1 Ronald Lovitt, CA Bar No. 40921 lovitt o lh-sf.com 2 J. Thomas Hannan, CA Bar No. 39140 3 ith(a lh-s£com Henry I. Bornstein, CA Bar No. 75885 4 hbomsteinna,sbcglobal.net LOVITT & HANNAN , INC. 5 900 Front Street, Suite 30 0 San Francisco, CA 94111 } A G 7006 6 22 Telephone: (415) 362-8769 7 Fax: (415) 362-7528 . ^ rsT GA N 8 Attorneys for Plaintiff E-FILING JO4 9 *Additional Counsel on Signature Page 10
11 UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA 12 SAN JOSE DIVISION
13 PHYLLIS JONES, 06- 5 Plaintiff Pi 14 , ) Civil Action No.
15 v. )
16 FRED D. ANDERSON, JAMES J . BUCKLEY, ) ROBERT CALDERONI, TIMOTHY D . COOK,) VERIFIED DERIVATIVE 17 GUERRINO DE LUCA, IAN DIERY, DANIEL) COMPLAINT FOR VIOLATION OF L. EILERS, G THE SECURITIES EXCHANGE ACT, 18 . FREDERIC FORSYTH, ) STEVEN P. JOBS, RONALD B. JOHNSON, ) BREACH OF FIDUCIARY DUTY , 19 MITCHELL MANDICH, JONATHAN ) AIDING AND ABETTING, UNJUST RUBINSTEIN, MICHAEL H . SPINDLER, ) ENRICHMENT . RESCISSION, 20 AVADIS TEVANIAN, JR., WILLIAM V. ) GROSS MISMANAGEMENT, AND CAMPBELL, MILLARD DREXLER , ) WASTE OF CORPORATE ASSET S 21 ARTHUR D. LEVINSON, and JEROME B. ) 22 YORK, ) Defendants, 23 DEMAND FOR JURY TRIAL and 24 APPLE COMPUTER, INC ., 25 Nominal Defendant . 26
27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No. ) - Page - 1 1 I. NATURE OF THE ACTION
2 1 . This is a shareholder 's derivative suit brought by Plaintiff, a shareholder of Apple
3 Computer, Inc. ("Apple"or the "Company") , on behalf of nominal defendant Apple against 4 certain current and former officers and members of Apple's Board of Directors . Plaintiff brings 5 claims for violation of the Securities Exchange Act of 1934 (the "Exchange Act") and Rules 6 7 promulgated thereunder, breach of fiduciary duty, aiding and abetting, unjust enrichment,
8 rescission, gross mismanagement , and corporate waste arising from the actions of the Individual
9 Defendants (defined below) in engaging in, or permitting others to engage in the deceptive
10 practice of backdating stock options gr anted to certain executives for the purpose of increasing
11 the value of these stock options without disclosing or reporting the additional compensation or 12 costs to the Corporation that resulted . 13 2. Between at least 1993 and 2001 (the "relevant period"), the Individual Defendants 14 15 received grants of stock options from the Company on unusually favorable dates when Apple
16 stock was trading at virtually the lowest price for the given period . Analysis of the fortuitous
17 timing of these option grants reveals that the pa ttern is not a coincidence , and that the grants
18 must have been backdated, in violation of applicable stock option plans , in order to provide the 19 Individual Defendants with the largest possible return on their stock, at the expense of Apple and 20 its public shareholders. 21 . In this case, in breach of their fiduciary duties of good faith, due care and loyalty 22 3 23 as officers and/or directors of Apple, during the relevant period, the Individual Defendants (as
24 defined below) engaged in a conce rted effort to improperly backdate stock option grants, which
25 options represented thousands of shares of Apple stock, to Apple executive officers. 26
27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No. ) - Page - 2 1 4. In furtherance of the backdating scheme, Defendants improperly reported an d
2 accounted for the stock option grants, in violation of Generally Accepted Accounting Principles 3 ("GAAP") 4 5. As a result, Apple's financial results, as reported and filed with the Securities and 5 Exchange Commission ("SEC"), were in violation of GAAP and contained materially false and 6
7 misleading statements and information concerning the backdated option grants . 8 6. These SEC filings, including proxy statements and quarterly and annual reports ,
9 I were disseminated to Apple's shareholders . 1 0 7. The backdating scheme violated not only the Company's shareholder -approved III I stock option plans, but the Exchange Act and applicable federal and state laws . 12 8. As a result of the Individual Defendants' stock option backdating scheme an d 13 related misconduct, the Individual Defendants have diverted millions of dollars of corporate 14
15 assets to senior Apple executives, caused Apple to incur additional compensation expenses and
16 tax liabilities, . as well as loss of funds paid to Apple upon the exercise of the options, and
17 subjected Apple to potential liability from regulators, including the SEC and Internal Revenue 18 Service. 19 9. The practice of backdating stock, though widespread, remained virtuall y 20 I undetected until academic research revealed patterns of stock option grants that could not b e 21 explained by chance . Professor Eric Lie of the Tippie College of Business at the University of 22
23 Iowa, hypothesized that at least some grant dates must have been determined retroactively ,
24 prompting the SEC to begin investigating the anomaly . In March 2006, The Wall Street Journa l
25 published a study it performed with the help of Professor Lie and Professor John Emerson, a 26 I statistician at Yale University, that tested Professor Lie's theory. Charles Forelle and James 27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No . ) -Page - 3 1 Bandler, The Perfect Payday, The Wall Street Journal, March 18, 2006 . That article identified a
2 number of companies at which executives had achieved stock paydays the likelihood of which 3 far exceeded that of winning the lottery. Since that date, more than 80 corporations have been 4 investigated by the SEC, the Department of Justice, or one or more United States Attorneys, or 5 have conducted internal investigations . 6
7 10. On June 29, 2006, Apple first disclosed that an internal investigation uncovered
8 irregularities related to the issuance of certain stock option grants . Apple subsequently reported
9 that the Company would delay filing its quarterly report and the likely need to restate prio r 10 reported financial results to properly account for past option grants . 11 H. PARTIES 12 A. Plaintiff. 13 11 . Plaintiff Phyllis Jones is a resident of Bensalem, Pennsylvania and an Appl e 14 shareholder. During the relevant time period, at the time of the injurious acts complained of 15 16 herein, Plaintiffheld and continues to hold shares of Apple stock.
17 B. Nominal Defendant.
18 12. Nominal Defendant Apple is a California corporation headquartered at 1 Infinit e 19 Loop, Cupertino, California 95014 . The Company's stock is publicly traded on the NASDAQ 20 under ticker symbol "AA-PL." According to its website, www.apple .com, "Apple ignited the 21 personal computer revolution in the 1970s with the Apple II and reinvented the personal 22 computer in the 1980s with the Macintosh . Today, Apple continues to lead the industry in 23
24 innovation with its award-winning desktop and notebook computers, OS X operating system, and
25 iLife and professional applications . Apple is also spearheading the digital music revolution with
26 its iPod portable music players and iTunes online music store ." According to its SEC filings, 27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No. ) - Page - 4 1 "[t]he Company designs, manufactures, and markets personal computers and related software,
2 services, peripherals, and networking solutions . The Company also designs, develops, and 3 markets a line of portable digital music players along with related accessories and services 4 including the online distribution of third-party music, audio books, music videos, short films, and 5 television shows. . . . The Company sells its products worldwide through its online stores, it s 6
7 own retail stores, its direct sales force, and third-party wholesalers, resellers, and value added
8 resellers." 2005 Form 10-K (filed December 1, 2005) .1
9 C. Officer Defendants.
10 13. Defendant Fred D . Anderson served as the Company's Executive Vice Presiden t 11 I and Chief Financial Officer from April 1996 to June 2004 . Anderson has also served on the 12 Company's Board of Directors since June 2004 . During his tenure, Mr . Anderson has sold more 13 than 5 million shares of stock for proceeds that exceed $80 million dollars . 14 f 15 14. Defendant James J . Buckley served as the President of Apple Americas as o
16 November 1995 ; Senior Vice President and President, Apple USA as of January 1994 ; the
1 7 Company's Vice President and General Manager, Higher Education Division, from April 1992 to
18 January 1994; Vice President, Northern Operations, from May 1991 to April 1992 ; Vice 19 President, Central Operations, from April 1988 to May 1991 ; Area director, North Central Area, 20 from May 1986 to April 1988 ; Director of K-12 and Higher Education Sales from January 1986 2 1 22
23
24 25 From 1993 through 1998, the Company's fiscal year ended on the last Friday of September. From 1999 to the present, the Company's fiscal year has ended on the last Saturday of 26 September . 27
28 VERIFIED DERIVATIVE COMPLAINT (Cause No. ) - Page - 5 1 to May 1986; and as K-12 and Higher Education Sales Manager from May 1985 to Januar y
2 1986. 3 15. Defendant Robert Calderoni served as the Company's Senior Vice President , 4 Finance and Operation Controller, from July 1996 to November 1997 . During his tenure, Mr . 5 Calderoni has sold at least 100,000 shares of Apple stock for proceeds that exceed $ 6 500,000
7 dollars.
8 16. Defendant Timothy D. Cook has served as the Company's Chief Operatin g
9 Officer from October 2005 to the present ; Executive Vice President, Worldwide Sales and 10 Operations from January 2002 to October 2005 ; Senior Vice President, Worldwide Operations 1 1 Sales, Service and Support from February 1998 to January 2002 ; and as Senior Vice President, 12 Software Engineering, as of February 1997 . During his tenure, Mr. Cook has sold more than six 13 14 million shares of Apple stock for proceeds that exceed $100 million dollars .
