities owned by independent trusts of which family members of Sam 29 Case 3 :06-cv-01083 Document 11-1 Filed 07/27/2006 Page 30 of 48
Wyly and Charles J. Wyly, Jr. are beneficiaries." The sales took place in three separate transactions.
In the same filing, Michaels discussed how the trusts exercised a series of options to purchase shares that "provided the Company with $20 million of additional capital in 1997."
Late Wednesday, Michaels 161140 cents to $31.35.
73. On April 8, 2005, the Dallas Morning News published an article entitled,
"Michaels execs to forfeit profits Wyly brothers amend SEC filings to reflect unreported holdings." The article provided in part:
Michael Stores Inc. chairman Charles J. Wyly and vice chairman Sam Wyly plan to turn over to the company the profits made from the sale of family-owned Michaels stock held in offshore trusts.
The Irving-based arts and crafts retailer announced the brothers' plans on Friday.
The company previously disclosed an investigation by the New York County district attorney's office and the Securities and Exchange Commission.
The company also said that the Wyly brothers have updated SEC filings to include the shares beneficially owned by them through family members and held in the trusts. Those shares previously hadn't been reported.
The most recent filings show the Wylys with nearly 8 percent alike company's stock, nearly twice what had previously been reported.
"Charles Wyly and Sam Wyly filed these schedules with the Securities and Exchange Commission to ensure full disclosure regarding certain family-related investments in Michaels Stores," said Susan Tiholiz, spokeswoman for the Wyly family.
A spokeswoman for the district attorney's office had no comment on the investigation Friday. Michaels said it continues to cooperate with the district attorney and the SEC.
Although the filings didn't indicate the size of the profits that would be turned over to Michaels, the company said it doesn't expect the reimbursements to have an effect on its previously reported financial statements. 30 Case 3 :06-cv-01083 Document 11-1 Filed 07/27/2006 Page 31 of 48
Southwest Securities analyst Ozarslan Tangun wrote in a report Friday that he considered the Wylys' reporting issues a "non-event for Michaels."
Michaels stock fe1144 cents to close at $36.06.
The reporting discrepancy came to light in February when the New York County district attorney's office said it was examining stock transactions between offshore trusts and Charles and Sam Wyly, who are longtime Texas investors.
Michaels received a grand jury subpoena Feb. 17 from the district attorney's office asking for documents and records relating to offshore trusts that held Michaels shares on behalf of Wyly family members.
The Wyly brothers had said they owned an aggregate of 4.2 percent of Michaels' shares. The new fling says they beneficially own 10,868,352 shares of the company's stock, or 7.9 percent.
The 69-page document filed Friday includes detailed transactions dating to 1992 that involved shares held in trusts for various family members and registered on the Isle of Man, a small but well-known tax haven in the Irish Sea.
In general, investors who own 5 percent or more of a company's stock must disclose those holdings in a report to the SEC, according to Spence Barasch, an associate administrator in the agency's Fort Worth office, who said he is not familiar with this case.
However, the reporting requirements for company officers and directors are more stringent. They are required to file a different type of report regardless of how much stock they own, buy or sell, Mr. Barasch said.
In the past, the Wyly brothers did not include in this report purchases and sales of Michaels' shares held in the offshore trusts as required, but they "have informed the company they will," according to Michaels.
74. Defendants Wyly, Jr. and Wyly breached fiduciary duties owed to
Michaels by failing to properly disclose their holdings of the Company's shares.
Moreover, Defendants Wyly, Jr.' s and Wyly's failure to fully disclose their holdings has
31 Case 3 :06-cv-01083 Document 11-1 Filed 07/27/2006 Page 32 of 48
rendered the Company's SEC filings filed before, during and after the Relevant Period, false and misleading because those filings failed to accurately disclose the holdings of the Company's Chairman and Vice Chairman, as required by applicable SEC regulations. These actions have further exposed the Company to potential liability for violations of federal securities laws and have also further tarnished the Company's once valuable corporate image.
