1 BUCKLEY KING MICHAEL SALCIDO 2 2020 North Central Avenue, Suite 1120 Phoenix, AZ 85004 3 Telephone: 602/424-2550 602/424-2566 (fax) 4 [email protected]
5 Liaison Counsel 6 COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP 7 JEFFREY W. LAWRENCE 100 Pine Street, Suite 2600 8 San Francisco, CA 94111 Telephone: 415/288-4545 9 415/288-4534 (fax) [email protected] 10 Lead Counsel for Lead Plaintiff 11 UNITED STATES DISTRICT COURT 12 DISTRICT OF ARIZONA 13 TEAMSTERS LOCAL 617 PENSION No. 2:06-cv-02674-RCB 14 AND WELFARE FUNDS, on behalf of itself and all others similarly situated, CLASS ACTION 15 Plaintiff, LEAD PLAINTIFF'S COMPLAINT FOR 16 VIOLATIONS OF THE FEDERAL vs. SECURITIES LAWS 17 APOLLO GROUP, INC.; JOHN G. 18 SPERLING; TODD S. NELSON; KENDA B. GONZALES; DANIEL E. BACHUS; 19 JOHN BLAIR; JOHN R. NORTON III; DEMAND FOR JURY TRIAL HEDY GOVENAR; BRIAN E. 20 MUELLER; DINO J. DECONCINI; PETER SPERLING; and LAURA 21 PALMER NOONE, 22 Defendants. 23 24 25
26 27 28
2:06-cv-02674-RCB Document 71 Filed 11/23/2007 Page 1 of 103 1 TABLE OF CONTENTS 2 Page 3 1. INTRODUCTION ...... 1 4 II. JURISDICTION AND VENUE...... 6 5 III. PARTIE S ...... 6 6 IV. DEFENDANTS' DUTIES ...... 10 7 A. Apollo's Code of Ethics ...... 12 8 B. Defendants' Duties with Respect to Granting and Approving Stock 9 Option Grants ...... 14 10 C. Apollo's Stock Option Plans ...... 16 11 IV DEFENDANTS' FRAUDULENT SCHEME: BACKDATED STOCK OPTION GRANTS AT APOLLO ...... 17 12 A. 1998 Option Grants ...... 18 13 B. 1999 Option Grants ...... 19 14 C. 2000 Option Grants ...... 19 15 D. 2001 Option Grants ...... 21 16 VI. DEFENDANTS' FALSE AND MISLEADING STATEMENTS ISSUED 17 DURING THE CLASS PERIOD ...... 23 18 VII. THE TRUTH BEGINS TO EMERGE...... 56 19 A. The Restatement ...... 61 20 VIII. ADDITIONAL ALLEGATIONS OF SCIENTER ...... 71 21 A. The Company' s Admissions and Recent Actions Establish Defendants ' Scienter ...... 72 22 B. Defendants' Specific Participation in the Backdating Establishes 23 Their Scienter ...... 73 24 C. Defendants' Personal Enrichment Through Lucrative Stock Option Grants and Insider Trading Supports a Finding of Scienter...... 79 25 D. The Fact that Failing to Report Compensation Expenses from 26 Backdated Options Was Essential to Maintaining Apollo's Profitable Performance Supports a Strong Inference of Scienter ...... 79 27 E. The Mass "Retirements of Apollo Directors and Executives 28 Supports a Strong Inference of Scienter...... 81
2:06-cv-02674-RCB Document 71 filed 11/23/2007 Page 2 of 103 1
2 Page
3 IX. LOSS CAUSATION ...... 81 4 X. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON- THE-MARKET DOCTRINE ...... 83 5 XI. APPLICABILITY OF THE AFFILIATED UTE PRESUMPTION OF 6 RELIANCE ...... 84 7 XII. NO SAFE HARBOR ...... 84 8 XIII. PLAINTIFFS' CLASS ACTION ALLEGATIONS ...... 85 9 For Violation of § 10(b) of the Exchange Act and Rule 1 Ob-5 Against All Defendants 10 SECOND CLAIM FOR RELIEF ...... 92 11 For Violation of §20A of the Exchange Act Against All Defendants 12 THIRD CLAIM FOR RELIEF ...... 94 13 For Violation of §20(a) of the Exchange Act Against All Defendants 14 FOURTH CLAIM FOR RELIEF ...... 94 15 For Breach of Fiduciary Duty and/or Aiding and Abetting Against All 16 Defendants
17 FIFTH CLAIM FOR RELIEF ...... 95 18 Civil Conspiracy to Commit Fraud Against Defendants Nelson, Blair, Norton, Gonzales, Bachus and Mueller 19 PRAYER FOR RELIEF ...... 95 20 21 22 23 24 25 26 27 28
2:06-cv-02674-RCB Document 71 filed 11/23/2007 Page 3 of 103 1 I I. INTRODUCTION
2 1. Lead Plaintiff, the Pension Trust Fund For Operating Engineers ("Operating
3 Engineers or "Lead Plaintiff ), brings this federal securities law class action on behalf of 4 itself and all persons who purchased or otherwise acquired the publicly traded securities of
5 Apollo Group Inc. ("Apollo or the "Company) between November 28, 2001 and 6 October 18, 2006 (the "Class Period ), against Apollo and certain of its officers and/or 7 directors for violations of the Securities Exchange Act of 1934 (the "Exchange Act ) and 8 Arizona state law. 9 2. This action involves an admitted fraudulent scheme that spanned more than 10 five years. At the crux of the fraudulent scheme was a practice whereby defendants 11 intentionally manipulated stock option grants to the Company' s officers, directors and 12 employees in order to provide the recipients with a more profitable exercise price and to 13 under-report the Company ' s expenses and thereby overstate the Company ' s earnings. As a 14 result of this scheme, Apollo has been forced to restate its previously filed financial 15 statements for fiscal years 2001 through the second quarter of2006 by over $59 million (the 16 "Restatement ). Defendants ' scheme caused the Company' s financial statements issued 17 during the Class Period to be materially false and misleading, resulting in an artificial 18 inflation of the Company' s stock price, the disclosure of which caused investors to lose 19 hundreds of millions of dollars. By engaging in this scheme, defendants, among other 20 things, concealed that Apollo was not recording material compensation expenses and was 21 materially overstating its net income and earnings per share, in violation of the Generally 22 Accepted Accounting Principles ("GAAP ).
23 3. A stock option granted to an employee ofa corporation allows the employee to 24 purchase a specified number of shares of company stock at a specified price - referred to as 25 the "exercise price or "strike price - for a specified period of time. To qualify for 26 favorable accounting and tax treatment, options are often required to be priced at the market 27 price on the date of the grant, as Apollo's were required to be, in order to incentivize 28 corporate performance and profitability by good, honest management efforts. When the
2:06-cv-02674-RCB Document 71 - Filed 11/23/2007 Page 4 of 103 1 employee exercises the option, he or she purchases the stock from the company at the 2 exercise price, regardless of the stock's market price at the time the option is exercised. If 3 the Company has grown and prospered, the share price will have increased from the strike 4 price and the option grantee will pocket the difference. Stock options are granted by public 5 companies as part of compensation packages for employees and executives to align their 6 interests with those of the shareholders. 7 4. Where, however, the system is abused by backdating the options, that is, 8 picking an option-grant date earlier and at a lower price than are the actual date the option 9 was granted- or by "spring-loading, i.e., granting the stock optionjust before the company 10 is going to issue positive news which will likely push the stock price up, the executive gets 11 an instant, unearned profit and the incentive to grow the company is gone because the 12 executive has already made a profit without doing anything. Further, the company is hurt as 13 the spread between the true grant exercise price and the market price is required by law to be 14 treated as compensation expense, which reduces profits, results in the corporate stock option 15 plan losing its tax protection and the corporation's internal non-public information is
16 misappropriated by the executives for their personal profit. Shareholders and share 17 purchasers are also hurt, as the reported corporate profits are improperly inflated, as is the 18 trading price of the stock (at least until the truth comes out), and their ownership interest in 19 the corporation is unfairly diluted.
20 5. Stock option manipulation and, in particular, the practice ofgranting an option 21 with an exercise price tied to a date prior to the actual grant date is fraudulent where: (a) the 22 backdating of grant dates violates the terms of the company's stock option plan; (b) the 23 company misrepresents how the options are priced; or (c) the company fails to properly 24 record expenses associated with these option grants under GAAP. All three of these 25 circumstances existed here.
26 6. Defendants' manipulation of - and, in particular, the backdating of - stock
27 I option grants was not permitted under the contractual terms of the Company's stock option 28 plans. Instead, defendants' manipulation ofApollo's stock option grants was the linchpin of
2:06-cv-02674-RCB Document 71 - Filed 11/23/2007 Page 5 of 103 1 a broader fraudulent scheme to personally profit from increases in the Company's stock price
2 I with the benefit of hindsight, and to misrepresent and hide material information from the 3 public about defendants' scheme. In furtherance of this fraudulent scheme, defendants
4 I engaged in the following misconduct: 5 (a) In direct contravention of fundamental GAAP principles, defendants 6 failed to report expenses associated with the backdated options and thereby materially 7 understated Apollo's expenses and materially overstated its net income and earning per 8 share. Ifoptions are priced below a stock's fair market value when they are awarded, there is 9 an instant gain. Pursuant to Accounting Principles Board Opinion No. 25, "Accountingfor 10 Stock Issued to Employees ("APB 25 ), which was in effect through June 2005, the 11 Company was obligated to recognize this gain as compensation expense over the vesting 12 period of the option. After June 2005, Statement of Financial Accounting Standards 123,
13 "Accounting for Stock-Based Compensation ("SFAS 123 ), required that the Company 14 recognize the entire value of all option grants on the grant date amortized over the vesting 15 period of the option. However, as the Company has now admitted, it did not properly 16 account for its backdated option grants.
17 (b) By retroactively pricing the options, defendants caused the Company to 18 issue options with terms that violated the express requirements of the Company's stock 19 option plans, which rendered the Company's public representations that options were issued 20 in compliance with the Company's stock option plans materially false and misleading.
21 Specifically, the Company's stock option plans expressly state that the exercise price of 22 incentive stock options shall not be less than 100% of the fair market value of the stock on 23 the date of the grant. However, where, as here, options are backdated, the exercise price of 24 the stock options is lower than the fair market value on the true date of the grant. 25 (c) Defendants repeatedly misled investors by affirmatively representing in 26 the Company's Securities and Exchange Commission ("SEC ) filings that the purpose ofits 27 stock option plans and stock option grants was to align the personal interests ofits directors, 28 employees and officers with those of the Company and its shareholders by providing such
2:06-cv-02674-RCB Document 71 - Red 11/23/2007 Page 6 of 103 1 individuals with an incentive for outstanding performance in order to generate superior 2 I returns. 3 (d) Defendants expressly misrepresented the value ofofficer compensation 4 I in various Company filings. Specifically, in identifying specific options granted to officers, 5 defendants falsely stated that such options were granted with an exercise price equal to the 6 fair market value of the stock on the grant date when, in fact, the options granted were 7 backdated and "in-the-money when granted. 8 7. Apollo' s Restatement of May 22, 2007 effectively acknowledges that its 9 previously reported financial results were materially false and misleading when made 10 because such statements omitted material facts regarding, and failed to take account of, the 11 financial effect of the backdated option grants. Indeed, the Restatement laid out an 12 extensive, if not breathtaking scope of fraudulent conduct: the Company not only admitted 13 that 57% of all option grants used improper measurement dates and that 73% of the total 14 Management Grants (24 out of 33) were improper, but the Restatement confirmed that the 15 Company falsified documents to make it appear that the grants were completed and approved 16 on dates when that was simply not true.' 17 8. Apollo's Restatement further admits that, as a result ofdefendants backdating, 18 the Company's net income was overstated. For example, in fiscal 2001, the Restatement 19 reduced Apollo's net income by $21.8 million, or 25.5%. Similarly, in 2002, the 20 Restatement reduced Apollo's net income by $25.7 million, or 19%. Indeed, for the Class 21 Period as a whole, Apollo's net income was overstated by 5.6% due to the Company's 22 backdating and falsification of financial statements.