15 17. Defendant Guerrino De Luca served as the Company's Executive Vice President ,
1 6 Marketing until October 1997; President of Claris Corporation, an Apple subsidiary, during 17 1995; Vice President of Marketing and Sales for the Apple software division from 1994 to 1995 ; 18 Vice President and General Manager of the Personal Interactive Electronics Group for Apple 19 Europe from 1993 to 1994; and Vice President, Marketing, for Apple Europe from 1992 to 1993 . 20 18. Defendant Ian Diery served as the Company's Senior Executive Vice Presiden t 21
22 and General Manager, Computer Division from July 1993 to April 1995; Executive Vice
23 President, Worldwide Sales and Marketing from July 1992 to July 1993 ; and as Senior Vice
24 President of Apple and President, Apple Pacific Division, from October 1989 to July 1992 . 25 19. Defendant Daniel L . Eilers served as the Company's Senior Vice President, an d 26 President and CEO of Claris Corporation from March 1991 to December 1995 ; Vice President, 27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No . ) - Page - 6 I I Strategy and Corporate Development from 1989 to March 1991 ; Vice President, Strategic
2 Investments from November 1987 to 1989 ; Director of Strategic Investments from 1986 to 3 November 1987; Assistant Treasurer from 1984 to 1986; and Software Product Manager from 4 June 1982 to 1984 . During her tenure, Ms . Eilers has sold at least 55,000 shares of Apple stock 5 for proceeds that exceed $500,000 dollars . 6
7 20. Defendant G. Frederick Forsyth served as the Company's Senior Vice President,
8 Worldwide Operations from June 1993 to February 1997 ; Senior Vice President and General
9 Manager, Macintosh Systems Division, from April 1991 to June 1993 ; Senior Vice President,
10 Worldwide Manufacturing, from November 1990 to April 1991 ; and Vice President, Worldwide 11 Manufacturing Apple Products Division, from June 1989 to November 1990 . During his tenure, 12 Mr. Forsyth has sold at least 80,000 shares of Apple stock for proceeds that exceed $800,000 13 dollars. 14
15 21 . Defendant Steven P . Jobs has served as the Company's Chief Executive Officer
1 6 since 2000, and as Interim Chief Executive Officer from 1997 to 2000 . Jobs was also
17 responsible for various duties as a co-founder of the company, and has served as a director since 18 August 1997 . Apple has acknowledged that Mr . Jobs received ten million shares of backdated 19 stock options in January 2000 that were later cancelled in March 2003 in a transaction in which 20 Jobs exchanged options for five million shares of restricted stock. These shares were later sold 21 22 in March 2006 for nearly $300 million dollars . V
23 22 . Defendant Ronald B . Johnson has served as the Company's Senior Vice
24 President, Retail since approximately 2001 ; and as the Senior Vice President, New Busines s
25 Development, from approximately January 2000 to 2001 . During his tenure, Mr . Johnson has 26 sold nearly two million shares of Apple stock for proceeds that exceed $80 million dollars . 27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No . ) - Page - 7 1 23. Defendant Mitchell Mandich served as the Company's Senior Vice President, 2 Worldwide Sales, from 1997 to October 2000 ; as Senior Vice President, Americas Sales and 3 Service as of February 1997; and, on information and belief, as Vice President, North American 4 Business Division, during the relevant period . During his tenure, Mr . Mandich has sold at least 5 140,000 shares of Apple stock for proceeds that exceed $4 6 .8 million dollars .
7 24. Defendant Jonathan Rubinstein served as the Company's Senior Vice President,
8 iPod Division until April 2006 . Rubinstein also served as the Company's Senior Vice President,
9 Hardware Engineering, as of February 1997 . During his tenure, Mr . Rubenstein has sold more 10 than six million shares of Apple stock for proceeds that exceed $125 million dollars . 11 25. Defendant Michael H. Spindler served as the Company's Chief Executive Officer 12 from June 1993 to February 1996 ; its President from November 1990 to February 1996 ; Chief 13 Operating Officer and Executive Vice President from January 1990 to June 1993 14 ; Senior Vice
15 President from February 1989 to January 1990 ; as President, Apple Europe, from August 1988 to
16 January 1990 ; Senior Vice President, Apple Europe Division, from April 1988 to August 1988; 17 Senior Vice President, International, from January 1988 to April 1988 ; Senior Vice President, 18 International Sales and Marketing, from November 1986 to January 1988 ; and as Vice President, 19 International from February 1985 to November`1986. Spindler also served as a member of the 20 Company's Board of Directors from January 1991 to February 1996 . 21 26 22 . Defendant Avadis Tevanian, Jr. served as the Company's Senior Vice President,
23 Chief Software Technology Officer until March 2006 . Tevanian also served as the Company's
24 Senior Vice President, Software Engineering, as of February 1997 . During his tenure, Mr. 25 Tevanian has sold more than six million shares of Apple stock for proceeds that exceed $ 4 26 million dollars . 27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No. ) - Page - 8 1 27. The Defendants identified in Paragraphs 21 to 26 are collectively referred to a s
2 the "Officer Defendants." 3 D. Compensation and Audit Committee Director Defendants .
28. Defendant William V . Campbell has served as a director of Apple since fiscal
year 1997 . Campbell has also served as a member of the Compensation Committee of the Board
of Directors ("Compensation Committee") since August 2001, and as a member of Audit and I
Finance Committee of the Board of Directors ("Audit Committee") since fiscal year 1998 .2
9 29 . Defendant Millard Drexler has served as a director of Apple since 1999 . Drexler
10 has also served as a member of the Compensation Committee since fiscal year 2002. 1 1 30. Defendant Arthur D. Levinson has served as a director of Apple since fiscal year I 12 2000. Levinson also served as a member of the Compensation Committee from August 2001 13 through fiscal year 2003, and as a member of the Audit Committee since fiscal year 2001 . 14 During his tenure as a board member, Mr. Levinson has sold at least 140,000 shares of Apple 15
1 6 stock for proceeds that exceed $4 million dollars .
17 31 . Defendant Jerome B. York has served as a director of Apple since fiscal year
18 1997. York has also served as a member of the Compensation Committee from August 200 1 19 I through fiscal year 2001, and as a member of the Audit Committee since fiscal year 1998 . 20
21
22 2 From April 2000 to August 2001, the Board of Directors did away with the Compensation 23 Committee and administered the Company's executive compensation program, including options, itself. Defendants who served on the Board during that time include Defendants 24 Campbell, Levinson and York . Should Plaintiff discover additional Apple directors or other persons who are responsible for the wrongdoing alleged herein, including but not limited to 25 during the period April 2000 to August 2001, Plaintiff will, to the extent necessary and 26 appropriate, amend or seek leave to amend this Complaint.
27
28 VERIFIED DERIVATIVE COMPLAINT (Cause No . ) - Page - 9 1 During his tenure as a board member, Mr . York has sold more than 200,000 shares of Apple
2 stock for proceeds that exceed $4 million dollars . 3 32. Defendants Campbell, Drexler, Levinson, and York are referred to collectively as 4 the "Compensation Committee Defendants." 5 33. Defendants Campbell, Levinson, and York are referred to collectively as th e 6
7 "Audit Committee Defendants ."
8 34. The Officer Defendants, Compensation Committee Defendants, and Audit
9 Committee Defendants identified in Paragraphs 13 to 31 are referred to collectively as the 10 "Individual Defendants ." 11 M. JURISDICTION AND VENUE 12 35. This Court has federal question jurisdiction over the subject matter of this action 13 pursuant to 28 U .S.C. § 1331, and Section 27 of the Securities Exchange Act of 1934, 15 U .S.C. 14 § 78aa, because Plaintiff asserts claims under that Act and the Rules promulgated thereunder . 15
16 Alternatively, this Court has jurisdiction over the non-federal claims asserted herein under 28
17 U.S.C. § 1332 as the Parties are citizens of different states and the amount in controversy in this
18 matter exceeds $75,000, exclusive of interest and costs . This Court also has supplemental 19 jurisdiction pursuant to 28 U.S.C. § 1376(a). 20 36. Venue is proper in this District because one or more Defendants either resides or 21 maintains offices in this District, and a substantial portion of the alleged wrongdoing occurred in 22
23 this District. Moreover, Defendants have received substantial compensation in this District b y
24 doing business here and engaging in numerous activities that had an effect in this District.
25.
26
27
28 VERIFIED DERIVATIVE COMPLAINT (Cause No. - Page - 10 1 IV. SUBSTANTIVE ALLEGATIONS
2 A. Background. 3 37. Under accounting rules in effect prior to 2004, public companies in the United 4 States were permitted to grant stock options to employees without recording an expense so long 5 as the options' strike price was at or above the market's closing price for the stock on the day the 6 options were granted . If the option granted was priced below the market price on the date 7
8 granted, known as an "in the money" options grant, SEC regulations required that any publicly
9 traded company recognize and record the difference as a compensation expense in their financial
10 statement . See, e.g., APB 25, superseded in 2004 by FAS 123(R) . Accounting rules also 11 required that companies recognize the same compensation expense if "in the money" options 1 2 were granted to non-employees . Thus while "in the money" stock options are more valuable to 1 3 those to whom they are granted, the additional expenses, if reported, reduce the total amount of 14 15 net income reported to shareholders of a publicly traded company .
16 38. In order to maximize remuneration to its officers and employees, and to attrac t
17 non-employee executives to its ranks without impacting its reported income, one or more of the 1 8 Individual Defendants engaged in a practice of falsifying the issue date of stock options to 19 certain key personnel, known as "backdating." Through this practice, the Individual Defendants 20 would review historical stock prices before issuing stock options, to determine the date upon 21 which stock prices were significantly below the current market price and falsify the relevant 22 23 documents to make it appear as if the stock options were granted on the earlier date . As a result,
24 the executive to whom the options were granted could realize the gain observed between the
25 historical and actual grant date while the Company's records would appear to show no differenc e 26 27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No. ) - Page - 11 1 between the option price and the market price, thereby avoiding both the reporting requiremen t
2 and compensation expense . 3 39. Stock options granted to company insiders must be approved in advance by the 4 Company's Board of Directors and disclosed in order to comply with SEC regulations and 5 reporting requirements . See, e.g., Regulation S-K. Such approval can be extended through pre- 6
7 approval of a prescribed option grant plan or through discretionary grants that are individually
8 reviewed and approved .
9 B. Apple's Stock Option Plans.
10 40. Throughout the relevant time period, Apple maintained several Stock Option 11 Plans. The Employee Stock Option Plan was created "to attract and retain high quality personnel 12 for positions of substantial responsibility to provide additional incentive to Employees of the 1 3 Company, . . . and to promote the success of the Company's business ." Apple Computer, Inc . 14
15 1990 Employee Stock Option Plan (as amended through 12/4/96), § 1 .