75. Defendants Wyly, Jr. and Wyly have further breached their fiduciary duties of loyalty and good faith to the Company through their self dealing in causing trusts under their control to exercise and sell Michaels stock options while failing to report the profits from those sales to the Company. As a result, the Company's SEC filings filed before and during the Relevant Period were false and misleading as
Defendants Wyly, Jr.'s and Wyly' s stock sales were inaccurately reported as required by applicable SEC regulations.
76. As a result of the Individual Defendants actions, Michaels' market capitalization has been damaged by over 50% or over $1.7 billion. At the same time that the Defendants were causing Michaels to suffer such devastation of its market capitalization, the Insider Selling Defendants fared much better by selling over $20.3 million of their personally held stock.
77. On March 18 , 2006, The Wall Street Journal published an article entitled "The Perfect Payday; Some CEOs reap millions by landing stock options when they are most valuable; Luck -- or something else?" The article provided in pertinent part:
On a summer day in 2002, shares of Affiliated Computer Services Inc. sank to their lowest level in a year. Oddly, that was good news for Chief Executive Jeffrey Rich.
32 Case 3 :06-cv-01083 Document 11-1 Filed 07/27/2006 Page 33 of 48
His annual grant of stock options was dated that day, entitling him to buy stock at that price for years. Had they been dated a week later, when the stock was 27% higher, they'd have been far less rewarding. It was the same through much of Mr. Rich's tenure: In a striking pattern, all six of his stock-option grants from 1995 to 2002 were dated just before a rise in the stock price, often at the bottom of a steep drop.
Just lucky? A Wall Street Journal analyst suggests the odds of this happening by chance are extraordinarily remote -- around one in 300 billion. The odds of winning the multistate Powerball lottery with a $1 ticket are one in 146 million.
Suspecting such patterns aren't due to chance, the Securities and Exchange Commission is examining whether some option grants carry favorable grant dates for a different reason: They were backdated. The SEC is understood to be looking at about a dozen companies' option grants with this in mind.
The Journal's analysis of grant dates and stock movements suggests the problem may be broader. It identified several companies with wildly improbable option-grant patterns. While this doesn't prove chicanery, it shows something very odd: Year after year, some companies' top executives received options on unusually propitious dates.
The analysis bolsters recent academic work suggesting that backdating was widespread, particularly from the start of the tech- stock boom in the 1990s through the Sarbanes-Oxley corporate reform act of 2002. If so, it was another way some executives enriched themselves during the boom at shareholders' expense. And because options grants are long-lived, some executives holding backdated grants from the late 1990's could still profit from them today.
Stock options give recipients a right to buy company stock at a set price, called the exercise price or strike price. The right usually doesn't vest for a year or more, but then it continues for several years. The exercise price is usually the stock's 4 p.m. price on the date of the grant, an average of the day's high and low, or the 4 p.m. price the day before. Naturally, the lower it is, the more money the recipient can potentially make someday by exercising the options.
Which day's price the options carry makes a big difference. Suppose an executive gets 100,000 options on a day when the stock is at $30. Exercising them after it has reached $50 would bring a profit of $20 times 100,000, or $2 million. But if the grant date was
33 Case 3 :06-cv-01083 Document 11-1 Filed 07/27/2006 Page 34 of 48
a month earlier and the stock then was at, say, $20, the options would bring in an extra $1 million.
78. Two days later, on March 20 , 2006 , Michaels issued a press release (the
"March 20, 2006 Press Release") announcing that Michael's "Board has decided to begin a process to explore strategic alternatives to enhance shareholder value including, but not limited to, a potential sale of the Company." In the March 20, 2006
Press Release, Michaels also announced that R. Michael Rouleau was retiring as the
Company's President and CEO.
79. Although it would not become clear until June of 2006, the Company's announcement that it was up for sale was related, at least in part, to the revelations regarding options backdating in the Wall Street Journal article.