23 9. The backdating at Apollo has led to windfall profits for the Company's 24 executives and directors. Indeed, John G. Sperling ("John Sperling ) has admitted that all of 25 1 The Company disclosed that there were 100 option grants during the Restatement 26 period. With regard to the creation of false documents, the Company in its Form 10-K stated, "[t]he Companyprepared and maintained inaccurate documentation concerning the 27 date that grant awards were completed and approved (emphasis added). 28
2:06-cv-02674-RCB Document 71 - filed 11/23/2007 Page 7 of 103 1 Apollo's Section 16 officers, including himself, received backdated options. John Sperling,
2 I and his son, Peter V. Sperling ("Peter Sperling ), control over 99% ofthe voting stock ofthe 3 Company, have alone pocketed over $1 billion by selling shares of Apollo stock, some of
4 I which was the result of exercising and selling illegally backdated stock options. 5 10. When the backdating scheme at Apollo was disclosed through a series of 6 disclosures in 2006, investors lost hundreds ofmillions ofdollars between June and October 7 2006, as Apollo's stock price steadily declined as more and more of the scheme was 8 disclosed, despite Apollo's denials that backdating had occurred. On October 18, 2006, the 9 day that Apollo effectively admitted to backdating option grants and falsifying its financial 10 results to cover up the scheme, the stock plummeted 22.9% to a 4-year low of $37.55, on 11 trading volume of over 28 million shares - over 14 times the average daily trading volume 12 during the Class Period. 13 11. Once the backdating scheme was uncovered, it led to widespread house- 14 cleaning of many ofthe co-schemers. Apollo 's longtime Chief Financial Officer ("CFO ), 15 Kenda B. Gonzales ("Gonzales ), and Apollo's ChiefAccounting Officer ("CAO ), Daniel
16 E. Bachus ("Bachus ), were fired, or forced to resign, for their involvement in the backdating 17 of stock options. In addition, both members of Apollo's Compensation Committee during
18 the period in which backdating was occurring at the Company, John R. Norton III ("Norton ) 19 and John Blair ("Blair ) resigned from Apollo's Board ofDirectors (or "Board ), along with 20 both original members of the Apollo Board ofDirector's Special Committee ("SC ) which 21 was charged with investigating the options misconduct at the Company, Daniel Diethelm 22 ("Diethelm ) and Hedy Govenar ("Govenar ).
23 12. Despite its seriousness, this case is relatively straightforward: defendants 24 issued in-the-money backdated options and simply stole money from Apollo's shareholders.
25 Defendants were able to cover up their fraud and falsely inflate the price of the Company's 26 stock by failing to disclose their grants and issuing false and misleading financial statements. 27 As one jurist summarized in a similar case: "[T]his case is incredibly simple. Plaintiffs claim 28 defendants were playing a game with a stacked deck. When awarded options, with
2:06-cv-02674-RCB Document 71 - Filed 11/23/2007 Page 8 of 103 1 deliberately selected grant dates which were already in the money, defendants were playing a 2 game they knew they could not lose; and, unsurprisingly, defendants won.... In this game
3 I ... the patsy was either the hapless corporation, which in varying ways defendants
4 I controlled, or the corporation's shareholders, whose equity provided the game's antes and 5 bloated pot. In re UnitedHealth Group PSLRA. Litig., No. 06-CV- 1691 (JMR/FLN), 2007 6 U.S. Dist. LEXIS 40623, at *6-*8 (D. Minn. June 4, 2007). 7 II. JURISDICTION AND VENUE 8 13. The claims asserted herein arise under § § 10(b), 20(a) and 20A ofthe Exchange 9 Act, 15 U.S.C. §§78j(b), 78t(a) and 78t-1, and Rule lOb-5, 17 C.F.R. §240.10b-5, 10 promulgated thereunder. In connection with the acts, conducts and other wrongs complained 11 ofherein, defendants, directly or indirectly, used the means and instrumentalities of interstate 12 commerce, the United States mail and the facilities of a national securities market. 13 14. Jurisdiction exists pursuant to §22 of the Securities Act of 1933 ("Securities 14 Act ), 15 U.S.C. §77v. This Court also has supplemental jurisdiction over the state law 15 claims asserted herein pursuant to 28 U.S.C. § 1367. 16 15. Venue is proper in this District pursuant to §22 ofthe Securities Act, 15 U.S.C. 17 §77v and 28 U.S.C. § 1391(b). Many of the acts charged herein, including the preparation 18 and dissemination of materially false and misleading information, occurred in substantial
19 part in this District. Apollo's principal executive offices are located in Phoenix, Arizona. 20 Further, the individual defendants conduct business in this District. 21 III. PARTIES
22 16. Lead Plaintiff Pension Trust Fund for Operating Engineers is a $3.17 billion 23 pension fund providing benefits to members ofOperating Engineers Local Union No. 3, the 24 largest of the 182 unions within the International Union of Operating Engineers and the
25 largest construction trades local in the United States. The members work in both the public 26 and private sectors, with the majority of the fund's participants working in private
27 construction as heavy equipment operators, mechanics, drillers, concrete pumpers and soil 28 testors and inspector surveyors and dredgers. Operating Engineers purchased Apollo
2:06-cv-02674-RCB Document 71 - 6iled 11/23/2007 Page 9 of 103 1 publicly-traded securities during the Class Period at artificially inflated prices and suffered 2 economic loss and damages as a result of the violation ofthe securities laws alleged herein. 3 17. Defendant Apollo is an Arizona corporation with its principal executive offices 4 located at 4615 East Elwood Street, Phoenix, Arizona. The Company purports to be a 5 leading provider of higher education programs for working adults. 6 18. Defendant John Sperling is the founder of Apollo and is currently Acting 7 I Executive Chairman of the Board of the Company. John Sperling was the Chairman of the 8 Board from the Company's inception through June 2004, was President until February 1998 9 and Chief Executive Officer ("CEO ) until August 2001. At all times John Sperling has 10 been a director of the Company. He was appointed Acting Executive Chairman in January 11 2006 upon the resignation ofTodd S. Nelson ("Nelson ) as Chairman, CEO and President of 12 Apollo. John Sperling admits to having received stock options while CEO ofApollo. Based 13 on his knowledge of material non-public information regarding the Company, defendant
14 John Sperling sold 3.5 million shares of Apollo stock for proceeds of $157.1 million during 15 the Class Period. John Sperling is a citizen of Arizona. 16 19. Defendant Nelson was until 2006 Chairman, CEO and President of the 17 Company. Nelson was President from February 1998, CEO from August 2001 and 18 Chairman from June 2004. Nelson joined Apollo in 1987 serving in a variety ofpositions, 19 including a variety of executive positions since 1989. Apollo announced that Nelson 20 unexpectedly "resigned from the Company in January 2006. John Sperling, however, stated 21 that he personally recommended that the Board terminate Nelson because "he was 22 preoccupied primarily with the stock price and not with the functioning of the company.
23 Nelson was also subsequently found by the SC to have been responsible for granting many 24 ofthe backdated stock options at Apollo. Further, Nelson received backdated options while 25 he was employed at Apollo. Based on his knowledge of material non-public information 26 regarding the Company, defendant Nelson sold 1.9 million shares of Apollo stock for
27 proceeds of $82.8 million during the Class Period. Nelson is a citizen of Arizona. 28
2:06-cv-02674-RCB Document 71 -FAIed 11/23/2007 Page 10 of 103 1 20. Defendant Gonzales was CFO, Secretary and Treasurer ofthe Company from 2 October 1998 until she was forced to resign in November 2006 because ofher involvement 3 I in the stock option backdating at Apollo. Based on her knowledge of material non-public 4 information regarding the Company, defendant Gonzales sold 136,389 shares of Apollo
5 I stock for proceeds of $5.3 million during the Class Period. Gonzales is a citizen ofArizona. 6 21. Defendant Bachus was CAO and Controller from the time he joined the 7 Company in August 2000 until he was forced to resign because of his involvement in the 8 stock option backdating at Apollo. Based on his knowledge of material non-public 9 information regarding the Company, defendant Bachus sold 30,554 shares of Apollo stock 10 for proceeds of $1.7 million during the Class Period. Bachus is a citizen of Arizona. 11 22. Defendant Blair was director of Apollo from September 2000 until he
12 I announced his resignation in May 2007. Blair served as a director ofWestern International 13 University Inc., a wholly-owned subsidiary ofApollo, from 1982 to September 2000. As the 14 Chairman of the Audit Committee defendant Blair caused or allowed the dissemination of 15 improper public statements described herein. As a member ofthe Compensation Committee, 16 defendant Blair controlled the other defendants' stock option awards. Based on his 17 knowledge ofmaterial non-public information regarding the Company, defendant Blair sold
18 60,185 shares ofApollo stock for proceeds of$3.6 million during the Class Period. Blair is a 19 citizen of Arizona.
20 23. Defendant Norton was director ofApollo from March 1997 until he announced 21 his resignation from the Board in December 2006. As a member of the Audit Committee, 22 defendant Norton was responsible for Apollo's public financial statements. As the Chairman 23 of the Compensation Committee, defendant Norton controlled the other defendants' 24 backdated stock option awards. Based on his knowledge ofmaterial non-public information 25 regarding the Company, defendant Norton sold 184,498 shares ofApollo stock for proceeds
26 of $7.9 million during the Class Period. Norton is a citizen of Arizona. 27 24. Defendant Govenar was a director of Apollo from March 1997 until she
28 I announced her resignation from the Board in May 2007. Govenar was a director of the
2:06-cv-02674-RCB Document 71 -F8Ied 11/23/2007 Page 11 of 103 1 University of Phoenix, Inc. ("University of Phoenix ), Apollo's most important and well 2 known subsidiary, from 1992 to February 1997. Based on her knowledge of material non- 3 public information regarding the Company, defendant Govenar sold 78,343 shares ofApollo
4 I stock for proceeds of $3.4 million during the Class Period. Govenar is a citizen of 5 California. 6 25. Defendant Brian E. Mueller ("Mueller ) has been the President ofApollo since 7 January 2006. Mueller joined the Company in 1987, serving in a variety of positions, 8 including a variety of executive positions since 1993. Most recently, Mueller held the title of 9 Chief Operating Officer ("COO ) prior to his appointment as President of the Company. 10 Mueller is a citizen of Arizona. 11 26. Defendant Dino J. DeConcini ("DeConcini ) has been a director of Apollo 12 since 1981. As a member ofthe Audit Committee, defendant DeConcini caused or allowed 13 the dissemination of the improper public statements described herein. Based on his 14 knowledge ofmaterial non-public information regarding the Company, defendant DeConcini 15 sold 115,611 shares of Apollo stock for proceeds of $5.7 million during the Class Period.
16 DeConcini is a citizen of California. 17 27. Defendant Peter Sperling is Senior Vice President and a director ofApollo. He 18 has been with the Company since 1983. Peter Sperling is the son of defendant John 19 Sperling. Based on his knowledge of material non-public information regarding the
20 Company, defendant Peter Sperling sold 9.9 million shares of Apollo stock for proceeds of 21 $472.5 million during the Class Period. Peter Sperling is a citizen ofArizona and California. 22 28. Defendant Laura Palmer Noone ("Noone ) has been President of the 23 University of Phoenix since September 2000. Noone has been with the University of 24 Phoenix since 1987. Because of Noone's position, she knew the adverse non-public
25 information about the business of Apollo, as well as its finances, markets and present and 26 future business prospects, via access to internal corporate documents, conversations and 27 connections with other corporate officers and employees, attendance at management 28 meetings and via reports and other information provided to her in connection therewith.