1 6 41 . In addition, Apple maintained an Executive Officer Stock Plan, the purpose of
17 which, according to its terms, was "to attract and retain the best available personnel for positions
18 of substantial responsibility ; to provide additional incentive to the Chairman and/or Executive 19 Officers and other key employees ; and to promote the success of the Company's Business ." 20 Apple Computer, Inc . 1998 Executive Officer Stock Plan, dated April 22, 1998, § 1 .3 21
22
23
24 3 In addition to amending and restating the above Plans, between 1993 and 2000, the Company 25 also maintained an Employees Incentive Stock Option Plan, and Executive Long Term Stock 26 Option Plan , among others. Unless otherwise specified, cites herein are to the 1998 Executive Stock Option Plan, dated April 22, 1998, but it is believed that the features regarding stock 27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No. ) -Page - 12 1 42. The Plans permitted grants of stock options, stock purchase rights or stoc k
2 appreciation rights ("SARs"), up to a specified maximum, at the discretion of the administrator , 3 each fiscal year. 4 43. The Plans were to be administered by the Board or a committee designated fo r 5 that purpose . The Plans specified that to the extent that any options or SAR's granted by the 6 plan were to be "performance-based compensation" the Plan must be administered by a 7
8 committee of two or more outside directors . As explained in paragraphs 47 to 49 below, the
9 relevant stock option Plans were administered by the Stock Option Committee until April 2005,
10 then by the Compensation Committee, except from April 2000 to August 2001, during which 11 time Apple's executive compensation plans, including the relevant option Plans, were 12 administered by the Board of Directors. 13 44 . The Plans required that, absent specific approval by the Administrator, or a 14
15 merger or acquisition, the exercise price for any stock option issued under the Plan must be at
16 least 100% of the Fair Market Value on the date of the grant and, for Employees who own stock
17 representing more than 10% of the voting power of the Company or any parent or subsidiary, at 18 least 110% of the Fair Market Value on the date of the grant . Plan at § 9(a)(i)-(iii). The Fair 19 Market Value is defined in the Plans as "the closing sales price for such stock (or the closing bid, 20 if no sales were reported) as quoted on [Nasdaq or other exchange] or system, on the date of 21 determination or, if the date of determination is not a trading day, the immediately precedin g 22
23
24
25 grant dates and fair market value and other salient features of the Plans for purposes of this 26 Complaint were identical across all Plans unless otherwise noted .
27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No . ) -Page - 13 1 trading day, as reported in The Wall Street Journal or such other source as the Administrator
2 deems reliable[.]" Plan at § 2(p) (For certain plans in effect before 1998, the Fair Market Value 3 was determined at closing on the day immediately preceding the date of determination) . The 4 Plans further specified that "[t]he Fair Market Value of the Shares shall be determined as of the 5 time the Option with respect to such Shares is granted ." Plan at § 6(a) . 6 I 7 45. For all Plans of which Plaintiff is aware, the date of the option grant was defined 8 as "the date on which the Administrator makes the determination granting such Award, or such I
9 other later date as is determined by the Administrator." Plan at § 13 . None of the Plans I 1 0 I permitted the Administrator to establish a grant date that preceded the determination date . 11 46. By establishing a stock option grant date that preceded the date upon which th e 12 stock option was actually granted, the Company violated the terms of the Plans . 13 C. The Apple Stock Option/Compensation Committee. 14
15 47. From the beginning of the relevant period until April 1995, the Board maintained 16 a Stock Option Committee, which was responsible for the administration and granting of stock
17 option grants . In April 1995, the Stock Option Committee was dissolved by the Board and its 18 functions were assumed by the Compensation Committee . 1996 Proxy Statement, Form DEF- 19 14A (filed Dec. 19, 1995). The Stock Option Committee and Compensation Committee are 20 jointly referred to herein as the "Compensation Committee ." 2 1 22
23 24
25
26 27
28 VERIFIED DERIVATIVE COMPLAINT (Cause No . ) - Page - 14 1 48. During the relevant period, Defendants Campbell, Drexler, Levinson, and York
2 served on the Compensation Committee . 3 49. The Compensation Committee was responsible for approving stock option plan s 4 or grants. Specifically, the Compensation Committee was responsible for reviewing and 5 approving compensation and awards under Apple's compensation and incentive plans and 6
7 programs for Apple's executive officers, as well as for administering the Company's stock 8 option and other stock-based plans . Pursuant to this authority, during the relevant Period, the
9 Compensation Committee was responsible for determining the stock option awards that are the
1 0 subject of this litigation, in the amounts set forth below . 11 D. The Apple Audit Committee. 12 50. During the relevant period, Defendants Campbell, Levinson, and York served on 13 the Audit Committee, which was to be comprised of not less than three directors who satisfied 14 the independence requirements of applicable NASDAQ and SEC rules . 15
16 51 . The Board's Audit Committee was responsible for monitoring the Company' s
17 financial reporting, including compensation reporting . Indeed, the stated purpose of the Audit
18 Committee is as follows: 19
20
21
22 4 As noted in footnote 2, above, from April 2000 to August 2001, the Board did not have a 23 Compensation Committee and administered the Company's executive compensation program, including options, itself. Defendants who served on the Board during that time include 24 Campbell, Drexler, Levinson, and York . Should Plaintiff discover additional Apple directors 25 or other persons who are responsible for the wrongdoing alleged herein, including but not limited to during the period April 2000 to August 2001, Plaintiff will, to the extent necessary 26 and appropriate, amend or seek leave to amend this Complaint . 27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No . ) - Page - 15 1 The primary purpose of the Committee is to assist the Board in oversight and monitoring of: (i) the Corporation's financial statements and other 2 financial information provided by the Corporation to its shareholders and others; (ii) compliance with legal and regulatory requirements ; (iii) the 3 independent auditors, including their qualifications and independence; (iv) 4 the Corporation's systems of internal controls, including the internal audit function; and (v) the auditing, accounting, and financial reporting process 5 generally.
6 Apple Computer, Inc . Audit and Finance Committee Charter ("Audit Committee Charter"), § 1 . 7 See also prior Audit and Finance Committee Charter, attached as Appendix A to Apple's Prox y 8 Statement, Form DEF 14A, filed with the SEC March 12, 2001 ("2001 Audit Committee 9 Charter"), which contains nearly identical language . 10 y 11 52. The Audit Committee Charter provides the Audit Committee with broad authorit
12 and responsibility for the Company's financial reporting, including the following :
13 DUTIES AND RESPONSIBILITIES. To fulfill its responsibilities, the Committee shall: 14
15 Independent Auditor
16 1 . Appoint, compensate, and oversee the work of the independent auditors (including resolving disagreements between Management and the 17 independent auditors regarding financial reporting) for the purpose of preparing or issuing an audit report or related work. 18
19
20 Financial Reporting
21 9. Review with Management and the independent auditor : 22 • The Corporation's annual audited financial statements, and related 23 footnotes, and quarterly unaudited financial statements, including the disclosures under "Management's Discussion and Analysis of 24 Financial Condition and Results of Operations," prior to filing the Corporation's Annual Report on Form 10-K and Quarterly Reports 25 on Form 10-Q, respectively, with the SEC. 26
27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No. ) - Page - 16 1 • The independent auditors' audit of the annual financial statements and their report thereon. 2
3 • The accompanying management Letter and any reports with respect to interim periods. 4 • Any major changes to the Corporation's accounting principles and 5 practices. . . .
6 • Other matters related to the conduct of the audit that are to be 7 communicated to the Committee under Generally Accepted Auditing Standards. 8 10 . Review with Management, the independent auditors, and the 9 Corporation's counsel, as appropriate, any legal and regulatory matters that may have a material impact on the financial statements, related 10 compliance policies, and programs and reports received from regulators . 11 11 . Review and discuss earnings press releases prior to public 1 2 disclosure.
13 12. Provide a report for inclusion in the Corporation's proxy statement 14 in accordance with the rules and regulations of the SEC.