80. On June 9, 2006, in a Form 8-K filed with the SEC, the Company issued the following press release:
IRVING, Texas - June 8, 2006 - Michaels Stores, Inc. (NYSE: MIK) today filed a Rule 12b-25 filing related to its April 29, 2006 Form 10-Q filing. Based on recent media reports regarding historical stock option practices at other publicly traded companies, the Company's Audit Committee has initiated an internal review on a proactive basis into the Company's historical stock option grant practices. The Audit Committee's internal review is being conducted with the assistance of independent legal counsel and outside accounting experts. The Audit Committee has not reached any final conclusions as the internal review is not complete and is continuing.
Due to the volume of data subject to this review, the Company has been unable to complete and file by the prescribed due date its Quarterly Report on Form 10-Q for the fiscal quarter ended April 29, 2006. The Company is working diligently to file its Quarterly Report on Form 10-Q by the fifth calendar day following the required filing date as permitted by Rule 12b-25. At this time, the Company is unable to determine whether any accounting adjustment might be required, the final amount of any accounting adjustment, if required, or whether such an adjustment will require a restatement of prior period financial statements or will be reflected in its fiscal 2006 results of operations. The Company is 34 Case 3 :06-cv-01083 Document 11-1 Filed 07/27/2006 Page 35 of 48
also evaluating whether previously deducted compensation expense related to exercised stock options might not be deductible under Section 162(m) of the Internal Revenue Code, which could result in additional taxes and interest due related to prior deductions and the loss of future deductions. However, the Company has not completed its assessment of these tax matters.
The internal review is focused principally on the time period from 1990 to 2001. Since October 2001, the Company has utilized pre- determined effective grant dates and generally pre-determined grant levels for its stock option program. Stock option grants from October 2001 to the present have consistently followed these processes.
81. On June 13, 2006, in a Form 10-Q filed with the SEC, the Company confirmed that there may be discrepancies with regard to Company stock options granted before 2001, and accounting discrepancies in its financials related to stock options granted before 2001:
The Company's Audit Committee has initiated an internal review on a proactive basis into the Company's historical stock option practices, including a review of the Company's underlying option grant documentation and procedures and related accounting. In accordance with New York Stock Exchange requirements, the Audit Committee is composed solely of independent directors. The Audit Committee's internal review is being conducted with the assistance of independent legal counsel and outside accounting experts. The Company's independent registered public accounting firm has been informed about the internal review. The Company has also voluntarily reported the commencement of this review to the Securities and Exchange Commission.
The internal review is focused principally on the period from 1990 to 2001. Since October 2001, the Company has followed a process of utilizing pre-determined effective grant dates and generally pre-determined grant levels for its stock option program. Stock option grants from October 2001 to the present have consistently followed this process.
Prior to October 2001, the Company granted stock options principally utilizing a process in which an authorized committee of the Board would approve stock option grants from time to time through unanimous written consent resolutions with specified effective dates that generally preceded the date on which the
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consents were fully executed by members of the applicable committee.
The Company has historically considered the effective date specified in the written consents by the applicable committee as the accounting measurement date for determining stock-based compensation expense under APB No. 25, Accounting for Stock Issued to Employees. For the period under review, based on preliminary findings, the Company presently believes that, with respect to certain non-routine grants, the measurement date may differ from the measurement date used in its accounting prior to 2001 . Based on the Company's current analysis, non-cash compensation cost could potentially be recorded in an amount up to approximately $60 million, which relates to periods prior to fiscal 2001 . Therefore, the amounts do not affect results of operations or the statement of cash flows in any period presented in the Company's Annual Report on Form 10-K for fiscal 2005. The Company expects the effect, if any, on its financial position in each of the years presented in the fiscal 2005 Form 10-K would be a reclassification of any unrecorded non-cash compensation cost between retained earnings and accumulated paid in capital, with no impact on total stockholders' equity. Based on the Company's current analysis, any potential misstatement of the Company's financial statements presented in its fiscal 2005 Form 10-K is not considered material.