2:06-cv-02674-RCB Document 71 49Ied 11/23/2007 Page 12 of 103 1 During the Class Period, Noone participated in the issuance of false and/or misleading 2 statements, including the preparation of false and/or misleading press releases and SEC
3 filings. Based on her knowledge ofmaterial non-public information regarding the Company, 4 defendant Noone sold 245,854 shares of Apollo stock for proceeds of $15 .3 million during 5 the Class Period. Noone is a citizen of Arizona. 6 IV. DEFENDANTS' DUTIES 7 29. Each officer and director of Apollo owed Apollo shareholders the duty to 8 exercise care and diligence in the management and administration of the affairs of the 9 Company. 10 30. By reason oftheir positions as officers and directors ofApollo, and because of 11 their ability to control the business and corporate affairs of the Company, defendants owed 12 Apollo shareholders the obligations of loyalty, good faith, independence and candor. 13 31. As officers and/or directors ofa publicly held company, defendants had a duty 14 to promptly disseminate accurate and truthful information with respect to the Company's 15 operations, finances and compensation practices.
16 32. Because of their positions of control and authority as directors or officers of 17 Apollo, each of the defendants was able to and did, directly and indirectly, control the 18 wrongful acts complained of herein. These acts include: (i) agreement to and/or 19 acquiescence in the improper stock option practices; and (ii) causing Apollo to file false SEC 20 filings in violation ofthe U.S. securities laws. Because of their positions with Apollo, each 21 ofthe defendants had access to adverse non-public information and was required to disclose 22 these facts promptly and accurately to Apollo shareholders and the financial markets but 23 failed to do so. 24 33. To discharge their duties, the officers and directors ofApollo were required to 25 exercise reasonable and prudent supervision over the management, policies, practices and
26 controls ofthe business and financial affairs ofApollo. By virtue of such duties, the officers
27 and directors of Apollo were required, among other things, to: 28
2:06-cv-02674-RCB Document 71 - Red 11/23/2007 Page 13 of 103 1 (a) manage, conduct, supervise and direct the business affairs ofApollo in
2 I accordance with applicable federal law, government rules and regulations, and the charter 3 I and by-laws of Apollo, including its stock option plans; 4 (b) not permit any officer, director or employee ofApollo to engage in self- 5 dealing, insider trading or stock manipulation; 6 (c) not permit any officer, director or employee of Apollo to violate
7 I applicable laws, rules and regulations; 8 (d) remain informed as to the status of Apollo' s operations, including its 9 practices in relation to its executive compensation practices, financial statement preparation 10 and internal financial, accounting and disclosure controls, and upon receipt of notice or
11 information of imprudent, improper or unsound practices, to make inquiry in connection 12 therewith, and to take steps to correct such conditions or practices and make such disclosures 13 as are necessary to comply with the federal securities laws and maintain their duty ofcandor 14 to the Company's shareholders; 15 (e) establish and maintain systematic and accurate records and reports of 16 the business and affairs ofApollo and procedures for the reporting to the Board ofDirectors 17 and to periodically investigate, or cause independent investigation to be made of, said reports 18 and records;
19 (f) maintain and implement an adequate, functioning system of internal 20 legal, financial, disclosure and accounting controls, such that Apollo's financial statements - 21 including its expenses, accounting for stock option grants and other financial information -
22 would be accurate and in accordance with applicable laws; 23 (g) exercise control and supervision over the public statements to the 24 securities markets and trading in Apollo stock by the officers and employees ofApollo; and 25 (h) supervise the preparation and filing of any financial reports or other
26 information required by law from Apollo and to examine and evaluate any reports of 27 examinations, audits or other financial information concerning the financial affairs ofApollo 28
2:06-cv-02674-RCB Document 71 - [Fled 11/23/2007 Page 14 of 103 1 and to make full and accurate disclosure of all material facts concerning, inter alia, each of 2 the subjects and duties set forth above. 3 34. Defendants, as corporate officers and/or directors, were obligated to comply
4 I with applicable laws and to disclose the truth about Apollo. Each of the defendants 5 participated in the issuance and/or review of the false and/or misleading statements, 6 including the false SEC filings and reports issued to Apollo shareholders. 7 A. Apollo' s Code of Ethics 8 35. All ofthe defendants, as corporate officers and/or directors, were keenly aware
9 I of their obligations to comply with applicable laws and to disclose the truth about Apollo, 10 particularly such requirements as are detailed in Apollo's Code of Ethical Conduct, which 11 existed during the Class Period and states in pertinent part: 12 It is the Company's belief that a strong commitment to principles of ethical conduct is essential for its success. Accordingly, Apollo has adopted the Code 13 of Ethical Conduct to outline expectations and provide standards for all employees, directors, and officers, regardless of the position he or she holds. 14 The Code promotes: 15 - Honest and ethical conduct; 16 - Full, fair, accurate, timely, and understandable disclosure in reports and public communications; 17 - Compliance with applicable laws, rules and regulations; 18 - The prompt reporting of violations of this Code to appropriate 19 individuals identified in this Code; and 20 - Accountability for adherence to this Code. 21 22 LAWS, RULES, REGULATIONS AND COMPANY POLICIES 23 It is the Company ' s philosophy that being informed about the legal environment in which Apollo does business and conducting business in a 24 manner that is lawful is vital to continued success. Every employee, director, and officer of the Company is expected to comply with all applicable local, 25 state and federal laws and regulations, in the cities, states and countries in which Apollo or one ofits subsidiaries operates. While an employee, director, 26 or officer is not expected to be on familiar terms with every law or regulation, such person is expected to utilize reasonable judgment when determining 27 when it is appropriate to seek advice or clarification on laws, rules and regulations. Further, the employee, officer or director is expected to follow 28 both the letter and spirit of these laws, rules and regulations. Employees,
2:06-cv-02674-RCB Document 71 - [Fled 11/23/2007 Page 15 of 103 directors, and officers are expected to be familiar with and comply with the terms, conditions and policies set forth in the Apollo Group, Inc. Employee Handbook. BUSINESS INFORMATION AND DISCLOSURES TO INVESTORS
As a public company, it is critical that Apollo ' s filings with the Securities and Exchange Commission as well as other public communications be full, fair, accurate , complete, timely and understandable . To assist in meeting the reporting standards detailed above, for all material information, including information relating to the Company ' s financial records and reports, an internal system ofcontrols and procedures, as well as a Disclosure Committee has been established. Each individual is expected to follow these controls and procedures to the extent they apply to his or her role. Employees, directors, and officers are expected to always record information accurately, honestly and in accordance with all applicable legal requirements as well as the Company's internal system of controls. An employee, director, 10 or officer of the Company will never be granted authorization to knowingly enter into or maintain any false or misleading information in the corporate 11 books, records, accounts or financial statements. 12 If an employee is aware that public disclosures are not accurate, complete or timely, or if an employee becomes aware of a transaction or development that 13 he or she believes may require disclosure, that employee should report the information immediately to a member of the Disclosure Committee. The 14 Disclosure Committee includes the President and Chief Executive Officer, Chief Financial Officer, ChiefAccounting Officer, Director of Internal Audit, 15 and the Financial Reporting Manager. 16 In the event the President and Chief Executive Officer and/or one ofthe senior financial officers or any other officer becomes aware of information that has 17 been filed or disclosed regarding the Company's business and/or financial condition that does not meet the standards set forth above, he or she is 18 expected to promptly report the violation to the Audit Committee ofthe Board of Directors. 19 20 SECURITIES LAWS AND INSIDER TRADING 21 Employees, directors, and officers are not allowed to purchase or sell Apollo 22 stock, including Apollo Class A common stock and University of Phoenix Online common stock, while in the possession of material, non-public 23 information concerning Apollo. In general, information will be considered "material if a reasonable investor would consider it important in making his 24 or her investment decision. This information includes but is not limited to, earnings results, acquisitions, divestitures , or pending changes in management 25 or control . In addition, to use any material non-public information to "tip others who might make an investment decision on the basis ofthis information 26 is not only unethical , but also illegal. 27 These rules also apply to the use of material, non-public information about other companies including but not limited to clients, competitors and potential 28 business partners. These rules also apply to an employee's, director's, or
2:06-cv-02674-RCB Document 71 - [Bed 11/23/2007 Page 16 of 103 1 officer's spouse, children, parents and siblings, as well as any other family members living in his or her household. 2 The Company also maintains a separate Insider Trading Policy (Employee 3 Handbook, Section 9. 14) that employees, directors, and officers are expected to become familiar with and comply with at all times. Questions regarding 4 this policy should be directed to the Chief Financial Officer.
5 Ex. A.2 6 36. Notwithstanding these policies, defendants' backdating at Apollo did not begin 7 to be disclosed to Apollo's shareholders until a June 2006 Lehman Brothers report was 8 published, and even then, as the truth leaked out, Apollo continued to deny that it had
9 I engaged in any misconduct. 10 B. Defendants' Duties with Respect to Granting and Approving Stock Option Grants 11 37. The individual defendants, because of their positions with the Company, 12 possessed the power and authority to control the contents ofApollo's quarterly reports, press 13 releases, SEC filings, and presentations to securities analysts, money and portfolio managers 14 and institutional investors, i.e., the market. They were provided with copies of the 15 Company's reports, SEC filings, registration statements and press releases alleged herein to 16 be misleading prior to or shortly after their issuance and had the ability and opportunity to 17 prevent their issuance or cause them to be corrected. 18 38. Defendants, as corporate officers and/or directors, were keenly aware oftheir 19 obligations to comply with applicable laws and to disclose the truth about Apollo 's stock 20 option backdating, particularly with respect to the director defendants who served on the 21 Compensation and Audit Committees. 22 39. Defendants Norton and Blair served on Apollo' s Compensation Committee 23 throughout the Class Period, and were responsible for "review[ing] all aspects of 24 compensation ofexecutive officers and determin[ing] or mak[ing] recommendations on such 25
26
27 12 All "Ex. references are to exhibits attached hereto. 28
2:06-cv-02674-RCB Document 71 - f#ed 11/23/2007 Page 17 of 103 1 matters to the full Board of Directors. 3 Further, according to Apollo's Form 10-K for the 2 fiscal year ended August 31, 2002, the Compensation Committee:
3 reviews and approves each of the elements of our executive compensation program related to our executive officers, including, John G. Sperling and 4 Todd S. Nelson (the "Senior Executives ), and periodically assesses the effectiveness and competitiveness of the program in total. In addition, the 5 committee administers the key provisions of the executive compensation program and reviews with our Board of Directors in detail all aspects of 6 compensation for our Senior Executives. 7 8 Stock option grants are intended to provide substantial rewards to executives based on stock price appreciation and improved overall financial performance. 9 10 Options. We believe that it is important for executive officers to have an 11 equity stake in us, and, toward this end, we make option grants to key executive officers from time to time under the Apollo Group, Inc. 2000 Stock 12 Incentive Plan. In making option awards, the Compensation Committee reviews our financial ]performance during the past fiscal year, the awards 13 granted to other executives, and the individual officer's specific role.
14 40. Defendants DeConcini and Norton served on Apollo's Audit Committee 15 throughout the Class Period, and were responsible for: (i) reviewing and discussing the
16 I audited financial statements of the Company with management; (ii) discussing with the 17 Company's independent accountants the matters required to be discussed by the Statement of 18 Accounting Standards ("SAS ) No. 61, Communications with Audit Committees, and SAS 19 No. 90, Audit Committee Communications; (iii) receiving and reviewing the written 20 disclosures and letters from its independent accountants required by Independence Standards 21 Board No. 1, Independence Discussions with Audit Committees; (iv) discussing with its 22 independent accountants, the independent accountants' independence; and (v) recommending 23 to the Board of Directors that the audited financial statements be incorporated by reference 24 into the Company's Annual Reports. 25
26 3 Thomas Wier served as the Chairman of Apollo's Compensation and Audit 27 Committees until FY01. Mr. Wier passed away in 2003. 28
2:06-cv-02674-RCB Document 71 - Hed 11/23/2007 Page 18 of 103 1 C. Apollo' s Stock Option Plans
2 41. During the relevant period, Apollo issued stock options to Apollo executives 3 and employees under two separate plans. 4 42. From June 1994 to March 24, 2000, Apollo issued stock option grants to 5 Section 16 officers pursuant to the Long Term Incentive Plan dated May 13, 1994, as 6 amended on September 22, 1995 ("LTIP ). The LTIP required approval ofall grants by both 7 members ofthe Compensation Committee . Under the terms of the LTIP, the exercise price 8 of an Incentive Stock Option was required to be equal to the market price of the Company 9 stock at the time of the grant. Specifically, Section 7. 1 of the LTIP states that the exercise 10 price of an Incentive Stock Option "may not be less than the Fair Market Value ofa share of 11 [s]tock on the date of [the] grant.... Fair Market Value is defined as "the fair market value 12 of such stock ... determined by such methods or procedures established from time to time
13 by the Committee. Ex. B.