15
16 14. Discuss with the independent auditors the financial statements and audit findings , including any significant adjustments, Management 1 7 judgments and accounting estimates , significant new accounting policies 18 and disagreements with Management and any other ma tters described in SAS No. 61, as may be modified or Supplemented . 19
20 Management Discussions 21 22 26. Inquire about the application of the Corporation's accounting policies and its consistency from period to period, and the compatibility of 23 these accounting policies with Generally Accepted Accounting Principles, and, when applicable, the provisions for future occurrences that may have 24 a material impact on the financial statements of the Corporation . 25
26
27
28 VERIFIED DERIVATIVE COMPLAINT (Cause No . ) - Page - 17 1 1 Audit Committee Charter, § V . See also 2001 Audit Committee Charter, which contains nearl y
2 identical language. 3 E. Stock Option Grants to the Officer Defendant s 4 53. From 1993 to 2001, the Compensation Committee granted certain Apple stoc k 5 options to the Officer Defendants, as follows: 6 Subsequent 7 10-Day 8 Purported Number Exercise Increase fficer Date of Grant of O tions Price >5% 9 Anderson, Fred D. 4/1/96 400,000 $24.56 5.30% 4/21/97 100,000 $18.38 10 7/11/97 500,000 $13 .25 22.60% 11 8/5/97 250,000 $19.75 23.70% 12/19/97 250,000 $13 .69 38.40% 12 3/2/99 475,000 $34.63 1/17/01 1,000,000 $16.81 28.60% 13 Buckley, James J. 10/12/93 15,000 $23.75 25.30% 14 12/20/93 30,000 $29.50 6.80% 1/26/94 20,000 $33.88 7.00% 15 11/7/94 25,000 $40.3 8 4/27/95 200,000 $38 .25 7.20% 1 6 Calderoni, Robert 2/21/97 25,000 $17 .00 17 4/21/97 20,000 $18 .3 8 8/5/97 80,000 $19 .75 23.70% 1 8 Cook, Timothy D. 2/2/98 700,000 $17 .69 10.90% 3/2/99 300,000 $34.63 19 1/17/01 1,000,000 $16.81 28.60% 20 De Luca, Guerrino 2/21/97 200,000 $17.00 7/11/97 309,750 $13.25 22.60% 21 8/5/97 190,250 $19.75 23.70% Diery, Ian 10/12/93 40,000 $23.75 25.30% 22 12/20/93 90,000 $29.50 6.80% 23 1/24/95 60,000 $42.25 Eilers, Daniel L . 10/3/94 200,000 $33.69 18.00% 24 4/27/95 60,000 $38.25 7 .20% Forsyth, G. Frederick 4/27/95 40,000 $38.25 7.20% 25 Jobs, Steven P . 8/14/97 30,000 $23.63 26 1/12/00 20,000,000 $43 .59 26.20% 10/19/01 7,500,000 $18.30 27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No . ) - Page - 18 1 Subsequent 10-Day 2 Purported Number Exercise Increase 3 fficer Date of Grant of O tions Price > 5% Johnson, Ronald B. 12/14/99 1,200,000 $47.44 6.10% 4 Mandich, Mitchell 12/19/97 224,250 $13.69 38.40% 12/29/97 200,000 $13.13 48 .60% 5 3/2/99 387,876 $34.63 Rubinstein, Jonathan 0 6 2/21/97 200,000 $17.0 7/11/97 200,000 $13 .25 22.60% 7 8/5/97 300,000 $19.75 23 .70% 12/19/97 300,000 $13 .69 38.40% 8 3/2/99 458,334 $34.63 1/17/01 1,000,000 $16.81 28.60% 9 Spindler, Michael H. 10/13/93 200,000 $24.00 32.30% 10 11/2/94 100,000 $43 .13 Tevanian, Jr., Avadis 1/17/01 1,000,000 , $16.81 28 .60% 11
12 54. As noted above, the Plans required that, absent specific approval by the I 13 Administrator, or a merger or acquisition, the exercise price for any stock option issued under the 14 Plan must be at least 100% of the Fair Market Value on the date of the grant. 15 55 . Pursuant to APB 25, which predated FAS 123(R) .and was the applicable GAAP 16
17 provision at the time of the foregoing stock option grants, if the market price on the date of gran t
18 exceeded the exercise price of the options, the Company was required to recognize the differenc e
19 as an expense. 20 56. Pursuant to Section 162(m) of the Internal Revenue Code, 26 U .S .C . § 162(m), 21 compensation in excess of $1 million per year, including gains on stock options, paid to a 22 corporation's five most highly-compensated officers is Tax deductible only if . (i) the 23 I
24 I compensation is payable solely on account of the attainment of one or more performance goals ; 25 (ii) the performance goals are determined by a compensation commi ttee comprised solely of two
26 I or more outside directors ; (iii) the material terms under which the compensation is to be paid , 27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No . ) -Page - 19 1 including the performance goals, are disclosed to shareholders and approved by a majority of the
2 vote in a separate shareholder vote before the payment of the compensation ; and (iv) before any 3 payment of such compensation, the compensation committee certifies that the performance goals 4 and any other material terms were in fact satisfied . 5 57. As recognized by Professor Lie, "in the absence of opportunistic grant timing o r 6 opportunistic timing of information flows around grants, the returns before and after grant dates 7
8 should be similar. Consequently, if opportunistic timing is absent, the distribution of the
9 difference between the returns for a given number of days after the grants and the returns for the 10 same number of days should be centered roughly at zero ." Randall A. Heron and Erik Lie, What 11 Fraction of Stock Option Grants to Top Executives Have Been Backdated or Manipulated 12 (July 14, 2006) . 13 58 . With respect to Apple, the stock option grant dates follow a striking pattern tha t 14 r 15 could not have been the result of chance . The table above shows that each of the Office
16 Defendants received a substantial number of option shares that increased in value immediately
17 after they were granted, by significant amounts . 18 59. Indeed, more than half of the foregoing stock option grants were dated just after a 19 sharp drop and just before a substantial rise in Apple's stock price (low point) and more than two 20 thirds were granted on dates when the option values increased immediately after they were 21 granted (low point and upward trend), as the following charts demonstrate : 22
23
24
25
26
27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No. ) - Page - 20 1 Total Options Granted5
2 Relative Stoc k # of Total # 3 Price Dates Options Low Point 11 24,859,000 4 Upward Trend 5 12,640,250 5 Downward 5 2,916,21 0 Trend 6 High Point 6 1,135,000 Total 41,550,460 7
8
9 e 1 0 60. The Wall Street Journal concluded that Apple's stock option grants wer
11 "especially propitious," and included executives of that company in its list of those who hav e
12 "received stock options on favorable dates just ahead of sharp gains in the company stock," a s 13 the following examples it provided illustrate: 14 Examples of optic granted (St p,ices adjusted for stets) Dateof9rant 15 Fred Anderson Steve Jobs Four top executives Apple Computer Former CEO App IF Computer CEO Apple Compute r 16 2 m1ill.n options 40 nrJilion* o ptk t S WIHafi opthra 17 P,54 6M z4 18 19
20 S s U J F ;Y, IN IF M 9147 9 ')U 21 Company's Response at Date Publication (Aug. 7, 2006) An Apple spokesman said the company is refraining from Furthercomnient on the matter ward an 22 pendent investigation of the in egufatities is completed. **I W- Jobs s optiom were Later canceled in exchange for restri ed stock- 23 24
25 1 26 5 Includes options issued to all corporate officers, in addition to the Officer Defendants .
27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No. ) - Page - 21 1 The Wall Street Journal, Online . Printed August 18, 2006 .
2 61. In addition, the following charts provide specific examples of the extraordinary I 3 pattern of Apple's stock grants during the relevant period :
September 14, 1993 - November 10, 1993
opt
632
$30 - 9 c
10 P8
0 10/1211993 - 1 1 Options Granted on S26 55,000 Shares 12 b cC 1 3 $24
10/13/1993 - 14 $22 Options Granted on 200,000 Shares 15 ein
16 Sep 14, Sep 19, Sep 24, Sep 29, Oct 04, Oct 09, Oct 14, Oct 19, Oct 24, Oct 29, Nov 03, Nov 08, 1993 1993 1993 1993 1993 1993 1993 1993 1993 1993 1993 1993 17
18 19 20
21 22
23 24
25
26
27
28 VERIFIED DERIVATIVE COMPLAINT (Cause No . ) - Page - 22 1 September 9, 1994 - October 31, 1994 2
3
4 $42
5 $40
6 V O $38 10/3/1994 - Options Granted on 7 0 200,000 Shares U 'o I V 8 d b m 9 5 $3 4
10 $32 11
12 $30 Sep 09, Sep 14, Sep 19, Sep 24, Sep 29, Oct 04, Oct 09, Oct 14, Oct 19, Oct 24, Oct 29, 1994 1994 1994 1994 1994 1994 1994 1994 1994 1994 199 4 1 3
14 July 8, 1997 - September 3, 199 7 1 5
,Div 16 $28 17 $26 1 8 u $24 19 a 0 $22 20 0 $20 U 21 'e 0 $1 8
22 c $1 6 8/5/1997 - Options Granted on 23 820,250 Shares
24 $12
25 $1 0 Jul 08 , Jul 13, Jul 18, Jul 23, Jul 28, Aug 02, Aug 07, Aug 12, Aug 17, Aug 22, Aug 27, Sep Ol, 26 1997 1997 1997 1997 1997 1997 1997 1997 1997 1997 1997 1997 27
28 II VERIFIED DERIVATIVE COMPLAINT (Cause No . ) - Page - 23 1 November 20,1997 - January 28,1998 2
3
4
5 a x 6 c
7 C L S a 8 9
10 11
12 Nov 20, Nov 25, Nov 30, Dec 05, Dec 10, Dec 15, Dec 20, Dec 25, Dec 30, Jan 04, Jan 09, Jan 14, Jan 19, Jan 24, 1997 1997 1997 1997 1997 1997 1997 1997 1997 1998 1998 1998 1998 199 8 13
14 November 15,1999 - Janua ry 12, 2000 15
16
17
18 d 4V 19
0
20 d 0 •o 21 V
22
23
24
25 Nov 15, Nov 20, Nov 25, Nov 30, Dec 05, Dec 10, Dec 15, Dec 20, Dec 25, Dec 30, Jan04, Jan 09, 26 1999 1999 1999 1999 1999 1999 1999 ,1999 1999 1999 2000 2000
27
28 VERIFIED DERIVATIVE COMPLAINT (Cause No. ) - Page - 24 1 December 14, 1999 - February 10, 2000 2
3
4
5
6
7
8
9
10
11
12
13 Dec 14, Dec 19, Dec 24, Dec 29, Jan 03, Jan 08, Jan 13, Jan 18, Jan 23, Jan 28, Feb 02, Feb 07, 1999 1999 1999 1999 2000 2000 2000 2000 2000 2000 2000 2000 1 4
15 62. As the research by Professor Lie and others demonstrates, while positive returns
16 for a single grant might be innocently explained, a consistent pattern of frequent and well-timed 17 grants makes backdating the most plausible--if not the only plausible--explanation . See, e.g., 18 Charles Forelle, How the Journal analyzed Stock-Option Grants, The Wall Street Journal, March 19 18, 2006 ("It is very unlikely that several grants spread over a number of years would all fall on 20 high-ranked. days [i.e. most favorable to the recipient] ."). 21 22 63 . Plaintiff alleges that the reason for the extraordinary pattern set forth in the abov e
23 I data can only be that the purported grant dates set forth therein were not the actual dates o n
24 I which the stock option grants were made. Rather, at the behest of the Officer Defendants, the 25 1 . Committee Defendants improperly backdated the stock option grants to make it appear as though 26
27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No. ) - Page - 25 1 the grants were made on dates when the market price of Apple stock was lower than the marke t 2 price on the actual grant dates . 3 64. This improper backdating, which violated the terms of the Company' s 4 shareholder-approved stock option plans, resulted in option grants with lower exercise prices, 5 which improperly increased the value of the options to the Officer Defendants and improperly 6
7 reduced the amounts the Officer Defendants had to pay the Company upon exercise of the
8 options.