As the Audit Committee's review is not complete and is ongoing as of the date of this filing, additional information may become available which could cause the current estimate of potential unrecorded compensation to change materially. Once the review is complete, the Company will make a final determination as to what, if any, estimated unrecorded stock-based compensation cost should be recorded in the Company's financial statements. However, based on its current analysis and estimates, the Company does not believe a restatement of prior period financial statements will be required.
The Company is also evaluating whether previously deducted compensation related to exercised stock options might be non- deductible under Section 162(m) of the Internal Revenue Code, which could result in additional taxes and interest related to the prior deductions. The Company currently believes that the amount of lost tax deductions, if any, previously claimed would not be material to results of operations, cash flow, or the Company's financial position, but has not finalized its assessment of this matter. (Emphasis added.)
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82. On June 15, 2006, The Wall Street Journal published an article that reported that the Company understated compensation expenses by as much as $60 million between 1990 and 2001 because of stock options it awarded with effective dates that were earlier than the date on which they were approved:
Crafts retailer Michaels Stores Inc. said it understated compensation expenses by as much as $60 million between 1990 and 2001 because of stock options it awarded with effective dates that were earlier than the date on which they were approved.
The Irving, Texas, company, which previously delayed reporting financial results for its first quarter ended April 29, said the discovery, which emerged from an internal options investigation, will require reclassification of certain financial results but it doesn't expect to make any restatements. Michaels said it changed its practices in 2001 to give options awards on set dates, and its investigation didn't uncover any anomalies since then.
Stock options give an executive the opportunity to profit if the company's share price advances . Typically, an option is supposed to be granted with a "strike ," or exercise , price set at the market value of the stock on the date the company's board approves it. Choosing a different date for the exercise price could potentially violate federal securities laws.
Michaels didn't specify which options were involved or which executives got them. It said that its practice had been to account for "certain non-routine grants" as if they were awarded on the date a board committee voted for them. However, the strike price of the options was based on an earlier "effective date" of the options. A Michaels' spokesman declined to say when or how that effective date was chosen.
83. A little more than a week later on June 15, 2006, the Company announced that it had received a letter from the SEC requesting that it preserve all documents concerning the granting of stock options from 1990 through the present.
Moreover, Michaels indicated that the SEC intends to request production of these documents in the future.
84. A day later on June 16, 2006, the Company received a grand jury
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subpoena from the U.S. District Court for the Southern District of New York that also requested documents relating to the granting of stock options.
PROPOSED ACQUISITION
85. Just three (3) months after the Company announced it was exploring
"strategic alternatives " to purportedly "enhance shareholder value ," the Company issued a press release entitled "Michaels Stores Announces Recapitalization
Agreement with Bain Capital and The Blackstone Group for More than $6 billion, or
$44 per share." The release dated June 30, 2006 stated in part:
Michaels Stores, Inc. today announced that, following a comprehensive review of strategic alternatives that began on March 20, 2006, its board of Directors has approved a transaction to recapitalize the Company with investment by two leading global private investment firms, Bain Capital and The Blackstone Group.
Under the terms of the agreement, following the transaction Bain Capital and Blackstone will own substantially all of the outstanding shares of Michaels Stores, and the shareholders will receive $44 per share in cash, representing a transaction value of more than $6 billion. This price reflects a premium of nearly 30 percent to the closing price of the stock prior to the Company's announcement on March 20, 2006 regarding its review of strategic alternatives. Bain Capital and Blackstone will own equal stakes in the company upon completion of the transaction.
Said Charles J. Wyly, Jr., Chairman of Michaels Stores, This transaction delivers outstanding value for all Michaels Stores' shareholders and represents a powerful endorsement of our Company' s strategy , performance and business prospects. Over the past decade , the Company has become the nation ' s leading arts and crafts retailer and is well-positioned for future growth. We have a proven strategy and attractive assets, including more than 1,000 stores nationwide , a strong and loyal customer base, and capable , experienced management and associates.
