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In Re: Michaels Stores, Inc. Securities Litigation 06-CV-01083-Verified

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In Re: Michaels Stores, Inc. Securities Litigation 06-CV-01083-Verified 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 1 Case 3:06-cv-01083 Document 11-1 Filed 07/27/2006 Page 2 of 48 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 3 Case 3:06-cv-01083 Document 11-1 Filed 07/27/2006 Page 4 of 48 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. 4 Case 3:06-cv-01083 Document 11-1 Filed 07/27/2006 Page 5 of 48 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. 5 Case 3:06-cv-01083 Document 11-1 Filed 07/27/2006 Page 6 of 48 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. 6 Case 3:06-cv-01083 Document 11-1 Filed 07/27/2006 Page 7 of 48 30. Defendant James F. Tucker ("Tucker") at all relevant times served as the Executive Vice President-Chief Information Officer of Michaels.
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