9 F. Dissemination of False and Misleading Financial Statements and Reports 10 65. As a result of the Individual Defendants' backdating of stock options, the 11 Company issued materially false and misleading financial statements and reports, including but 12 not limited to annual reports, filed with the SEC and disseminated to shareholders and the public 13 as Forms 10-K, proxy statements, filed with the SEC and disseminated to shareholders and the 14 15 public as Forms DEF-14A, and other quarterly and interim reports . Each of the Individual
16 Defendants knew or should have known that these statements were false and either knowingly
1 7 participated in their dissemination or failed to prevent or correct them . These financial 18 statements and reports were prepared and presented in violation of GAAP . Due to the improper 19 backdating of the. stock options alleged herein, these financial statements and reports overstated 20 Apple's net income and earnings and understated Apple's compensation expense . 21 66. For instance, in Apple's annual report Form 10-K for the year ended Septembe r 22 23 30, 1994, filed with the SEC on December 13, 19 .94 (the "1994 10-K"), the reported net income
24 of $310,178,000 and earnings per share of $2.61 were overstated, and the operating expense of
25 $1,948,000 was understated, for the reasons set forth in paragraph 65 . The 1994 10-K was 26 signed by Defendant Spindler individually and on behalf of a number of other Apple officers an d 27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No. ) - Page - 26 1 directors and incorporated by reference the executive compensation information contained in th e
2 Company's proxy statement, which was false and misleading for the reasons described 3 immediately below . 4 67. On December 12, 1994, the Company, with the effect of concealing the imprope r 5 option backdating, filed with the SEC and disseminated to Apple's shareholders the Company's 6 annual proxy statement (the "1994 Proxy Statement"), which provided, among other things, 7 8 notice of and information for Apple's annual shareholders' meeting to be held January 24, 1995 .
9 The 1994 Proxy Statement falsely reported the dates of stock option grants to the Officer
10 Defendants and stated, for example, that "[a]ll options were granted at an exercise price equal to 11 fair market value based on the closing market value of the Company's Common stock on the 12 business day immediately preceding the date of the grant," which was materially false and 1 3 misleading in light of the backdating alleged herein . The Individual Defendants knew or 14 . 15 reasonably should have known of these misstatements and failed to prevent or correct them
16 68. In Apple's annual report Form 10-K for. the year ended September 29, 1995, filed
17 with the SEC on December 19, 1995 (the "1995 10-K"), the reported net income of 18 $424,000,000 and earnings per share of $3 .45 were overstated, and the operating expense of 19 $2,197,000,000 was understated, for the reasons set forth in paragraph 65 . The 1995 10-K was 20 signed by Defendant Spindler individually and on behalf of a number of other Apple officers and 21 directors and incorporated by reference the executive compensation information contained in the 22
23 Company's proxy statement, which was false and misleading for the reasons described
24 immediately below .
25 69. On December 19, 1995, the Company, with the effect of concealing the imprope r 26 I options backdating, filed with the SEC and disseminated to Apple's shareholders the Company' s 27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No. ) - Page - 27 1 proxy statement (the "1995 Proxy Statement"), which provided, among other things, notice of I
2 and information for Apple's annual shareholders' meeting to be held January 23, 1996 . The 3 1995 Proxy Statement falsely reported the dates of stock option grants to the Officer Defendant s 4 and stated, for example, that "[a]ll options were granted at an exercise price equal to fair market 5 value based on the closing market value of the Company's Common stock on the business day 6 immediately preceding the date of the grant," which was materially false and misleading in light 7
8 of the backdating alleged herein. The Individual Defendants knew or should have known about
9 these misstatements and failed to prevent or correct them .
10 70. Apple' s annual report Form 10-K for the year ended September 27, 1996, file d 1 1 with the SEC on December 19, 1996 (the "1996 10-K"), reported a net loss of $816,000,000, a 12 loss per share of $6 .59, and operating expense of $2,351,000,000, which were all understated, for 13 the reasons set forth in paragraph 65 . The 1996 10-K was signed by Dr . Gilbert F. Amelio 14 15 individually and on behalf of, among others, Defendant Anderson, and incorporated by reference
16 the executive compensation information contained in the Company's proxy statement, which was
1 7 false and misleading for the reasons described immediately below.
18 71 . On December 27, 1996, the Company, with the effect of concealing the imprope r 19 options backdating, filed with the SEC and disseminated to Apple's shareholders the Company's 20 proxy statement (the "1996 Proxy Statement"), which provided, among other things, notice of 21 and information for Apple's annual shareholders' meeting to be held February 5, 1997 . The 22
23 1996 Proxy Statement falsely reported the dates of stock option grants to the Officer Defendants
24 and stated, for example, that "[a]ll options were granted at an exercise price equal to fair market
25 value based on the closing market value of the Company's Common stock on the business day 26 immediately preceding the date of the grant," which .was materially false and misleading in ligh t 27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No. ) - Page - 28 1 of the backdating alleged herein. The Individual Defendants knew or should have known abou t
2 these misstatements and failed to prevent or correct them . 3 72. In Apple's annual report Form 10-K for the year ended September 26, 1997, file d 4 with the SEC on December 05, 1997 (the "1997 10-K"), the reported net loss of $1,045,000,000, 5 loss per share of $8 .29, and the operating expense of $2,438,000,000 were all understated, for the 6 . The 1997 10-K was signed by the following Defendants, 7 reasons set forth in paragraph 65
8 among others, Jobs, Anderson, Campbell, and York, and incorporated by reference the executive
9 compensation information contained in the Company's proxy statement, which was false and
10 misleading for the reasons described immediately below . The 1997 10-K also falsely assured 11 shareholders and the public that "[t]he fair values for these options . . . purchases were estimate d 12 at the date of the grant." 13 73. On March 16, 1998, the Company, with the effect of concealing the improper .14
15 options backdating, filed with the SEC and disseminated to Apple's shareholders the Company's
16 proxy statement (the "1997 Proxy Statement"), which provided, among other things, notice of
17 and information for Apple's annual shareholders' meeting to be held April 22, 1998 . The 1997 1 8 Proxy Statement falsely reported the dates of stock option grants to the Officer Defendants and 19 stated, for example, that "[a]ll options were granted at an exercise price equal to fair market 20 value based on the closing market value of Common Stock on the Nasdaq National Market on 21 the trading day immediately preceding the date of grant. For administrative purposes, the Board 22 23 on November 5, 1997 amended the Company's stock option plans to provide that the exercise
24 price of options granted under such plans will be the fair market value based on the closing
25 market value on the date of grant," which was materially false and misleading in light of th e 26
27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No . __, - Page - 29 1 backdating alleged herein. The Individual Defendants knew or should have known about thes e
2 misstatements and failed to prevent or correct them . 3 74. In Apple's annual report Form 10-K for the year ended September 25, 1998, filed 4 with the SEC on December 23, 1998 (the "1998 10-K"), the reported net income of 5 $309,000,000 and earnings per share of $2 .10 were overstated, and the operating expense of 6
7 $1,218,000,000 was understated, for the reasons set forth in paragraph 65. The 1998 10-K was
8 signed by Defendant Anderson individually and on behalf of, among others, Defendant Jobs,
9 Campbell, and York. The 1998 10-K also falsely assured shareholders and the public that "[a]ll 10 options were granted at an exercise price equal to the fair market value based on the closing 11 market value of Common Stock on the Nasdaq National Market on the date of the grant ." 12 75 . On February 9, 1999, the Company, with the effect of concealing the improper 13 14 options backdating, filed with the SEC and disseminated to Apple's shareholders the Company's
15 proxy statement (the "1998 Proxy Statement"), which provided, among other things, notice of
16 and information for Apple's annual shareholders' meeting to be held March 24, 1999. The 1998
17 Proxy Statement falsely reported the dates of stock option grants to the Officer Defendants and 1 8 stated, for example, that "[a]ll options were granted at an exercise price equal to the fair market 19 value based on the closing market value of Common Stock on the Nasdaq National Market on 20 the date of grant," which was materially false and misleading in light of the backdating alleged 2 1
22 herein. The Individual Defendants knew or should have known about these misstatements and 23 failed to prevent or correct them.
24 76. In Apple's annual report Form 10-K for the year ended September 25, 1999, filed 2 5 with the SEC on December 22, 1999 (the "1999 10-K"), the reported net income of 26 $601,000,000 and earnings per share of $3.61 were overstated, and the operating expense o f 27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No . ) - Page - 30 1 79. On March 12, 2001, the Company, with the effect of concealing the improper I
2 options backdating, filed with the SEC and disseminated to Apple's shareholders the Company's 3 proxy statement (the "2000 Proxy Statement"), which provided, among other things, notice o f 4 and information for Apple's annual shareholders' meeting to be held April 19, 2001 . The 2000 5 Proxy Statement falsely reported the dates of stock option grants to the Officer Defendants and 6 7 stated, for example, that "[a]ll options were granted at an exercise price equal to the fair market
8 value based on the closing market value of Common Stock on the Nasdaq National Market on
9 the date of grant," which was materially false and misleading in light of the backdating alleged 10 herein. The Individual Defendants knew or should have known about these misstatements an d 1 1 failed to prevent or correct them. 12 80. In Apple 's annual report Form 10-K for the year ended September 29, 2001, file d 13 d 14' I with the SEC on December 21, 2001 (the "2001 10-K"), the reported net loss of $25,000,000 an
1 5 loss per share of $0 .07 were understated, as was the operating expense of $1,579,000,000, for the
16 I reasons set forth in paragraph 65'. The 2001 10-K was signed by the following Defendants ,
17 among others, Jobs, Anderson, Campbell, and York . The 2001 10-K also falsely assured 1 8 shareholders and the public that "[a]ll options were granted at an exercise price equal to the fair 19 market value based on the closing market value of Common Stock on the Nasdaq National 20 Market on the date of the grant." 21 r 22 81 . On March 21, 2002, the Company, with the effect of concealing the imprope 23 options backdating, filed with the SEC and disseminated to Apple's shareholders the Company's
24 proxy statement (the "2001 Proxy Statement"), which provided, among other things, notice of
25 and information for Apple's annual shareholders' meeting to be held April 24, 2002 . The 2001 26 Proxy Statement falsely reported the dates of stock option grants to the Officer Defendants and 27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No . ) - Page - 32 1 stated, for example, that "[a]ll options were granted at an exercise price equal to the fair market 2 value based on the closing market value of Common Stock on the Nasdaq National Market on 3 the date of grant," which was materially false and misleading in light of the backdating alleged 4 herein. The Individual Defendants knew or should have known about these misstatements and 5 failed to prevent or correct them . 6
7 82. In Apple's annual report Form 10-K for the year ended September 28, 2002, file d
8 with the SEC on December 19, 2002 (the "2002 10-K"), the reported net income of $65,000,000
9 and earnings per share of $0 .18 were overstated, and the operating expense of $1,586,000,000 10 was understated, for the reasons set forth in paragraph 65 . The 2002 10-K was signed by the 11 following Defendants, among others, Jobs, Anderson, Campbell, and York . The 2002 10-K also 12 falsely assured shareholders and the public that "[a]ll options were granted at an exercise price 13 14 equal to the fair market value based on the closing market value of Common Stock on the