We are delighted to partner with Michaels' management team to help build on its already strong position in an attractive industry, and capitalize on the significant growth opportunities that lie ahead," said Mat Levin, a Managing Director at Bain Capital. Our deep experience in the retail sector reinforces our conviction that Michaels has the best store locations, a broad and attractive 38 Case 3 :06-cv-01083 Document 11-1 Filed 07/27/2006 Page 39 of 48
assortment of products for crafters of all ages, and a sustainable competitive advantage thanks to smart investments in systems and infrastructure. We look forward to helping Michaels achieve its full long-term potential."
"Michaels is a best-in-class retailer in a highly attractive category," said Michael Chae, Senior Managing Director of The Blackstone Group. The Company is very well-positioned today, and we believe there is significant opportunity still ahead of it. We look forward to partnership with the Michaels' management team to pursue these exciting opportunities."
Completion of the transaction is contingent on regulatory review and approval by the shareholders of Michaels Stores and is expected to occur by the end of the calendar year.
JP Morgan acted as financial advisor and Cravath, Swaine and Moore acted as legal advisors to Michaels Stores and to its Board of Directors in connection with the review of strategic alternatives and with this transaction.
Supporting a special committee of the board of Directors were Goldman Sachs and Wachtell, Lipton, Rosen & Katz. Duetsche Bank, Bank of America and Credit Suisse acted as financial advisors, and Ropes & Gray LLP as legal advisor, to Bain Capital and Blackstone.
86. As a direct and proximate result of the Individual Defendants' foregoing breaches of fiduciary duties, the Company has sustained millions of dollars in damages, including, but not limited to, the additional compensation expenses and tax liabilities the Company was required to incur and loss of funds paid to the Company upon exercise of options.
87. Moreover, the Individual Defendants' backdating of option awards will divert funds directly from Michael's public stockholders to the pockets of the Individual
Defendants and other Michaels executives. As disclosed in the merger agreement between Michaels and the Buyout Group, filed with the SEC on July 6, 2006,
each unexercised Company Stock Option that is outstanding immediately prior to the Effective Time shall be canceled, with the holder of each such Company Stock Option becoming entitled to receive an amount in cash 39 Case 3 :06-cv-01083 Document 11-1 Filed 07/27/2006 Page 40 of 48
equal to (i) the excess, if any, of (A) the Merger Consideration over (B) the exercise price per share of Company Common Stock subject to such Company Stock Option, multiplied by (ii) the number of shares of Company Common Stock subject to such Company Stock Option.
88. Thus, a significant portion of the total consideration the Buyout Group is willing to pay for Michaels in the Acquisition is being unfairly diverted to Company insiders whose options will be cashed out for far more money than they would be worth had the Individual Defendants not improperly backdated the option grants.
CLASS ACTION ALLEGATIONS
89. Plaintiff brings this action individually and as a class action, pursuant to
Fed. R. Civ. P. Rule 23, on behalf of all common stockholders of the Company (the
"Class"). Excluded from the Class are Defendants herein and any person, firm, trust, corporation or other entity related to or affiliated with any of the defendants.
90. This action is properly maintainable as a class action.
91. The Class is so numerous that joinder of all members is impracticable.
As of March 31, 2006, there were approximately 132,068,710 million shares of
Michaels common stock outstanding.
92. There are questions of law and fact which are common to the Class including, inter alia, the following:
a. whether the Acquisition is unfair to the Class;
b. whether Plaintiff and the other members of the Class would be irreparably damaged were the transactions complained of herein consummated;
c. whether Defendants have breached their fiduciary and other common law duties owed by them to Plaintiff and the other members of the Class; and
d. whether the Class is entitled to injunctive relief or damages as a result of the wrongful conduct committed by Defendants. 40 Case 3 :06-cv-01083 Document 11-1 Filed 07/27/2006 Page 41 of 48
93. Plaintiff is committed to prosecuting this action and has retained competent counsel experienced in litigation of this nature. Plaintiff's claims are typical of the claims of the other members of the Class and Plaintiff has the same interests as the other members of the Class. Accordingly, Plaintiff is an adequate representative of the Class and will fairly and adequately protect the interests of the Class.