14 43. After March 24, 2000, Apollo awarded Management Grants pursuant to the 15 2000 Stock Incentive Plan ("2000 Plan ). The 2000 Plan required the approval of all grants
16 by the Compensation Committee or by both the President and CEO. Nelson became 17 President ofthe Company in 1998 and was promoted to President and CEO in August 2001, 18 and he retained both offices until he resigned in January 2006. Nelson had authority to 19 approve the option grants for employees other than himself. Backdated grants under the
20 2000 Plan were approved by both Nelson and the Compensation Committee during the 21 relevant period.
22 44. Under the 2000 Plan, the exercise price of Incentive Stock Options was 23 supposed to be tied to the market price of the Company stock at the time of the grant. 24 Section 7.2 of the 2000 Plan states that "the exercise price for any Incentive Stock Option 25 may not be less than the Fair Market Value [of Company stock] as of the date of the grant. 26 Fair market value is defined as "the closing price for the [s]tock ... for that date or, if no 27 closing price is reported for that date, the closing price on the next preceding date for which 28 a closing price was reported. Ex. C.
2:06-cv-02674-RCB Document 71 - flied 11/23/2007 Page 19 of 103 1 45. Both the LTIP Plan and the 2000 Plan require that the Plans be administered by 2 a "Committee that also had authority to designate plan participants, determine types and 3 number of option awards and make all other necessary administrative decisions. The
4 I "Compensation Committee Report in the Form 10-K for each relevant year (the "Report ) 5 identifies the "Committee as the Board's Compensation Committee. Per each Report, the 6 Compensation Committee "administers the key provisions of the executive compensation 7 program and reviews with our Board of Directors in detail all aspects of [executive] 8 compensation.... Each Report states that the executive compensation program primarily 9 comprises of "base salary, annual bonus, and long-term incentives in the form of stock 10 option grants. Each Report was signed by the members of the Compensation Committee 11 (during the Class Period, Norton and Blair), and as such, the members ofthe Compensation 12 Committee as well as the Board as a whole, reviewed, approved, and had direct personal 13 knowledge of the stock option grants under the 1994 LTIP Plan and the 2000 Plan. 14 46. Apollo falsely represented that the Company applied APB 25 in accounting for 15 stock option grants, stating in an August 1, 2000 Proxy Statement that "The Company has
16 elected to continue to account for its stock-based awards in accordance with Accounting 17 Principles Board Opinion No. 25, `Accounting for Stock Issued to Employees' ('APB 25'), 18 and has provided the pro forma disclosures as required by Statement ofFinancial Accounting 19 Standards 123, `Accounting for Stock-Based Compensation' (`SFAS 12Y).... 20 V. DEFENDANTS' FRAUDULENT SCHEME: BACKDATED STOCK OPTION GRANTS AT APOLLO 21 47. Apollo has admitted in its Form 10-K for the year ending August 31, 2006 that 22 "57 of the 100 total grants made during this time period used incorrect measurement dates 23 for accounting purposes. 24 48. While some ofthese grants were not publicly reported, several grants reported 25 in Apollo's Forms 10-K had purported grant dates so improbable that backdating is the only 26 plausible explanation. 27 28
2:06-cv-02674-RCB Document 71 - Ued 11/23/2007 Page 20 of 103 1 A. 1998 Option Grants
2 49. Defendants dated certain of Apollo's 1998 option grants on December 18, 3 1998 at $11.39 per share (split adjusted). This was nearly the low for the month of 4 December when Apollo's stock traded between $10.22 and $15.06 per share. Defendants
5 John Sperling, Nelson, Peter Sperling, Gonzales and Noone received 125,000, 100,000, 6 50,000, 22,000 and 20,000 options, respectively, at this price. 7 Apol Io G roup, Inc. 8 November 18.1998 to January 19.1999
9 $15 10 $15 11
12 $14 13 $13 14 0U)
15 o $12 16 17 $11 18 $10 19
20 $9 11/18/1998 12/01/1998 12/11/1998 12/23/1998 01/06/1999 0111'-1, 21 11/24/1998 12/07/1998 12!1711998 12/30/1998 01/12/1999 22 Date Executive No. of Total Grant Total Grant 10 Day 23 Securities Value at Value 10 Return Options Date of Trading Days 24 Granted Grant After Grant 12/19/199 John Ch Sperling 125,000 S3,203,750 0,4-149 9750 S945,000 25 12/19/1999 Todd S. Nelson- 100,000 S2,563,00(L S3,319,000 S756,000 12/19/1999 Peter V. Sperling 50,000 SI,291,5 S1,659,500 S379,000 26 12/18/1998 KendaB. 22,000 $563,860 $730,180 $166,320
27 12/18/1998 Laura Palmer 20,000 $512,600 $663,800 $151,200
28 -TOTAL 317000 It-R-Ild-71ft IMAII-71ft 10-106-520
2:06-cv-02674-RCB Document 71 - f8ed 11/23/2007 Page 21 of 103 1 B. 1999 Option Grants
2 50. Defendants dated Apollo's 1999 option grants on April 19, 1999 at $10.22 per 3 share (split adjusted) - the low ofthe month. Defendant Gonzales received 20,000 options at 4 this price.
5 Apollo Group, Inc. 6 March 19, 1999 to May19. 1999 $14 7 8 $13 9 10 $12 11 12 o 13 14 $10 15
16 $9 03/19/1999 04/07/1999 04/23/1999 05/11/1999 17 03/29/1999 041151 05/03/1999 05/19/1999 18 Date Executive No. Of Total Grant Total Grant 5 Day 19 Securities Value at Value 5 Trading Return Options Date of Days After 20 Granted Grant rant 4/19/1999 Kendra B. 20,000 $460,000 $495,000 $35,000 21 Gonzales
22 C. 2000 Option Grants
23 51. Defendants dated many of Apollo's 2000 grants as of January 12, 2000 at 24 $8.39 per share (split adjusted) - not only the low ofthe month but also the low oftheyear. 25 The stock traded as high as $11.33 per share in January and as high as $22.14 per share 26 during the year. Defendants John Sperling, Nelson, Gonzales, Peter Sperling and Noone
27 received 125,000, 100,000, 25,000, 25,000 and 10,000 options, respectively, at this price. 28
2:06-cv-02674-RCB Document 71 - f9ed 11/23/2007 Page 22 of 103 1 Apollo Group, Inc. 2 December 10. 1999 to February 14. 2000 $12OC 3 4
$11 0C 5 6 7 $100C 8
9 $9 0C 10
11 $8.00 1211011999 1212211999 01/04/2000 01/14/2000 011271 000 0210812000 12 12/16/1999 1212911999 0111012000 0112112000 1 ::.1^:'... 02/14/2000 13 Date Executive No. of Total Total Grant 5 Day 14 Securities Grant Value 5 Return Options Value Trading 15 at Granted Date of Days After 16 Grant Grant 1/12/2000 John G. Sperling 125,000 $2,360,000 $2,985,000 $625,000 17 1/12/2000 Todd S. Nelson 100,000 $1,888,000 $2,388,000 $500,000 18 1/12/2000 Kenda B. 25,000 $472,000 $597,000 $125,000 Gonzales 19 1/12/2000 Peter V. Sperling 25,000 $472,000 $597,000 $125,000 20 1/12/2000 Laura Palmer 10,000 $188,800 $238,800 $50,000 Noone 21 TOTAL 285,000 $5,380,800 $6,805,800 $1,425,000 22 Defendants also dated many ofApollo's grants as ofDecember 15, 2000 at $14.84 per share 23 (split adjusted) - not only the low ofthe month but also the lowfor thefourth quarter of 24 2000. This stock grant involved suspicious timing, as two days later Apollo issued better 25 than expected results which caused a dramatic and immediate climb in the Company's stock. 26 By December 20, 2000 - a day after the earnings release - Apollo's stock closed at $20.89 27 per share. The stock hit its high for the year of $22.14 per share a few days later on 28
2:06-cv-02674-RCB Document 71 - 00ed 11/23/2007 Page 23 of 103 1 December 28, 2000 - a 49% increase in eight trading days. Defendants John Sperling,
2 Nelson, Peter Sperling, Gonzales and Noone received 125,000, 10090009 2590009 10,000 and 3 10,000 options, respectively, at this price. 4 Apollo Group, Inc. 5 November 15. 2000 to January 16. 2001 $24
6 $23
7 $22 121151001 8 $21 -
$20 9 a $19 10 o $18
11 $17
12 $16
13 $15
$14 14 11/15/2000 11/30/2000 12114!2600 12129/2000 01 / 16/2001 11/22/2000 12107/2000 12/21/2000 01/08/2001 15 16 Date Executive No. of Total Total 5 Day Securities Grant Grant Return 17 Options Value at Value 5 18 Granted Date of Trading Grant Days After 19 Grant 12/15/2000 John G. Sperling 125,000 $4,173,750 $5,968,750 $1,795,000 20 12/15/2000 Todd S. Nelson 100,000 $3,339,000 $4,775,000 $1,436,000 21 12/15/2000 Peter V. Sperling 25,000 $834,750 $1,193,750 $359,000 12/15/2000 Kenda B. 10,000 $333,900 $477,500 $143,600 22 Gonzales 23 12/15/2000 Laura Palmer 10,000 $333,900 $477,500 $143,600 Noone 24 TOTAL 270,000 $9,015,300 $12,892,500 $3,877,200 25 D. 2001 Option Grants 26 52. Defendants dated Apollo's 2001 option grants on September 21, 2001 at 27 $23.33 per share - not only the low of the month but also the low for the second half of 28
2:06-cv-02674-RCB Document 71 - Ei1ed 11/23/2007 Page 24 of 103 1 2001. The stock traded as high as $28.02 per share in September and as high as $32.03 per 2 share in the second half of the year. Defendants John Sperling, Nelson, Peter Sperling,
3 Gonzales, Noone and Bachus received 150,000, 15090009 25,000, 25,000, 25,000 and 10,000 4 options, respectively, at this price. 5 Apollo Group, Inc. 6 August 21. 2001 to October 22, 2001 $31 7 $30 8
$29 9
$28 10 m 11 $27 12 $25
13 $25
14 $24
15 $23
16 $22 08/21/2001 08/2912001 09/01/2001 09121/2001 10/01/2001 10109/2001 10/17/2001 17 08/24/2001 09/04/2001 09/18/2001 09/26/2001 10/04/2001 1011212001 10/22/2001 18 Date Executive No. of Total Grant Total Grant 5 Day 19 Securities Value at Value 5 Return Options Date of Trading 20 Granted Grant Days After Grnnt 21 9/21/2001 John G. Sperling 150,000 $5,250,000 $6,304,500 $1,054,500 9/21/2001 Todd S. Nelson 150,000 $5,250,000 $6,304,500 $1,054,500 22 9/21/2001 Peter V. Sperling 25,000 $975,000 $1,050,750 $175,750 9/21/2001 Kenda B. 25,000 $875,000 $1,050,750 $175,750 23 Gonzales 9/21/2001 Laura Palmer 25,000 $875,000 $1,050,750 $175,750 24 Noone .9/21/2001 Daniel E. Bachus 10,000, S350,000 S420,300 S70,& 25 I TOTAL 385-.000 1 $13,475,-000 $16.181.-550 i $2.706.-550 26 27 28
2:06-cv-02674-RCB Document 71 - E2ed 11/23/2007 Page 25 of 103 VI. DEFENDANTS' FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD 2 53. During the Class Period, defendants issued a series of false and misleading 3 statements in violation of § § 10(b), 20(a) and 20A of the Exchange Act and Rule 1 Ob-5. 4 Defendants issued false and misleading statements regarding: (i) the Company's financial 5 results; (ii) the terms and value ofthe options granted to officers, directors, and employees; 6 (iii) the internal controls relating to stock option grants and related financial reporting; and 7 (iv) the Company's application ofAPB 25 and SFAS 123 regarding the accounting for stock 8 option grants. 9 54. On March 26, 2002, Apollo issued a press release entitled "Apollo Group Inc. 10 Reports Fiscal 2002 Second Quarter Results. These false financial results were repeated in 11 Apollo' s Form 10-Q, which was filed with the SEC on April 12, 2002. The press release 12 stated in part: 13 Todd S. Nelson, president and CEO, said, "We are pleased to report this 14 outstanding quarter. Both our on-ground and online results for University of Phoenix exceeded our expectations.... 15 16 Total consolidated revenues for Apollo Group Inc. for the three months ended 17 Feb. 28, 2002 rose 36.6% to $222.6 million, compared with $163.0 million in the second quarter of fiscal 2001. The University of Phoenix accounted for 18 93.7% of the $210.7 million in net tuition revenues from students enrolled in degree programs for the quarter ended Feb. 28, 2002. 19 20 Total consolidated revenues for Apollo Group Inc. for the six months ended 21 Feb. 28, 2002 rose 32.6% to $450.8 million, compared with $340.1 million for the same period last year.... 22 23 Consolidated net income for Apollo Group Inc. for the three months ended 24 Feb. 28, 2002 increased 71.8% to $28.1 million, compared to $16.3 million for the same period last year. Net income for University of Phoenix Online for 25 the three months ended Feb. 28, 2002 increased 110.5% to $12.7 million, compared to $6.0 million for the same period last year. 26 Consolidated net income for Apollo Group Inc. for the six months ended 27 Feb. 28, 2002 increased 48.3% to $61.1 million, compared to $41.2 million for the same period last year. Net income for University of Phoenix Online for 28