15 Nasdaq National Market on the date of the grant."
16 83 . On March 24, 2003, the Company, with the effect of concealing the improper 1 7 options backdating, filed with the SEC and disseminated to Apple's shareholders the Company's 18 proxy statement (the "2002 Proxy Statement"), which provided, among other things, notice of 19 and information for Apple's annual shareholders' meeting to be held April 24, 2003 . The 2002 20 Proxy Statement falsely reported the dates of stock option grants to the Officer Defendants and 21
22 stated, for example, that "[a]ll options were granted at an exercise price equal to the fair market
23 value based on the closing market value of Common Stock on the Nasdaq National Market on
24 the date of grant," which was materially false and misleading in light of the backdating alleged 25 herein. The Individual Defendants knew or should have known about these misstatements and 26 failed to prevent or correct them . 27
28 VERIFIED DERIVATIVE COMPLAINT (Cause No. ) - Page - 33 1 84. Furthermore, from 1993 to 2001, the Company, with the effect of concealing th e
2 improper options backdating filed with the numerous SEC Form 4s that falsely reported the dates 3 of stock option grants to the Officer Defendants . The Individual Defendants knew or shoul d 4 have known about these misstatements and failed to prevent or correct them . 5 G. Backdating is Reveale d 6 85. Backdating practices were largely undetected until academics investigated timing 7 .
8 anomalies related to stock options. These studies noted the frequency with which stock option
9 grants occurred just after a drop in stock price and immediately before the price rose, often at the
10 lowest price of the year . Such timing could not be statistically explained by random selection of 11 grant dates . One study hypothesized that the dates of the grants had been selected retroactively ; 12 such retroactive dating, or "backdating" would permit the grantor to select the most 13 advantageous price for the stock option and in effect create an "in the money" stock grant (one in 14 15 which the actual stock price exceeds the option price on the day granted), that would appear as if
16 it was granted while the stock price was low . Since companies are required to report "in the
17 money" grants as compensation to the recipient and as a charge to the corporation, the practice of
18 backdating would provide a means to confer additional stock value, or compensation, to officers 19 and employees that was not detectable, thereby permitting the Company to conceal the additional 20 compensation and forego reporting or recording the charge . 21 86. The academic research did not identify specific companies that had engaged i n 22 23 these practices, although it apparently triggered increased scrutiny by the SEC and other
24 I government officials.
25 87. The practice was publicly disclosed on March 18, 2006, when The Wall Street 26 I Journal published The Perfect Payday in which .it described stock option backdating practices b y 27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No . ) - Page - 34 III a number of companies, including Affiliated Computer Services, Inc . ("ACS"), KLA Group, Inc.
2 ("KLA"), Comverse Technology, Inc. ("Comverse"), and Vitesse Semiconductor Corporation 3 ("Vitesse"), that defied random chance . The Wall Street Journal, together with finance 4 professors Eric Lie and David Yermack and statistician John Emerson, studied patterns of 5 particularly favorable stock grants at certain companies and calculated the probability of such 6 l 7 patterns occurring randomly and concluded that the odds were improbable . The Journa 8 reported, for example, that all six of the stock options gr anted by ACS to its former CEO Jeffrey
9 Rich displayed a pattern of profitability that could not be explained by chance: 10 In a striking pattern all six of his stock-option grants from 1995 to 2002 11 were dated just before a rise in the stock price, often at the bottom of a steep drop. 12 Just lucky? A Wall Street Journal analysis suggests the odds of this 1 3 happening by chance are extraordinarily remote -- around one in 300 billion. The odds of winning the multistate Powerball lottery with a $1 14 ticket are one in 146 million. 15 Suspecting such patterns aren't due to chance, the Securities and 16 Exchange Commission is examining whether some options carry favorable grant dates for a different reason: They were backdated . 17
18 Charles Forelle and James Bandler, The Perfect Payday, The Wall Street Journal, March 18,
19 12006. 20 88. Since the date of The Wall Street Journal article, more than 80 companies 21 reported internal and/or governmental investigations of their backdating practices . Charles 22 Forelle and Nick Wingfield, Apple Spots More Options Missteps, The Wall Street Journal, Aug . 23
24 4, 2006. Additional research by Professor Lie suggests that between the period 1996-2005,
25 18 .9% of unscheduled "in the money" option grants to top executives were backdated o r
26 I manipulated, by nearly one-third of the companies investigated . 27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No. ) - Page - 35 1 89. On June 29, 2006, Apple was the latest to announce that an internal investigation 2 had discovered irregularities related to the issuance of certain stock option grants made between 3 1997 and 2001 . Specifically, the Company stated: 4 Apple® today announced that an internal investigation has discovered 5 irregularities related to the issuance of certain stock option grants made between 1997 and 2001 . One of the grants in question was to CEO Steve 6 Jobs, but it was subsequently cancelled and resulted in no financial gain to 7 the CEO. A special committee of Apple's outside directors has hired independent counsel to perform an investigation and the company has 8 informed the SEC . Apple executives will refrain from commenting further on this matter until the independent investigation is concluded. 9 "Apple is a quality company , and we are proactively and transparently 10 disclosing what we have discovered to the SEC," said Apple CEO Steve Jobs. "We are focused 11 on resolving these issues as quickly as possible."
12 90. Subsequent news reports revealed that the grant of 10 million shares to Mr . Jobs
13 was awarded on the date of the stock's lowest closing price for the month of January 2000 and
14 that the stock price rose 30% in the 20 trading days following the grant . James Bandler, Nick 15 Wingfield and William M . Bulkeley, Apple and CA Report Problems in Options Grants, The 16 Wall Street Journal, June 30, 2006 . Moreover, while the grants themselves had been cancelled in 17 2003 as Apple reported, Mr . Jobs received five million shares of restricted stock in exchange for 18 options. Heather Won Tesoriero, Options Backdating 19 : New Bruises on Apple, The Wall Street
20 Journal Online LawBlog, Aug . 4, 2006.
21 91 . Apple has acknowledged that one of the transactions in question in it s
22 investigation of "irregularities related to the issuance of certain stock option grants" is the 23 January 2000 grant (identified above) of stock options to Defendant Jobs, which were late r 24 cancelled in March 2003 in a transaction in which Jobs exchanged options from this and at least 25
26
27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No . ) - Page - 36 1 I one other grant for five million shares of restricted stock. These shares were later sold in March 2 2006 for nearly $300 million dollars . 3 92. Like the stock options examined by The Wall Street Journal, the pattern o f 4 options grants to Apple executives seem more than randomly fortuitous . The more likely reason 5 for the extraordinary pattern exhibited by Apple was that the Officer Defendants' stock options 6
7 were improperly backdated, as alleged herein . Indeed, Apple has since acknowledged that the
8 stock option grants were irregular and likely resulted in material misstatements of their financial
9 results. 1 0 93. Although the company stated, as part of its third quarter revenue and earnings 11 report issued and filed with the SEC as a Form 8-K on July 19, 2006, that "based upon the 12 irregularities identified to date, management does not anticipate any material adjustment to the 1 3
14 financial results included in this earnings release," shortly thereafter, the company announced 1 5 that "the Company has discovered additional evidence of irregularities [and] that the Company
16 will likely need to restate it historical financial statements to record non-cash charges for 17 compensation expense relating to past stock option grants ." Press release dated August 3, 2006 18 and filed with the SEC as an exhibit to Form 8-K . 19 94. The August 3, 2006 Form 8-K, stated the following: 20 On August 3, 2006, management of Apple Computer, Inc . (Apple) 21 concluded, and the Audit and Finance Committee of Apple's Board of 22 Directors approved the conclusion, that Apple's financial statements for the fiscal years ended 2003, 2004 and 2005, the interim periods contained 23 therein, the fiscal quarters ended December 31, 2005 and April 1, 2006, and all earnings and press releases and similar communications issued by 24 Apple relating to periods commencing on September 29, 2002 should no longer be relied upon. 25
26
27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No. ) - Page - 37 1 95 . On Friday August 11, 2006, Apple reported that it would delay filing its quarterl y
2 report and that : "The Company anticipates that there will be significant changes in the results of 3 operations for the quarter ended July 1, 2006 compared to the quarter ended June 25, 2005, 4 including significant increases in the Company's revenue and expenses . The Company cannot 5 provide a reasonable estimate of the results because it will likely need to restate its historical 6
7 financial statements to record non-cash charges for compensation expense relating to past stock 8 option grants . As the investigation related to stock option grants is currently ongoing, the
9 Company cannot at this time reasonably estimate the amount of any such charges, the resulting 10 tax and accounting impact, or which periods may require restatement ." Apple Form 8-K (filed 1 1 Aug. 11, 2006); see also Apple Delays Quarterly Filing, The Wall Street Journal, Aug. 11, 2006. 12 The Company also reported in its SEC filing that it had received a NASDAQ Staff 13 Determination Letter "indicating that the Company is not in compliance with the filing 1 4
15 requirements for continued listing," had requested a hearing and would remain listed pending a
16 decision of the Listing Qualifications Panel.