94. The prosecution of separate actions by individual members of the Class would create the risk of inconsistent or varying adjudications with respect to individual members of the Class which would establish incompatible standards of conduct for
Defendants, or adjudications with respect to individual members of the Class which would as a practical matter be dispositive of the interests of the other members not parties to the adjudications or substantially impair or impede their ability to protect their interests.
95. Defendants have acted, or refused to act, on grounds generally applicable to , and causing injury to , the Class and , therefore , preliminary and final injunctive relief on behalf of the Class as a whole is appropriate.
DERIVATIVE AND DEMAND EXCUSED ALLEGATIONS
96. Plaintiff brings this action derivatively in the right and for the benefit of the
Company to redress Defendants ' breaches of fiduciary duties and unjust enrichment.
97. Plaintiff is an owner of Michaels' common stock and was an owner of
Michaels common stock at all times relevant hereto.
98. Plaintiff will adequately and fairly represent the interests of the Company and its shareholders in enforcing and prosecuting its rights.
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99. As a result of the facts set forth herein, Plaintiff has not made any demand on the Michaels Board of Directors to institute this action against the Individual
Defendants. Such demand would be a futile and useless act because the Board is incapable of making an independent and disinterested decision to institute and vigorously prosecute this action.
100. The Board currently consists of six directors: Defendants Hanlon,
Marcus , Minyard , Smith, C. Wyly, and S. Wyly. The following directors are incapable of independently and disinterestedly considering a demand to commence and vigorously prosecute this action:
a. C. Wyly and S. Wyly, because they are directly interested in the improperly backdated stock option grants and repriced options complained of herein as both recipients of backdated options and Repriced Options and as members of the Compensation Committee. Moreover, by colluding with the Director Defendants as alleged herein, C. Wyly and S. Wyly have demonstrated that they are unable or unwilling to act independently of the Director Defendants. Due to their failure to properly disclose their personal holdings held in trusts tied to family owned or benefiting trusts to the Company, as alleged more fully herein, Defendants Wyly and Wyly, Jr. each face a substantial likelihood of liability for breaches of their fiduciary duties of loyalty, good faith and due care. These Defendants' failures to make proper disclosures have rendered Michaels' SEC filings filed before and during the Relevant Period false and misleading. Thus, the Company's public image has been further tarnished and it now faces further potential liability for violations of federal securities laws. Defendants Wyly and Wyly, Jr., who are brothers, have breached their fiduciary duties and will not institute action against each other or the remainder of the Individual Defendants. Thus, these Defendants lack the requisite disinterest and independence to consider Plaintiffs demand.
b. The principal professional occupation of Defendants Wyly, Jr. and Wyly are their positions as Chairman and Vice Chairman of the Board of Michaels, pursuant to which they received and continue to receive substantial monetary compensations and other benefits. Specifically, Defendant 42 Case 3:06-cv-01083 Document 11-1 Filed 07/27/2006 Page 43 of 48
Wyly, Jr. received $37 , 500 per month and Wyly received $18,750 per month during the Relevant Period . For FY:04, FY:03, FY:02 and FY:01, Michaels paid Defendant Wyly, Jr. $523,460, $471,355 , $471,365 and $337,500 respectively, in salary , bonus and other compensation, and granted him 235,000, 235,000, 117,500 and 235 , 000 options to purchase Michaels stock , respectively . Defendants Wyly, Jr. and Wyly lack independence from Defendants Marcus , Hanlon and Minyard , Defendants who are not disinterested and/or independent and exert influence over Wyly, Jr.'s and Wyly's compensation by virtue of their positions as members of the Compensation Committee . The Compensation Committee has the authority to review and approve Wyly, Jr.'s and Wyly's base salary, bonus and equity compensation. This lack of independence renders Defendants Wyly, Jr. and Wyly incapable of considering a demand to commence to vigorously prosecute this lawsuit. Therefore, any demand upon Defendants Wyly, Jr. and Wyly would have been futile.