2:06-cv-02674-RCB Document 71 - 03ed 11/23/2007 Page 26 of 103 the six months ended Feb. 28, 2002 increased 103.7% to $23.7 million, compared to $11.6 million for the same period last year. 2
3 Business Outlook 4 Apollo Group Inc. 5 We expect revenue for the quarter ending May 31, 2002 to be between 6 $264 million and $266 million and to be between $986 million and $988 million for fiscal 2002. 7 n Operating margin is expected to be between 25.5% and 26.0% for the 8 quarter ended May 31, 2002 and to be between 23.0% and 9 n 23.5% for fiscal 2002. 10 55. On or around June 25, 2002, Apollo issued a press release entitled "Apollo 11 Group Inc. Reports Fiscal 2002 Third Quarter Results. These false financial results were 12 repeated in Apollo's Form 10-Q, which was filed with the SEC on July 12, 2002. The press 13 release stated in part: 14 Todd S. Nelson, president and CEO, said, "We are pleased to report another quarter with strong enrollment and earnings growth. In May, the Apollo 15 Group was moved to the S&P 500 from the S&P MidCap 400. We are honored to be added to this index.... 16 Total consolidated revenues for Apollo Group Inc. for the three months ended 17 May 31, 2002 rose 29.0% to $276.3 million, compared with $214.3 million in the third quarter of fiscal 2001.... 18 19 Total consolidated revenues for Apollo Group Inc. for the nine months ended 20 May 31, 2002 rose 31.2% to $727.1 million, compared with $554.4 million for the same period last year.... 21 22 Consolidated net income for Apollo Group Inc. for the three months ended 23 May 31 , 2002 increased 43.5% to $50.8 million, compared to $35 .4 million for the same period last year. Net income for University of Phoenix Online for 24 the three months ended May 31, 2002 increased 84.7% to $ 19.7 million, compared to $10. 6 million for the same period last year. 25 Consolidated net income for Apollo Group Inc. for the nine months ended 26 May 31, 2002 increased 46.1 % to $111.9 million, compared to $76.6 million for the same period last year. Net income for University ofPhoenix Online for 27 the nine months ended May 31, 2002 increased 28
2:06-cv-02674-RCB Document 71 - E#ed 11/23/2007 Page 27 of 103 94.6% to $43.3 million, compared to $22.3 million for the same period last year. 2
3 Business Outlook 4 Apollo Group Inc. 5 n We expect revenue for the quarter ending Aug. 31, 2002 to be between 6 $273 million and $275 million and to be approximately $1 billion for fiscal 2002. 7 n Operating margin is expected to be between 23.0% and 23.5% for the 8 quarter ended Aug. 31, 2002 and to be between 23.5% and 9 n 24.0% for fiscal 2002. 10 56. On October 8, 2002, the Company issued a press release entitled "Apollo 11 Group, Inc. Reports Fiscal 2002 Fourth Quarter and Year End Results. The press release 12 stated in part: 13 Todd S. Nelson, president and CEO, said, "We are pleased to report another strong quarter in both enrollment and earnings .... 14 Total consolidated revenues for Apollo Group Inc. for the year ended Aug. 15 31, 2002 rose 31.2% to $ 1.0 billion, compared with $769.5 million for the same period last year. The University of Phoenix accounted for 93.7% ofthe 16 $951.9 million in net tuition revenues from students enrolled in degree programs for the year ended Aug. 31, 2002. Total revenues for University of 17 Phoenix Online for the year ended Aug. 31, 2002 rose 81.4% to $327.5 million, compared with $ 180.5 million for the same period last year. 18 Total consolidated revenues for Apollo Group Inc. for the three months ended 19 Aug. 31, 2002 rose 31.2% to $282.3 million, compared with $215.1 million in the fourth quarter of fiscal 2001. The University of Phoenix accounted for 20 94.1 % of the $263.9 million in net tuition revenues from students enrolled in degree programs for the quarter ended Aug. 31, 2002. Total revenues for 21 University ofPhoenix Online for the three months ended Aug. 31, 2002 rose 77.7% to $99.9 million, compared with $56.2 million in the fourth quarter of 22 fiscal 2001. 23 Consolidated net income for Apollo Group Inc. for the year ended Aug. 31, 2002 increased 49.5% to $ 161.2 million, compared to $107.8 million for the 24 same period last year. Net income for University of Phoenix Online for the year ended Aug. 31, 2002 increased 102.7% to $64.4 million, compared to 25 $31.8 million for the same period last year.
26 Consolidated net income for Apollo Group Inc. for the three months ended Aug. 31 , 2002 increased 57.8% to $49.3 million, compared to $31 . 3 million 27 for the same period last year. Net income for University ofPhoenix Online for the three months ended Aug. 31 , 2002 increased 121.8% to $21.1 million, 28 compared to $9.5 million for the same period last year.
2:06-cv-02674-RCB Document 71 - ESed 11/23/2007 Page 28 of 103 2 Business Outlook
3 Apollo Group Inc. 4 n We expect revenue for the uarter ending Nov. 30, 2002 to be between $290 million and $292 million and to be between $1.290 billion and 5 $1.295 billion for fiscal 2003. 6 n Operating margin is expected to be between 23.0% and 23.5% for the quarter ending Nov. 30, 2002 and to be between 25.0% and 7 n 25.5% for fiscal 2003. 8 University of Phoenix Online 9 n We expect revenue for the quarter ending Nov. 30, 2002 to be between 10 $100 million and $101 million and to be between $500 million and $505 million for fiscal 2003. 11 n Operating margin is expected to be between 27.0% and 27.5% for the 12 quarter ending Nov. 30, 2002 and to be between 31.5% and 13 n 32.0% for fiscal 2003. 14 Diluted earnings per share attributed to Apollo Education Group are expected to be $0.23 for the quarter ending Nov. 30, 2002 and to be $1.08 for fiscal 15 2003. Diluted earnings per share attributed to University of Phoenix Online are expected to be $0. 13 for the quarter ending Nov. 30, 2002 and to be $0.76 16 for fiscal 2003. These diluted earnings per share numbers for the quarter ending Nov. 30, 2002 are consistent with the current First Call consensus 17 estimates.
18 57. On or around November 27, 2002, the Company filed with the SEC its Form 19 10-K for the fiscal year ended August 31, 2002, which repeated the false financial results
20 stated in the October 8, 2002 press release. The Form 10-K stated that John Sperling's and 21 Nelson's stock option grants bore an exercise price ofthe fair market value ofApollo's stock
22 on the date of the grant. The Form 10-K further stated in part: 23 Board Compensation Committee Report on Executive Compensation 24 Our Compensation Committee (the "Committee ) is composed entirely of independent outside members of our Board of Directors. The committee 25 reviews and approves each of the elements of our executive compensation program related to our executive officers, including, John G. Sperling and 26 Todd S . Nelson (the "Senior Executives ), and periodically assesses the effectiveness and competitiveness of the program in total. In addition, the 27 committee administers the key provisions of the executive compensation program and reviews with our Board of Directors in detail all aspects of 28
2:06-cv-02674-RCB Document 71 - 06ed 11/23/2007 Page 29 of 103 compensation for our Senior Executives. The committee has furnished the following report on executive compensation: 2
3 Stock option grants are intended to provide substantial rewards to 4 executives based on stock price appreciation and improved overall financial performance. The vesting of the options can be accelerated if certain profit 5 goals are achieved. 6 7 John Sperling was required to file Forms 4 in July 2002 to report the sale of Apollo Education Group Class A common stock and stock option 8 exercises ofApollo Education Group Class A common stock. This transaction was reported pursuant to Forms 5 filed in September 2002. 9 10 Compliance with Internal Revenue Code Section 162(m). 11 Section 162(m) ofthe Code limits the deductibility of executive compensation paid by publicly held corporations to $1 million for each executive officer 12 named in this report. The $1 million limitation generally does not apply to compensation that is pursuant to a performance-based plan approved by 13 shareholders. The Company's policy is to comply with the requirements of Section 162(m) and maintain deductibility for all executive compensation, 14 except in circumstances where we conclude on an informed basis that it is in the best interest of the Company and the shareholders to take actions with 15 regard to the payment of executive compensation which do not qualify for tax deductibility. 16 Based on our understanding of the regulations under Section 162 (m), 17 we believe that the full amount of compensation for each executive officer named in this report will be deductible. 18 58. Further, the 2002 Form 10-K contained certifications by Nelson and Gonzales 19 which stated that: 20 1. I have reviewed this annual report on Form 10-K of Apollo 21 Group, Inc. (the "registrant ); 22 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to 23 make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by 24 this annual report; 25 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all 26 material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 27 28
2:06-cv-02674-RCB Document 71 - E7ed 11/23/2007 Page 30 of 103 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in 2 Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
3 (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its 4 consolidated subsidiaries , is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; 5 (b) evaluated the effectiveness ofthe registrant's disclosure 6 controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date ); and 7 (c) presented in this annual report our conclusions about the 8 effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 9 5. The registrant's other certifying officers and I have disclosed, 10 based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the 11 equivalent functions): 12 (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant' s ability to record, 13 process, summarize and report financial data and have identified for the registrant' s auditors any material weaknesses in internal controls; and 14 (b) any fraud, whether or not material, that involves 15 management or other employees who have a significant role in the registrant's internal controls; and 16 6. The registrant' s other certifying officers and I have indicated in 17 this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to 18 the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 19 59. The statements in ¶¶54-58 made by defendants regarding fiscal 2002 were 20 false and misleading when made. The true facts known at the time were: 21 (a) Apollo's 2000, 2001, and 2002 financial results, including its net 22 income, earnings per share, and profit and gross margins, were all materially overstated due 23 to contrivances and manipulations in the administration ofApollo's stock options, including 24 backdating and failing to properly record or account for the actual amount and tax 25 consequences of compensation expenses of its executives; 26 (b) Apollo's financial and operating results reported during the Class Period 27 were not entirely due to the skill and business acumen of its top executives, their successful 28
2:06-cv-02674-RCB Document 71 - E8ed 11/23/2007 Page 31 of 103 1 I management of its business or the outstanding performance of its business units, as 2 I represented; in fact, a significant part was due to falsification of Apollo' s financial 3 statements by not properly accounting for (and thus understating) the true compensation
4 I expenses of its executive and management team; 5 (c) Apollo's top executives and directors were manipulating the Company's
6 I stock option plans to provide themselves with millions of dollars in undisclosed income by 7 backdating stock option grants to a much lower exercise price thus giving them an instant, 8 riskless profit, while exposing the Company to the risk of regulatory investigations, tax 9 penalties and even criminal proceedings; 10 (d) Apollo' s internal financial and accounting controls were materially 11 deficient and not effective in providing the necessary and required degrees of assurance that