17 V. THE INDIVIDUAL DEFENDANTS BREACHED THEIR FIDUCIARY DUTIES TO THE COMPANY AND ITS SHAREHOLDER S 18 1 9 96. By reason of their positions as directors, officers, and/or fiduciaries of Apple, an d
20 because of their ability to control Apple's business, corporate and financial affairs, each of the
21 Individual Defendants owed Apple and public shareholders the following fiduciary duties in thei r 22 I management and administration of the affairs of the Company and in the use and preservation of 23 I corporate assets: 24
25
26 27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No . ) - Page - 38 1 a. Good Faith. The duty to act at all times in good faith and in the best interests of the 2 company and its shareholders, and must not take action that results in a waste of I 3 corporate assets. 4 b. Due Care. The duty to take all reasonable steps to be informed with respect to the 5 decision in question and operate in a manner reasonably believed to be in the best 6 7 interests of the company, with the care of ordinarily prudent persons in a like positio n 8 and under similar circumstances .
9 c. Loyalty. Defined by courts in broad and unyielding terms, the duty of loyalt y
1 0 mandates that the best interest of the corporation and its shareholders takes precedence 11 over any interest possessed by a director, officer, or controlling shareholder and not 12 shared by the stockholders generally. 13 97. In order to satisfy these fiduciary obligations, the Individual Defendants were 14 15 required to exercise reasonable and prudent supervision over the management, policies, practices
16 and controls of the Company and to exercise their utmost ability to control and manage the
17 Company in a fair, just, honest, and equitable manner, in the best interests of Apple and its 1 8 shareholders. Defendants' fiduciary obligations did not allow them to act in furtherance of their 19 own self-interest, to the detriment of the Company and its shareholders . 20 98 . The Individual Defendants owed a duty to Apple and its shareholders to ensure 21 e 22 that Apple and its directors, officers and agents operated in compliance with all applicabl 23 federal and state laws, rules and regulations, and that Apple did not engage in any unsafe,
24 I unsound, or illegal business practices .
25 99. The Individual Defendants were further required to remain informed as to ho w 26 Apple was operating and, upon receiving notice or information of unsafe, imprudent, unsound or 27
28 VERIFIED DERIVATIVE COMPLAINT (Cause No . ) - Page - 39 1 illegal practices, to make a reasonable investigation into and take steps to correct the practices .
2 The Individual Defendants' duties included, but were not limited to, maintaining and 3 implementing an adequate system of internal accounting, as well as other financial controls and 4 reporting, and gathering and reporting information internally, to allow the Individual Defendants 5 to perform their oversight function properly and to prevent the use of non-public corporate 6 information for personal profit . 7
8 100. The Individual Defendants were also required to supervise the preparation, filing,
9 and/or dissemination of Apple's SEC filings, press releases, audits, reports, and other
10 information to be publicly disseminated, and to examine and evaluate any reports of 11 examinations or investigations concerning the practices, products or conduct of Apple's officers, 12 and to make full and accurate disclosure of all material facts concerning each of the items set 13 forth herein. 14 e 15 101 . In addition, the Individual Defendants were required to preserve and enhanc
16 Apple's reputation as a publicly-traded company, and to maintain public trust and confidence in
17 Apple as a prudently managed corporate entity fully capable of meetings its duties an d 18 obligations, including its public reporting obligations . 19 102. In violation of these duties, as well as GAAP, the Individual Defendants failed to 20 I accurately record, process, summarize, and report the Company's financial data . 21 . Specifically, the Officer Defendants and Compensation Committee Defendant s 22 103
23 breached their fiduciary duties by backdating the option grants in violation of the Plans and
24 I applicable federal and state laws, rules and regulations as described more fully in the Count s
25 below. 26 27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No. ) - Page - 40 1 104. Similarly, all Individual Defendants, including the Officer Defendants ,
2 Compensation Committee Defendants and Audit Committee Defendants, breached their 3 fiduciary duties by (a) failing to account for and report the options backdating ; (b) filing and 4 disseminating to Apple shareholders and the public false financial statements that improperly 5 recorded and accounted for the backdated option grants and concealed the improper backdating 6
7 of stock options; and (c) filing and disseminating to Apple shareholders and the public false 8 proxy statements and false Form 4 filings in order to conceal the improper backdating of stock
9 options. 10 105. The Individual Defendants' misconduct was not, and could not have been, a n 11 I exercise of good faith business judgment . Rather, it was intended to and did, unduly benefit th e 12 Individual Defendants at the expense of the Company and its public shareholders. 13 106. As a direct and proximate result of the Individual Defendants' fiduciary breaches , 14
15 the Company has sustained millions of dollars in damages . The Individual Defendants have
16 diverted millions of dollars of corporate assets to senior Apple executives, caused Apple to incur
17 additional compensation expenses and tax liabilities, as well as loss of funds paid to Apple upon 18 the exercise of the options, and subjected Apple to potential liability from regulators, including 19 the Securities and Exchange Commission and Internal Revenue Service. 20 VI. DERIVATIVE ACTION AND DEMAND FUTILITY ALLEGATION S 21 107. Plaintiff brings this action derivatively on behalf of and for the benefit of Apple t o 22
23 I redress injuries suffered, and yet to be suffered by Apple, as a direct and proximate result of the 24 I wrongdoing alleged herein. Apple is named as a nominal defendant solely in a derivative
25 capacity. 26
27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No. ) - Page - 41 1 108. Plaintiff was an Apple shareholder during the relevant period described herein
2 during which the alleged wrongdoing occurred ; Plaintiff has held Apple common stock during
3 the relevant period, and intends to retain these shares of Apple stock through the duration of this 4 litigation. 5 6 109. This action is not a collusive one to confer jurisdiction on a cou rt of the United
7 States that it would not otherwise have.
8 110 . Plaintiff will fairly and adequately represent the interests of other similarly
9 situated Apple shareholders in enforcing Apple's rights.
10 111 . Plaintiff has made no demand on the Apple Board of Directors before bringing 11 this action because such demand would be futile and is thereby excused . 12 112. The members of the Board upon whom the demand would be served either 13 14 actively participated or acquiesced in the behavior complained of, which served no legitimate
15 business purpose.
16 113 . The backdating of options constitutes self-dealing. The Officer Defendants
17 participated in or benefited from backdating options during the relevant period .
18 114. Moreover, all members of the Audit and/or Compensation Committee were 19 directly responsible for authorizing the backdated options and /or approved the false financial 20 statements . These Board members include Defendants Campbell, Drexler, Levinson, and York . 21 22 115. These acts served no legitimate purpose and were not the product of good faith
23 business judgment . Such acts were unlawful and are therefore incapable of ratification . As a
24 result, neither the business judgment rule, nor any pre-suit demand requirement are applicable
25 here. 26
27
28 VERIFIED DERIVATIVE COMPLAINT (Cause No. Page - 42 1 116. Moreover, there is no reason to believe that those members of the Board of
2 Directors who are not alleged to have participated directly in the wrongdoing described herein 3 are sufficiently independent to prosecute this action. They have ratified the wrongdoing alleged 4 herein. They have also tacitly or implicitly approved, participated in, and/or permitted the 5 wrongs alleged herein, concealed or disguised those wrongs, or recklessly or negligently 6
7 disregarded them, and are therefore not disinterested parties and lack sufficient independence to
8 exercise the business judgment required of them . Moreover, these directors cannot be expected
9 to prosecute claims against themselves and persons with whom they have extensive interrelated
10 business, professional and personal entanglements, if Plaintiff were to demand they do so . The 1 1 Apple Board of Directors cannot exercise independent objective business judgment in deciding 12 whether to bring this action or whether to vigorously prosecute this action because each of its 13 members participated personally in the wrongdoing alleged or are dependent upon the 14
15 Defendants who did. Thus, any requirement of pre-suit demand that is ordinarily applied t o
16 derivative suits can and should be, excused.
17 VII. TOLLING OF THE STATUTE OF LIMITATIONS 18 117. The Counts alleged herein are timely. As an initial matter, Defendants wrongfully 19 concealed their manipulation of Apple's stock option plans through strategic timing and 20 backdating, by issuing false and misleading SEC filings, including proxy statements and 21 22 quarterly and annual reports, by falsely reassuring Apple's investors that Apple's option grants
23 were being administered by a committee of independent directors, and by failing to disclose that
24 backdated options were, in fact, actually issued on dates other than those disclosed, and that
25 strategically timed option grants were issued based upon the manipulation of insider informatio n 26
27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No. ) - Page - 43 1 that ensured that the true fair market value of the Company's stock was, in fact, higher than th e 2 I exercise price on the actual date of the option grant . 3 118. Apple's public investors had no reason to know of the Defendants' breaches o f 4 their fiduciary duties until June 29, 2006, when Apple disclosed that its internal investigation had 5 discovered irregularities related to the issuance of certain stock option grants made between 1997 6
7 and 2001 . The full extent of Defendants' breaches and the damages caused as a result is not
8 known and cannot be known at this time .
9 119. Finally, as fiduciaries of Apple and its public shareholders, the Defendants canno t 10 rely on any limitations defense when they withheld from Apple's public shareholders the facts 11 that give rise to the claims asserted herein, i.e., that Apple's board breached its fiduciary 12 responsibilities to oversee the Company's executive compensation practices, and that the option 13
14 grant dates were manipulated so as to maximize the profit for the option grant recipients and,
15 accordingly, to maximize the Company's costs.
16 VIII. CAUSES OF ACTION 17 A. COUNT I: Violation of Exchange Act Section 14 (against the Compensation and Audit Commi 1 8 ttee Defendants) 19 120. Plaintiff incorporates by reference and realleges each and every allegation
20 contained above, as though fully set forth herein.