c. The Individual Defendants, because of their inter-related business, professional and personal relationships, have developed debilitating conflicts of interest that prevent the Board members of the Company from taking the necessary and proper action on behalf of the Company as requested herein. In addition to the conflicts that exist as a result of their participation in the improper accounting and insider selling, as detailed herein supra, Defendants Wyly, Jr. and Wyly are subject to prejudicial entanglements. Defendants Wyly, Jr. and Wyly are brothers and have long-standing personal and business relationships. They founded Earth Resources Company, Maverick Capital, and were both directors of Scottish Annuity and Life Holdings, Ltd. Because of their family, business and professional relationships, neither Defendant Wyly, Jr. nor Defendant Wyly would have taken the action requested by plaintiff herein against one another or the remainder of the Individual Defendants.
d. Hanlon and Marcus, because as members of the Compensation Committee and SO Committee, they directly participated in and approved the misconduct alleged herein and are substantially likely to be held liable for breaching their fiduciary duties, as alleged herein. Moreover, by colluding with the Option Recipient Defendants as alleged herein, Hanlon and Marcus have demonstrated that they are unable or unwilling to act independently of the Option Recipient Defendants;
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e. Hanlon and Marcus because, as members of the Audit Committee, they directly participated in and approved the misconduct alleged herein and are substantially likely to be held liable for breaching their fiduciary duties, as alleged herein. Moreover, by colluding with the Option Recipient Defendants, as alleged herein, Hanlon and Marcus have demonstrated that they are unable or unwilling to act independently of the Option Recipient Defendants.
101. Furthermore, demand is excused because the misconduct complained of herein was not, and could not have been, an exercise of good faith business judgment.
COUNT I
AGAINST THE INDIVIDUAL DEFENDANTS FOR BREACH OF FIDUCIARY DUTY
102. Plaintiff incorporates by reference all preceding and subsequent paragraphs as if set forth fully herein.
103. As alleged in detail herein, each of the Individual Defendants had a fiduciary duty to refrain from unduly benefiting themselves and other Company insiders at the expense of the Company.
104. As alleged in detail herein, the Option Recipient Defendants breached their fiduciary duties by:
a. colluding with the Director Defendants to backdate stock option grants and repricings;
b. colluding with the Director Defendants to violate GAAP and Section 162(m);
c. colluding with the Director Defendants to produce and disseminate to Michaels shareholders and the market false financial statements that improperly recorded and accounted for the backdated option grants and repricings and concealed the improper backdating of stock option grants and repricings; and
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d. colluding with the Director Defendants to file false proxy statements in order to conceal the improper backdating of stock option grants and repricings.
105. The Option Recipient Defendants ' foregoing misconduct was not, and could not have been, an exercise of good faith business judgment. Rather, it was intended to, and did, unduly benefit themselves at the expense of the Company.
106. The Director and Officer Defendants breached their fiduciary duties by:
a. colluding with the Option Recipient Defendants to backdate stock option grants and repricings;
b. colluding with the Option Recipient Defendants to violate GAAP and Section 162(m);
c. colluding with the Option Recipient Defendants to produce and disseminate to Michaels shareholders and the market false financial statements that improperly recorded and accounted for the backdated option grants and repricings and concealed the improper backdating of stock option grants and repricings; and
d. colluding with the Option Recipient Defendants to file false proxy statements in order to conceal the improper backdating of stock option grants and repricings.
107. The Individual Defendants ' foregoing misconduct was not, and could not have been, an exercise of good faith business judgment. Rather, it was intended to, and did, unduly benefit the Option Recipient Defendants at the expense of the
Company.