12 Apollo's financial results and reports were fairly and accurately presented and free from 13 fraud; 14 (e) Senior management's salaries and option grants had not been 15 determined as a result ofarm's-length negotiation with Apollo's Compensation Committee, 16 but rather were the product of cronyism and undisclosed conflicts of interest; and 17 (f) Because Apollo' s historical and current financial results were
18 I overstated, defendants ' forecasts of Apollo' s future financial performance were false and 19 could not be achieved. 20 60. On or around December 18, 2002, the Company issued a press release entitled
21 I "Apollo Group, Inc. Reports Fiscal 2003 First Quarter Results. These false financial results 22 were repeated in Apollo's Form 10-Q, which was filed with the SEC on January 14, 2003. 23 The press release stated in part: 24 Total consolidated revenues for Apollo Group, Inc. for the three months ended November 30, 2002 rose 35.4% to $308.9 million, compared with $228.2 25 million in the first quarter of fiscal 2002. The University of Phoenix accounted for 93.8% of the $291.4 million in net tuition revenues from 26 students enrolled in degree ]programs for the quarter ended November 30, 2002. Total revenues for University of Phoenix Online for the three months 27 ended November 30, 2002 rose 71.3% to $110.2 million, compared with $64.3 million in the first quarter of fiscal 2002. 28
2:06-cv-02674-RCB Document 71 - E9ed 11/23/2007 Page 32 of 103 Consolidated net income for Apollo Group, Inc. for the three months ended November 30, 2002 increased 72.0% to $56.7 million, compared to $33.0 2 million for the same period last year. Net income for University of Phoenix Online for the three months ended November 30, 2002 increased 100.9% to 3 $22.0 million, compared to $10. 9 million for the same period last year. 4
5 Business Outlook 6 Apollo Group, Inc. 7 We expect revenue for the quarter ending February 28, 2003 to be between $286 million and $288 million and to be between $1.310 8 billion and $1.315 billion for fiscal 2003. 9 Operating margin is expected to be between 20.5% and 21.0% for the quarter ending February 28, 2003 and to be between 26.5% and 27.0% 10 for fiscal 2003. 11 University of Phoenix Online 12 We expect revenue for the quarter ending February 28, 2003 to be between $112 million and $113 million and to be between $510 million 13 and $515 million for fiscal 2003. 14 Operating margin is expected to be between 29.0% and 29.5% for the quarter ending February 28, 2003 and to be between 32.5% and 33.0% 15 for fiscal 2003. 16 Diluted earnings per share attributed to Apollo Education Group are expected to be $.20 for the quarter ending February 28, 2003 and to be $1.16 for fiscal 17 2003. Diluted earnings per share attributed to University of Phoenix Online are expected to be $.17 for the quarter ending February 28, 2003 and to be 18 $.84 for fiscal 2003.
19 61. On or around March 25, 2003, the Company issued a press release entitled 20 "Apollo Group Inc. Reports Fiscal 2003 Second Quarter Results. These false financial
21 results were repeated in Apollo' s Form 10-Q, which was filed with the SEC on April 14, 22 2003. The press release stated in part: 23 Todd S. Nelson, president and CEO, said, "We are pleased that both our online and core businesses again exceeded our expectations this quarter resulting in 24 another strong financial and enrollment performance for Apollo Education Group and University of Phoenix Online.... 25 Total consolidated revenues for Apollo Group Inc. for the three months ended 26 Feb. 28, 2003 rose 32.6% to $295.2 million, compared with $222.6 million in the second quarter of fiscal 2002. The University of Phoenix accounted for 27 94.6% of the $277.3 million in net tuition revenues from students enrolled in degree programs for the quarter ended Feb. 28, 2003. Total revenues for 28 University of Phoenix Online for the three months ended Feb. 28, 2003 rose
2:06-cv-02674-RCB Document 71 - BDed 11/23/2007 Page 33 of 103 62.1 % to $117.0 million, compared with $72.2 million in the second quarter of fiscal 2002. 2 Total consolidated revenues for Apollo Group Inc. for the six months ended 3 Feb. 28, 2003 rose 34.0% to $604.1 million, compared with $450.8 million in the same period last year. The University ofPhoenix accounted for 94.2% of 4 the $568.7 million in net tuition revenues from students enrolled in degree programs for the six months ended Feb. 28, 2003 . Total revenues for 5 University of Phoenix Online for the six months ended Feb. 28, 2003 rose 66.4% to $227.2 million, compared with $ 136.5 million in the same period last 6 year. 7 Consolidated net income for Apollo Group Inc. for the three months ended Feb. 28, 2003 increased 62.6% to $45.7 million, compared to $28.1 million for 8 the same period last year. Net income for University of Phoenix Online for the three months ended Feb. 28, 2003 increased 9 • 75.9% to $22.4 million, compared to $12.7 million for the same 10 period last year. 11 Consolidated net income for Apollo Group Inc. for the six months ended Feb. 28, 2003 increased 67.7% to $ 102.4 million, compared to $61 . 1 million 12 for the same period last year. Net income for University ofPhoenix Online for the six months ended Feb. 28, 2003 increased 13 • 87.4% to $44.3 million, compared to $23.7 million for the same 14 period last year. 15 16 Business Outlook 17 Apollo Group Inc. 18 • We expect revenue for the quarter ending May 31, 2003 to be 19 between $357 million and $359 million and to be between $1.327 billion and $1.331 billion for fiscal 2003. 20 • Operating margin is expected to be between 29.5% and 30.0% 21 for the quarter ending May 31, 2003 and to be between 27.5% 22 and
23 • 28.0% for fiscal 2003. 24 • University of Phoenix Online 25 • We expect revenue for the quarter ending May 31, 2003 to be 26 between $144 million and $145 million and to be between $525 million and $527 million for fiscal 2003. 27 28
2:06-cv-02674-RCB Document 71 - Bi1ed 11/23/2007 Page 34 of 103 • Operating margin is expected to be between 35.0% and 35.5% for the quarter ending May 31, 2003 and to be between 33.0% 2 and 3 • 33.5% for fiscal 2003. 4 Diluted earnings per share attributed to Apollo Education Group are expected 5 to be $.35 for the quarter ending May 31, 2003 and to be $1.21 for fiscal 2003. Diluted earnings per share attributed to University of Phoenix Online are 6 expected to be $.25 for the quarter ending May 31, 2003 and to be $.87 for fiscal 2003. 7 62. On or around June 23, 2003, the Company issued a press release entitled 8 "Apollo Group Inc. Reports Fiscal 2003 Third Quarter Results. These false financial results 9 were repeated in Apollo' s Form 10-Q, which was filed with the SEC on July 15, 2003. The 10 press release stated in part that: 11 Todd S. Nelson, president and CEO, said, "We are pleased to report another 12 strong quarter in both enrollment and earnings.... 13 Total consolidated revenues for Apollo Group, Inc. for the three months ended May 31 , 2003 rose 31.8% to $364.2 million, compared with $276.3 million in 14 the third quarter of fiscal 2002. The University of Phoenix accounted for 94.9% of the $342.6 million in net tuition revenues from students enrolled in 15 degree programs for the quarter ended May 31 , 2003. Total revenues for University of Phoenix Online for the three months ended May 31 , 2003 rose 16 60.2% to $ 145.8 million, compared with $91.0 million in the third quarter of fiscal 2002. 17 Total consolidated revenues for Apollo Group, Inc. for the nine months ended 18 May 31 , 2003 rose 33.2% to $968.2 million, compared with $727.1 million in the same period last year. The University ofPhoenix accounted for 94.4% of 19 the $911 .3 million in net tuition revenues from students enrolled in degree programs for the nine months ended May 31 , 2003. Total revenues for 20 University of Phoenix Online for the nine months ended May 31, 2003 rose 63.9% to $373.0 million, compared with $227.5 million in the same period last 21 year.
22 Consolidated net income for Apollo Group, Inc. for the three months ended May 31 , 2003 increased 46.2% to $74.3 million, compared to $50.8 million for 23 the same period last year. Net income for University of Phoenix Online for the three months ended May 31 , 2003 increased 61.1% to $31.7 million, 24 compared to $19. 7 million for the same period last year. 25 Consolidated net income for Apollo Group, Inc. for the nine months ended May 31, 2003 increased 57.9% to $176.6 million, compared to $111.9 million 26 for the same period last year. Net income for University ofPhoenix Online for the nine months ended May 31, 2003 increased 75.5% to $76.0 million, 27 compared to $43.3 million for the same period last year. 28
2:06-cv-02674-RCB Document 71 - Bled 11/23/2007 Page 35 of 103 Net cash provided by operating activities for Apollo Group, Inc. for the three months ended May 31 , 2003 was $97.5 million, compared to $93.7 million for 2 the three months ended May 31 , 2002. Net additions to property and equipment for Apollo Group, Inc. for the three months ended May 31, 2003 3 were $11 . 9 million, compared to $11 .5 million for the three months ended May 31, 2002. 4 Net cash provided by operating activities for Apollo Group, Inc. for the nine 5 months ended May 31 , 2003 was $248.6 million, compared to $181.3 million for the nine months ended May 31 , 2002. Net additions to property and 6 equipment for Apollo Group, Inc. for the nine months ended May 31, 2003 were $41 .2 million, compared to $27. 7 million for the nine months ended 7 May 31, 2002. 8 9 Business Outlook 10 Apollo Group, Inc.
11 - We expect revenue for the quarter ending August 31 , 2003 to be between $365 million and $368 million and to be between $ 1.333 billion and $1.336 12 billion for fiscal 2003. 13 - Operating margin is expected to be between 28.5% and 29.0% for the quarter ending August 31 , 2003 and to be between 28.5% and 29.0% for fiscal 14 2003. 15 University of Phoenix Online 16 - We expect revenue for the quarter ending August 31, 2003 to be between $154 million and $155 million and to be between $527 million and $528 17 million for fiscal 2003. 18 - Operating margin is expected to be between 34.0% and 34.5% for the quarter ending August 31, 2003 and to be between 33.0% and 33.5% for fiscal 19 2003. 20 Diluted earnings per share attributed to Apollo Education Group are expected to be $.33 for the quarter ending August 11, 2003 and to be $1 .27 for fiscal 21 2003. Diluted earnings per share attributed to University of Phoenix Online are expected to be $.26 for the quarter ending August 31, 2003 and to be $.90 22 for fiscal 2003.
23 63. On October 7, 2003, the Company issued a press release entitled "Apollo 24 Group, Inc. Reports Fiscal 2003 Fourth Quarter and Year End Results. The press release 25 stated in part: 26 Total consolidated revenues for Apollo Group, Inc. for the year ended August 31, 2003 rose 32.7% to $1.340 billion, compared with $ 1.009 billion 27 for the same period last year. The University ofPhoenix accounted for 94.6% of the $1.261 billion in net tuition revenues from students enrolled in degree 28 programs for the year ended August 31, 2003. Total revenues for University
2:06-cv-02674-RCB Document 71 - Bed 11/23/2007 Page 36 of 103 of Phoenix Online for the year ended August 31, 2003 rose 61.7% to $529.6 million, compared with $327.5 million for the same period last year. Total consolidated revenues for Apollo Group, Inc. for the three months ended August 31, 2003 rose 31.5% to $371.3 million, compared with $282.3 million in the fourth quarter of fiscal 2002. The University of Phoenix accounted for 95.1% of the $349. 8 million in net tuition revenues from students enrolled in degree programs for the three months ended August 31, 2003. Total revenues for University ofPhoenix Online for the three months ended August 31, 2003 rose 56.7 % to $ 156.6 million, compared with $99.9 million in the fourth quarter of fiscal 2002.