21 121. The Compensation and Audit Committee Defendants issued, caused to be issued , 22 and participated in the issuance of materially false and misleading statements to shareholders that 23 were contained in the Company's 1994 through 2002 Proxy Statements, which, in the respective 24 sections disclosing executive compensation, misrepresented or failed to disclose the facts set 25 forth above 26 . By reasons of the conduct alleged herein, therefore, each Compensation and Audi t 27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No . ) - Page - 44 1 I Committee Defendant violated Section 14(a) of the Exchange Act, 15 U.S.C . § 78n(a). The
2 correct information would have been material to the Company's shareholders in determining 3 whether to elect directors to manage the Company. 4 122. Plaintiff, derivatively on behalf of the Company, therefore, seeks to void the I 5 election of Compensation and Audit Committee Defendants based upon the misleading and 6
7 incomplete proxy materials, and to recover damages caused by these Defendants' failure to
8 disclose the improper compensation described herein.
9 B. COUNT II: Breach of Fiduciary Duty (against the Individual Defendants)
10 123. Plaintiff incorporates by reference and realleges each and every allegatio n 1 1 contained above, as though fully set forth herein. 12 124. By reason of their positions as executive officers and/or directors of Apple an d 13 because of their ability to control the business and corporate affairs of the Corporation, the 1 4
15 Individual Defendants owe Apple and its shareholders the fiduciary obligations of good faith, 1 6 trust, loyalty, and due care, and were and are required to use their utmost ability to control and
17 manage Apple in a fair, just, honest, and equitable manner . The Individual Defendants were and
18 are required to act in furtherance of the best interests of Apple and its shareholders equally and 19 not in furtherance of theirs or other fiduciaries' personal interests or benefit . Each officer and 20 director owes to the Company and its shareholders the fiduciary duty to exercise good faith and 2 1 diligence in the administration of the Company and in the use and preservation of its property 22
23 and assets, and the highest obligations of fair dealing .
24 125. The Individual Defendants violated and breached these duties by their action s
25 described herein . Each of these Defendants either received backdated options or approved , 26 I administered, and ratified or permitted the backdated options to be granted to other Defendants. 27
28 VERIFIED DERIVATIVE COMPLAIN T (Cause No . ) - Page - 45 1 The Individual Defendants knew or, with exercise of reasonable care, should have known, that
2 Apple's executives were engaged in backdating stock options, that the option grants they 3 approved were not actually executed on the dates reflected in the relevant documents, that the 4 practice of backdating and failing to report the additional compensation was illegal, that the 5 backdated stock options violated relevant provisions of the pertinent stock option Plans, and that 6 7 the practice of backdating options was not an exercise of sound business judgment . The
8 Individual Defendants nevertheless continued to approve such options or to acquiesce in thei r
9 approval. 10 C. COUNT III: Aiding And Abetting Breach Of Fiduciary Duty (against the 11 Individual Defendants ) 12 126. Plaintiff incorporates by reference and realleges each and every allegatio n
13 I contained above, as though fully set forth herein. 14 127. As a result of the foregoing conduct, including their approval of the backdate d 15 I stock options, the Individual Defendants participated in and facilitated the breach of fiduciary 16 duties described herein. 17 128. By virtue of their role in creating and administering the Corporation's stoc k 1 8
19 option Plans, and their approval and authorization of the stock options that were backdated as
20 alleged herein, the Audit and Committee Defendants were able to, and in fact did, render aid and
2 1 assistance to the Officer Defendants in their breach of fiduciary duty . These Defendants did so 22 when they knew or should have known that the practice of backdating was illegal, harmful to the 23 company, inconsistent with GAAP and a breach of fiduciary duty [for the fiduciary defendants] . 24 25
26
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28 VERIFIED DERIVATIVE COMPLAIN T (Cause No . ) - Page - 46 1 129. The Company and its shareholders have been incurred as a result . Plaintiff,
2 derivatively on behalf of Apple, seeks damages and other relief for the Company as set forth 3 herein. 4 D. COUNT IV: Unjust Enrichment (against the Officer Defendants) 5 130. Plaintiff incorporates by reference and realleges each and every allegatio n 6 contained above , as though fully set forth herein. 7 8 131 . As a result of the foregoing conduct, including millions of dollars in exces s
9 I compensation awarded to Apple officers and directors through backdated stock options, th e
10 Officer Defendants have been unjustly enriched at the expense, of the Company and it s 11 shareholders. 12 132. The Company has been injured by reason of this unjust enrichment . Plaintiff, 13 derivatively on behalf of Apple, seeks damages and other relief for the Company . 14
15 I E. Count V: Rescission (against the Officer Defendants) 16 131 Plaintiff incorporates by reference and realleges each and every allegation
17 contained above, as though fully set forth herein.
1 8 134. As a result of the acts alleged herein, all stock option contracts between the 19 Officer Defendants and the Company entered into during the relevant period were obtained 20 through the Officer Defendants' deceit, and abuse of control. Moreover, the backdated stock 21 options and the shares underlying these options were not duly authorized by the Board, as was 22 legally required, because they were not authorized in accordance with the terms of the publicly 23
24 filed contracts-including the Plans and the Officer Defendants' employment
25 agreements-approved by the Company shareholders and filed with the SEC .
26
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28 VERIFIED DERIVATIVE COMPLAIN T (Cause No . ) - Page - 47 1 135. All stock option contracts between the Officer Defendants and the Company 2 entered into during the relevant period should, therefore, be rescinded, with sums paid under 3 such contracts returned to the Company, and all such executory contracts cancelled and declare d 4 void. 5 F. Count VI: Gross Mismanagement (against the Individual Defendants) 6 136. Plaintiff incorporates by reference and realleges each and every allegatio n 7
8 contained above, as though fully set forth herein.
9 137. By their actions alleged herein, Individual Defendants abandoned and abdicate d 1 0 their responsibilities and fiduciary duties with regard to prudently managing the assets and 11 business of Apple in a manner consistent with the operations of a publicly held corporation . 1 2 138. As a direct and proximate result of the Individual Defendants' gros s 13 mismanagement and breaches of duty alleged herein, Apple has sustained and will continue t o 1 4
15 I sustain significant damages in the millions of dollars .
161' 139. As a result of the misconduct and breaches of duty alleged herein, Individua l
17 Defendants are liable to the Company . 18 I G. Count VII: Waste of Corporate Assets (against the Individual Defendants) 19 140. Plaintiff incorporates by reference and realleges each and every allegatio n 20 contained above , as though fully set forth herein. 21 141 . By failing to properly consider the interests of the Company and its publi c 22 I 23 shareholders and by failing to conduct proper supervision, the Individual Defendants, withou t
24 I any valid corporate purpose, have cased Apple to waste valuable corporate assets solely for the
25 I financial gain of the Officer Defendants . 26 27
28 VERIFIED DERIVATIVE COMPLAINT (Cause No. ) - Page - 48 1 142. As a result of the waste of corporate assets, the Individual Defendants are liable to
2 the Company . 3 IX. PRAYER FOR RELIEF 4 WHEREFORE, Plaintiff demands judgment, as follows : 5 A. Against all of the Individual Defendants for the damages sustained by the 6 Company as a result of their breaches of fiduciary duty ; 7
8 B. Against the Individual Defendants in an amount equal to the amount by whic h
9 they have been unjustly enriched ;
10 C. Imposing on the Officer Defendants a constructive trust on their options contracts, 11 and on all proceeds that have been received or will in the future be received by them in respect of 12 such interests or otherwise as the result of their backdated stock option grants ; 13 D. Ordering the Defendants to transfer to the Company all proceeds, directly or 14 indirectly obtained by them as a result of the backdated stock option grants; 15
16 E. Awarding Plaintiff her costs and expenses incurred in this action, includin g
17 reasonable attorney, accountant, and expert fees ; and
18 F. Such other and further relief as may be just and proper . 19 X. JURY TRIAL DEMANDED 20 Plaintiff demands a trial by jury . 21 CERTIFICATION OF INTERESTED ENTITIES OR PERSONS 22 n 23 Pursuant to Civil Local Rule 3-16, the undersigned certifies that as of this date , other tha
24 I the named parties, there is no such interest to report .
25
26
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28 VERIFIED DERIVATIVE COMPLAIN T (Cause No. ) - Page - 49 1 DATED this /cday of August, 2006. 2
3 Ronald Lovitt, CA Bar No . 40921 4 [email protected] J. Thomas Hannan, CA Bar No. 39140 5 [email protected] Henry I. Bornstein, CA Bar No. 39140 6 hbomstein@sbcglobal .net 7 LOVITT & HANNAN, INC. 900 Front Street, Suite 300 8 San Francisco, CA 9411 1 (415) 362-8769 (phone); (415) 362-7528 (fax) 9 Lynn Lincoln Sarko 10 [email protected] 11 Juli E. Farris, CA Bar No .. 141716 j farris@kel lerrohrback. com 12 Elizabeth A. Leland bleland@kellerrohrback .com 13 Cari C. Laufenberg 14 [email protected] KELLER ROHRBACK L.L.P. 15 1201 Third Avenue, Suite 3200 Seattle, WA 98101-3052 16 (206) 623-1900 (phone) ; (206) 623-3384 (fax)
17 Gary A. Gotto 18 ggotto@kellerrohrback .com KELLER ROHRBACK P .L.C. 19 National Bank Plaza 3101 North Central Avenue, Suite 900 20 Phoenix, AZ 8501 2 (602) 248-0088 (phone); (602) 248-2822 (fax) 21
22 Karen Hanson Riebel khriebel@locklaw .com 23 LOCKRIDGE GRINDAL NAUEN, PLL P 100 Washington Ave . So., Suite 2200 24 Minneapolis, MN 5540 1 (612) 339-6900 (phone ); (612) 339-0981 (fax) 25
26 Attorneysfor Plaintiff
27
28 VERIFIED DERIVATIVE COMPLAINT (Cause No. ) - Page - 50 VERIFICATION
I, Phyllis Jones, herby verify that I have reviewed the foregoing Verified Derivative
Complaint for Violation of the Securities Exchange Act, Breach of Fiduciary Duty, Aiding and
Abetting, Unjust Enricb ent and Rescission, and authorized its filing and that the foregoing i s true and correct to the best of ipy knowledge, information and belief
I verify under penalty of perjury that the foregoing is lace art cor=L
Executed on this s2 of August, 2006
PhAis Jones
36M93-1