108. As a direct and proximate result of the Individual Defendants' foregoing breaches of fiduciary duties, the Company has sustained millions of dollars in damages, as alleged herein.
COUNT II
AGAINST THE INDIVIDUAL DEFENDANTS
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FOR VIOLATION OF SECTION 10(b) OF THE SECURITIES EXCHANGE ACT AND RULE 10b-5 PROMULGATED THEREUNDER
109. Plaintiff incorporates by reference all preceding and subsequent paragraphs as if set forth fully herein.
110. Each of the Individual Defendants intentionally or recklessly employed devices, schemes, and artifices to defraud and engaged in acts, practices, and a course of business which operated as a fraud and deceit upon the Company.
111. The Company relied upon the Individual Defendants' fraud in granting the
Option Recipient Defendants options to purchase shares of Michaels' common stock.
112. As a direct and proximate result of the Individual Defendants' fraud the
Company has sustained millions of dollars in damages, including, but not limited to, the additional compensation expenses and tax liabilities the Company was required to incur and loss of funds paid to the Company upon exercise of options.
COUNT III
AGAINST THE OPTION RECIPIENT DEFENDANTS FOR UNJUST ENRICHMENT
113. Plaintiff incorporates by reference all preceding and subsequent paragraphs as if set forth fully herein.
114. The Individual Defendants were unjustly enriched by their receipt and retention of backdated stock option grants, as alleged herein, and it would be unconscionable to allow them to retain the benefits thereof.
115. To remedy the Individual Defendants' unjust enrichment, the Court should order them to disgorge to the Company all profits, benefits and other compensation that includes, but is not limited to, the backdated stock options they received, including the
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proceeds of any such options that have been exercised, sold, pledged, or otherwise monetized.
COUNT IV
AGAINST THE INDIVIDUAL DEFENDANTS HIEMENZ, ROULEAU, MARCHUS, DECARO, TUCKER, SPENCER, SADLER AND VANSTORY FOR INSIDER SELLING
116. Plaintiff incorporates by reference and realleges each and every allegation set forth above as if set forth fully herein.
117. At the time of Defendants' stock sales set forth herein, Defendants knew the information described above and sold Michaels stock on the basis of such information.
118. The information described above was proprietary non-public information concerning the Company's financial condition and future business prospects. It was was proprietary asset belonging to the Company, which the Insider Selling Defendants used for their own benefit when they sold Michaels stock.
119. Defendants' sale of Michaels common stock, while in possession and control of this material adverse non-public information was a breach of his fiduciary duty of loyalty and good faith.
120. Since they used the Company's proprietary information for their own gain, this constitutes a breach of the Insider Selling Defendants' fiduciary duties, the
Company is entitled to the imposition of a constructive trust on any profits Defendants obtained thereby.
WHEREFORE, Plaintiff demands judgment as follows:
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A. Against all of the Individual Defendants and in favor of the Company for the amount of damages sustained by the Company as a result of the Individual Defendants' breaches of fiduciary duties and statutory violations;
B. Awarding to Michaels restitution from the Individual Defendants, and each of them, and ordering disgorgement of all profits, benefits and other compensation obtained by these Defendants;
C. Granting appropriate equitable relief to remedy Defendants' breaches of fiduciary duties;
D. Awarding to plaintiff the costs and disbursements of the action, including reasonable attorneys' fees, accountants' and experts' fees, costs, and expenses; and
E. Granting such other and further relief as the Court deems just and proper.
JURY TRIAL DEMANDED
Plaintiff demands a trial by jury.
DATED: July 27, 2006 FEDERMAN & SHERWOOD
s/William B. Federman William B . Federman , TX Bar #00794935 120 N. Robinson Avenue, Suite 2720 Oklahoma City, OK 73102 Telephone: (405) 235-1560 Facsimile : (405) 239-2112 -and- 2926 Maple Avenue , Suite 200 Dallas , TX 75201
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