Consolidated net income for Apollo Group, Inc. for the year ended August 31, 2003 increased 53.3% to $247.0 million, compared to $161.2 million for the same period last year. Net income for University of Phoenix Online for the year ended August 31 , 2003 increased 71.6% to $ 110.5 million, compared to $64.4 million for the same period last year. 10 Consolidated net income for Apollo Group, Inc. for the three months ended August 31 , 2003 increased 42.8% to $70.4 million, compared to $49.3 million 11 for the same period last year. Net income for University ofPhoenix Online for the three months ended August 31 , 2003 increased 63.6% to $34.5 million, 12 compared to $21 . 1 million for the same period last year. 13 Net cash provided by operating activities for Apollo Group, Inc. for the year ended August 31 , 2003 was $343.0 million, compared to $260.5 million for 14 the year ended August 31 , 2002. Net additions to property and equipment for Apollo Group, Inc. for the year ended August 31 , 2003 were $55 . 8 million, 15 compared to $36. 7 million for the year ended August 31, 2002. 16 Net cash provided by operating activities for Apollo Group, Inc. for the three months ended August 31 , 2003 was $94.4 million, compared to $79.2 million 17 for the three months ended August 31 , 2002. Net additions to property and equipment for Apollo Group , Inc. for the three months ended August 31, 2003 18 were $14. 7 million, compared to $9.0 million for the three months ended August 31, 2002. 19 Consolidated degree enrollments for all ofthe Apollo Group, Inc. institutions 20 at August 31, 2003 increased by 26. 8% to 200,100 students compared to 157,800 students at August 31, 2002. Degree enrollments at The University of 21 Phoenix (excluding University of Phoenix Online) were 95,600 students at August 31 , 2003 compared to 84,300 students at August 31, 2002 representing 22 a 13.4% increase. Degree enrollments for University of Phoenix Online at August 31 , 2003 increased by 60. 8% to 79,400 students compared to 49,400 23 students at August 31, 2002. 24 Business Outlook 25 Apollo Group, Inc.
26 - We expect revenue for the quarter ending November 30, 2003 to be between $392 million and $395 million and to be between $ 1.731 billion and $1.734 27 billion for fiscal 2004. 28
2:06-cv-02674-RCB Document 71 - B4ed 11/23/2007 Page 37 of 103 1 - Operating margin is expected to be between 30.0% and 30.5% for the quarter ending November 30, 2003 and to be between 29.5% and 30.0% for 2 fiscal 2004.
3 University of Phoenix Online 4 - We expect revenue for the quarter ending November 30, 2003 to be between $165 million and $166 million and to be between $793 million and $794 5 million for fiscal 2004. 6 - Operating margin is expected to be between 32.5 % and 33.0% for the quarter ending November 30, 2003 and to be between 34.0% and 34.5% for 7 fiscal 2004. 8 Diluted earnings per share attributed to Apollo Education Group are expected to be $.39 for the quarter ending November 30, 2003 and to be $1 .64 for fiscal 9 2004. Diluted earnings per share attributed to University of Phoenix Online are expected to be $.27 for the quarter ending November 30, 2003 and to be 10 $ 1.30 for fiscal 2004. 11 64. On November 26, 2003, the Company filed its Form 10-K for the fiscal year
12 I ending August 31, 2003, including the financial results previously reported for 2003, and its 13 2001-2002 financial results as well. The Form 10-K included certifications by Nelson and 14 Gonzales which were substantially the same as the certifications in the Company's 2002 15 I Form 10-K set out in ¶58, above. 16 65. The statements made by defendants, set forth in ¶¶60-63, regarding fiscal 2003 17 were false and misleading when made. The true facts known at the time were: 18 (a) Apollo's 2001, 2002 and 2003 financial results, including its net
19 I income, earnings per share, and profit and gross margins, were all materially overstated due 20 to contrivances and manipulations in the administration ofApollo's stock options, including 21 backdating and failing to properly record or account for the actual amount and tax 22 consequences of compensation expenses of its executives;
23 (b) Apollo's financial and operating results reported during the Class Period 24 were not entirely due to the skill and business acumen of its top executives, their successful 25 management of its business or the outstanding performance of its business units, as 26 represented; in fact, a significant part was due to falsification of Apollo's financial 27 statements by not properly accounting for (and thus understating) the true compensation 28 expenses of its executive and management team;
2:06-cv-02674-RCB Document 71 - BSed 11/23/2007 Page 38 of 103 1 (c) Apollo's top executives and directors were manipulating the Company's
2 I stock option plans to provide themselves with millions of dollars in undisclosed income by 3 backdating stock option grants to a much lower exercise price thus giving them an instant,
4 I riskless profit, while exposing the Company to the risk of regulatory investigations, tax 5 penalties and even criminal proceedings; 6 (d) Apollo' s internal financial and accounting controls were materially 7 deficient and not effective in providing the necessary and required degrees of assurance that 8 Apollo's financial results and reports were fairly and accurately presented and free from 9 fraud; 10 (e) Senior management's salaries and option grants had not been 11 determined as a result ofarm's-length negotiation with Apollo's Compensation Committee, 12 but rather were the product of cronyism and undisclosed conflicts of interest; and 13 (f) Because Apollo' s historical and current financial results were
14 I overstated, defendants ' forecasts of Apollo' s future financial performance were false and 15 could not be achieved. 16 66. On December 18, 2003, the Company issued a press release entitled "Apollo 17 Group, Inc. Reports Fiscal 2004 First Quarter Results. These false financial results were
18 repeated in Apollo's Form 10-Q, which was filed with the SEC on January 13, 2004. The 19 press release stated in part that: 20 Todd S. Nelson, president and CEO, said, "We are very pleased with the strong financial performance this quarter.... 21 Total consolidated revenues for Apollo Group, Inc. for the three months ended 22 November 30, 2003 rose 33.3% to $411.8 million, compared with $308.9 million in the first quarter of fiscal 2003. The University of Phoenix 23 accounted for 95.0% of the $387.6 million in net tuition revenues from students enrolled in degree programs for the three months ended 24 November 30, 2003. Total revenues for University ofPhoenix Online for the three months ended November 30, 2003 rose 61.3% to $177.8 million, 25 compared with $110.2 million in the first quarter of fiscal 2003.
26 Consolidated net income for Apollo Group, Inc. for the three months ended November 30, 2003 increased 48.7% to $84.3 million, compared to $56.7 27 million for the same period last year. Net income for University of Phoenix Online for the three months ended November 30, 2003 increased 87.5% to 28 $41.2 million, compared to $22.0 million for the same period last year.
2:06-cv-02674-RCB Document 71 - B6ed 11/23/2007 Page 39 of 103 Net cash provided by operating activities for Apollo Group, Inc. for the three months ended November 30, 2003 was $134.2 million, compared to $77.9 2 million for the three months ended November 30, 2002. Net additions to property and equipment for Apollo Group, Inc. for the three months ended 3 November 30, 2003 were $26.0 million, compared to $14. 1 million for the three months ended November 30, 2002. 4 Consolidated degree enrollments for all of the Apollo Group, Inc. institutions 5 at November 30, 2003 increased by 28% to 211,300 students compared to 164,700 students at November 30, 2002. Degree enrollments at The 6 University ofPhoenix (excluding University ofPhoenix Online) were 95,200 students at November 30, 2003 compared to 84,300 students at November 30, 7 2002 representing a 13% increase. Degree enrollments for University of Phoenix Online at November 30, 2003 increased by 60% to 91,000 students 8 compared to 57,000 students at November 30, 2002. 9 Business Outlook 10 Apollo Group, Inc.
11 - We expect revenue for the quarter ending February 29, 2004 to be between $379 million and $382 million and to be between $1.750 billion and $1.753 12 billion for fiscal 2004. 13 - Operating margin is expected to be between 25.0% and 25.5% for the quarter ending February 29, 2004 and to be between 30.0% and 30.5% for 14 fiscal 2004. 15 University of Phoenix Online 16 - We expect revenue for the quarter ending February 29, 2004 to be between $174 million and $175 million and to be between $806 million and $807 17 million for fiscal 2004. 18 - Operating margin is expected to be between 31.5% and 32.0% for the quarter ending February 29, 2004 and to be between 35.0% and 35.5% for 19 fiscal 2004. 20 For the quarter ending February 29, 2004, diluted earnings per share attributed to Apollo Education Group are expected to be $.31 and diluted earnings per 21 share attributed to University of Phoenix Online are expected to be $.28. We are increasing our fiscal 2004 guidance related to expected diluted earnings 22 per share attriuted to Apollo Education Group from $ 1.64 to $ 1.71. Expected diluted earnings per share guidance attributed to University ofPhoenix Online 23 is increasing from $1 . 30 to $ 1.40 for fiscal 2004.
24 67. On March 12, 2004, the Company issued a press release entitled "Apollo 25 Group Inc. Reports Fiscal 2004 Second Quarter Results. These false financial results were 26 repeated in Apollo's Form 10-Q, which was filed with the SEC on April 13, 2004. The press 27 release stated in part: 28
2:06-cv-02674-RCB Document 71 - Bled 11/23/2007 Page 40 of 103 Todd S. Nelson, president and CEO, said, "We are pleased with the strong financial performance this quarter. Total consolidated revenues for Apollo Group Inc. for the three months ended Feb. 29, 2004, rose 34.4% to $396.9 million, compared with $295.2 million in the second quarter of fiscal 2003. The University of Phoenix accounted for 95.5% of the $372.2 million in net tuition revenues from students enrolled in degree programs for the quarter ended Feb. 29, 2004. Total revenues for University of Phoenix Online for the three months ended Feb. 29, 2004, rose 57.4% to $184.1 million, compared with $117.0 million in the second quarter of fiscal 2003. Total consolidated revenues for Apollo Group Inc. for the six months ended Feb. 29, 2004, rose 33.9% to $808.7 million, compared with $604.1 million in the same period last year. The University ofPhoenix accounted for 95.2% of the $759.8 million in net tuition revenues from students enrolled in degree programs for the six months ended Feb. 29, 2004. Total revenues for University of Phoenix Online for the six months ended Feb. 29, 2004, rose 10 59.3% to $361.8 million, compared with $227.2 million in the same period last year. 11 Consolidated net income for Apollo Group Inc. for the three months ended 12 Feb. 29, 2004, increased 49.9% to $68.5 million, compared to $45.7 million for the same period last year. Net income for University ofPhoenix Online for 13 the three months ended Feb. 29, 2004, increased 70.0% to $38.0 million, compared to $22.4 million for the same period last year. 14 Consolidated net income for Apollo Group Inc. for the six months ended 15 Feb. 29, 2004, increased 49.2% to $152.8 million, compared to $102.4 million for the same period last year. Net income for University ofPhoenix Online for 16 the six months ended Feb. 29, 2004, increased 78.7% to $79.2 million, compared to $44.3 million for the same period last year. 17 Net cash provided by operating activities for Apollo Group Inc. for the three 18 months ended Feb. 29, 2004, was $91.1 million, compared to $73.3 million for the three months ended Feb. 28, 2003. Net additions to property and 19 equipment for Apollo Group Inc. for the three months ended Feb. 29, 2004, were $30.7 million, compared to $15.1 million for the three months ended 20 Feb. 28, 2003. 21 Net cash provided by operating activities for Apollo Group Inc. for the six months ended Feb. 29, 2004, was $225.3 million, compared to $151.1 million 22 for the six months ended Feb. 28, 2003. Net additions to property and equipment for Apollo Group Inc. for the six months ended Feb. 29, 2004, were 23 $56.7 million, compared to $29.2 million for the six months ended Feb. 28, 2003. 24 25
26 27 28
2:06-cv-02674-RCB Document 71 - 158ed 11/23/2007 Page 41 of 103 Business Outlook
2 Apollo Group Inc.
3 We expect revenue for the quarter ending May 31 , 2004, to be between $476 million and $479 million and to be between $ 1.770 billion and 4 $ 1.773 billion for fiscal 2004.
5 Operating margin is expected to be between 32.0% and 32.5% for the quarter ending May 31 , 2004, and to be between 30.5% and 3 1.0% for 6 fiscal 2004. 7 University of Phoenix Online 8 We expect revenue for the quarter ending May 31 , 2004, to be between $221 million and $222 million and to be between $820 million and 9 $821 million for fiscal 2004. 10 Operating margin is expected to be between 35.5% and 36.0% for the quarter ending May 31 , 2004, and to be between 35.0% and 35.5% for 11 fiscal 2004. 12 For the quarter ending May 31 , 2004, diluted earnings per share attributed to Apollo Education Group are expected to be $.50 and diluted earnings per share 13 attributed to University of Phoenix Online are expected to be $.40. For fiscal 2004, diluted earnings per share attributed to Apollo Education Group are 14 expected to be $1 . 77 and diluted earnings per share attributed to University of Phoenix Online are expected to be $1.47. 15 68. On June 24, 2004, the Company issued a press release entitled "Apollo Group, 16 Inc. Reports Fiscal 2004 Third Quarter Results. These false financial results were repeated 17 in Apollo's Form 10-Q, which was filed with the SEC on July 15, 2004. The press release 18 stated in part: 19 Todd S. Nelson, President and CEO, said, "We are pleased to report another 20 quarter with strong earnings and enrollment growth. The third quarter proved to be a strong quarter for new locations as well. University ofPhoenix opened 21 a campus in Louisville, KY and opened nine learning centers throughout the United States. Institute for Professional Development signed a new contract 22 with Warner Pacific College in Portland, OR. 23 Total consolidated revenues for Apollo Group, Inc. for the three months ended May 31 , 2004 rose 36. 5% to $497 .0 million, compared with $364.2 million in 24 the third quarter of fiscal 2003. The University of Phoenix accounted for 95.6% of the $464.5 million in net tuition revenues from students enrolled in 25 degree programs for the quarter ended May 31 , 2004. Total revenues for University of Phoenix Online for the three months ended May 31 , 2004 rose 26 60.0% to $233.3 million, compared with $ 145.8 million in the third quarter of fiscal 2003. 27 Total consolidated revenues for Apollo Group, Inc. for the nine months ended 28 May 31, 2004 rose 34.8% to $1.31 billion, compared with $968.2 million in
2:06-cv-02674-RCB Document 71 - B9ed 11/23/2007 Page 42 of 103 the same period last year. The University ofPhoenix accounted for 95.4% of the $1 .22 billion in net tuition revenues from students enrolled in degree 2 programs for the nine months ended May 31 , 2004. Total revenues for University of Phoenix Online for the nine months ended May 31 , 2004 rose 3 59.6% to $595.1 million, compared with $373.0 million in the same period last year. 4 Consolidated net income for Apollo Group, Inc. for the three months ended 5 May 31, 2004 increased 47.2% to $109.3 million, compared to $74.3 million for the same period last year. Net income for University ofPhoenix Online for 6 the three months ended May 31, 2004 increased 80.3% to $57.1 million, compared to $31.7 million for the same period last year. 7 Consolidated net income for Apollo Group, Inc. for the nine months ended 8 May 31 , 2004 increased 48.4% to $262.1 million, compared to $176. 6 million for the same period last year. Net income for University ofPhoenix Online for 9 the nine months ended May 31, 2004 increased 79.4% to $136.4 million, compared to $76.0 million for the same period last year. 10 Net cash provided by operating activities for Apollo Group, Inc. for the three 11 months ended May 31, 2004 was $161.0 million, compared to $97.5 million for the three months ended May 31, 2003. Net additions to property and 12 equipment for Apollo Group, Inc. for the three months ended May 31, 2004 were $27.1 million, compared to $11.9 million for the three months ended 13 May 31, 2003. 14 Net cash provided by operating activities for Apollo Group, Inc. for the nine months ended May 31 , 2004 was $386. 3 million, compared to $248.6 million 15 for the nine months ended May 31 , 2003. Net additions to property and equipment for Apollo Group, Inc. for the nine months ended May 31, 2004 16 were $83.7 million, compared to $41 .2 million for the nine months ended May 31, 2003. 17 18 Business Outlook 19 Apollo Group, Inc. 20 • We expect revenue for the quarter ending August 31, 2004 to be 21 between $483 million and $486 million and to be between 22 $1.788 billion and $1.791 billion for fiscal 2004. 23 • Operating margin is expected to be between 30.0% and 30.5% for the quarter ending August 31, 2004 and to be between 24 3 1.0% and 31.5% for fiscal 2004. 25 University of Phoenix Online 26 • We expect revenue for the quarter ending August 31, 2004 to be 27 between $237 million and $238 million and to be between $832 million and $833 million for fiscal 2004. 28
2:06-cv-02674-RCB Document 71 - HDed 11/23/2007 Page 43 of 103 • Operating margin is expected to be between 35.0% and 35.5% for the quarter ending August 31, 2004 and to be between 2 36.5% and 37.0% for fiscal 2004. 3 For the quarter ending August 31 , 2004, diluted earnings per share attributed 4 to Apollo Education Group are expected to be $.48 and diluted earnings per share attributed to University of Phoenix Online are expected to be $.42. For 5 fiscal 2004, diluted earnings per share attributed to Apollo Education Group are expected to be $1.83 and diluted earnings per share attributed to University 6 of Phoenix Online are expected to be $1.55. 7 69. On August 12, 2004, the Company issued a press release entitled, "Apollo 8 Group Inc. to Convert University of Phoenix Online Common Stock to Apollo Education 9 Group Class A Common Stock. The press release stated in part: 10 Apollo Group Inc. [] today announced that it will convert all outstanding shares of University of Phoenix Online (Nasdaq:UOPX) common stock into 11 shares of Apollo Education Group Class A common stock effective Aug. 27, 2004. 12 Todd S. Nelson, CEO and chairman, said, "We believe that the conversion of 13 University of Phoenix Online common stock will allow us to focus on online learning across all of our platforms and removes any market uncertainty 14 arising from the potential conversion of these shares. 15 70. On August 25, 2004, the Company issued a press release entitled, "Apollo 16 Group Inc. Reports Business Outlook for Fiscal 2005. The press release stated in part: 17 Apollo Group Inc. 18 We expect revenue for the quarter ending Nov. 30, 2004 to be between $529 million and $532 million and to be between $2.285 billion and 19 $2.288 billion for fiscal 2005. 20 Operating margin is expected to be between 32.5% and 33.0% for the quarter ending Nov. 30, 2004 and to be between 32.5% and 33.0% for 21 fiscal 2005. 22 Excluding non-cash charges related to the conversion ofUniversity ofPhoenix Online stock options into Apollo Education Group Class A stock options 23 anticipated to be recognized in the fourth quarter of fiscal 2005 , diluted earnings per share are expected to be $.56 for the quarter ending Nov. 30, 24 2004 and to be $2.40 for fiscal 2005. 25 71. On October 5, 2004, the Company issued a press release entitled, "Apollo
26 Group Inc. Reports Fiscal 2004 Fourth Quarter and Year End Results. The press release 27 stated in part: 28
2:06-cv-02674-RCB Document 71 - Med 11/23/2007 Page 44 of 103 Todd S. Nelson, CEO and chairman, said, "I am pleased to announce another strong quarter of earnings and enrollment growth with diluted earnings per share of $.52 (excluding non-cash expenses associated with the conversion of the UOPX tracking stock and the United States Department of Education settlement) and degree enrollment growth of 28% (including 14% growth at University of Phoenix local campuses and 50% growth at the University of Phoenix Online campus). Nelson further commented, "During the fourth quarter we opened four new University ofPhoenix campuses, which brings the total number ofnew campuses opened in fiscal 2004 to nine. Additionally, the board of directors recently authorized an additional $500 million in company funds to repurchase shares of APOL stock. During the fourth quarter of fiscal 2004, we converted all outstanding shares of University of Phoenix Online common stock into shares of Apollo Education Group Class A common stock. The conversion resulted in a $114.2 million reduction to net income related to the premium paid to convert outstanding shares of University of Phoenix Online common stock to Apollo Education Group Class A common stock and a non-cash stock-based 10 compensation charge of $123.5 million related to the conversion ofUniversity of Phoenix Online stock options into Apollo Education Group Class A stock 11 options. In addition, we accrued $9.8 million related to the resolution of a United States Department of Education ED) program review. Excluding 12 these charges, net income attributed to Apo to Education Group common stock for the three months and year ended Aug. 31 , 2004, was $93.1 million, or $.52 13 per diluted share, and $335.6 million, or $1.88 per diluted share, respectively. 14 Net income (loss) attributed to Apollo Education Group common stock (including the conversion of the UOPX tracking stock and the ED settlement 15 referenced above) for the three months and year ended Aug. 31 , 2004, was ($104.7 million), or ($.59) per diluted share and $ 137.8 million, or $.77 per 16 diluted share, respectively, compared to $65 . 5 million, or $.37 per diluted share and $231.7 million, or $1.30 per diluted share, respectively, reported for 17 the same periods last year. 18 Total consolidated revenues for Apollo Group Inc. for the three months ended Aug. 31, 2004, rose 32.7% to $492.8 million, compared with $371.3 million 19 in the fourth quarter of fiscal 2003. The University of Phoenix accounted for 95.7% of the $457. 9 million in net tuition revenues from students enrolled in 20 degree programs for the quarter ended Aug. 31, 2004. 21 Total consolidated revenues for Apollo Group Inc. for the year ended Aug. 31, 2004, rose 34.3% to $1 . 80 billion, compared with $1.34 billion in the same 22 period last year. The University ofPhoenix accounted for 95 . 5% ofthe $1.68 billion in net tuition revenues from students enrolled in degree programs for 23 the year ended Aug. 31, 2004. 24 Net cash provided by operating activities for Apollo Group Inc. for the three months ended Aug. 31 , 2004, was $127 .0 million, compared to $94.4 million 25 for the three months ended Aug. 31, 2003. Net additions to property and equipment for Apollo Group Inc. (excludin the purchase and sale ofland and 26 buildings related to future Online expansion for the three months ended Aug. 31, 2004, were $28.7 million, compared to 14. 7 million for the three months 27 ended Aug. 31, 2003. 28
2:06-cv-02674-RCB Document 71 - Wed 11/23/2007 Page 45 of 103 Net cash provided by operating activities for Apollo Group Inc. for the year ended Aug. 31 , 2004, was $513.4 million, compared to $343.0 million for the 2 year ended Aug. 31 , 2003. Net additions to property and equipment for Apollo Group Inc. (excluding the purchase and sale of land and buildings 3 related to future Online expansion) for the year ended Aug. 31 , 2004, were $80.3 million, compared to $55 . 8 million for the year ended Aug. 31, 2003. 4
5 Business Outlook 6 Apollo Group Inc. 7 - We expect revenue for the quarter ending Nov. 30, 2004, to be between $529 8 million and $532 million and to be between $2.285 billion and $2.288 billion for fiscal 2005. 9 - Operating margin is expected to be between 32.5% and 33.0% for the 10 quarter ending Nov. 30, 2004, and to be between 32.5% and 33.0% for fiscal 2005. 11 - Diluted earnings per share are expected to be $.56 for the quarter ending 12 Nov. 30, 2004. Excluding non-cash stock-based compensation charges related to the conversion in 2004 of University of Phoenix Online stock options into 13 Apollo Education Group Class A stock options anticipated to occur when the options vest in the fourth quarter of fiscal 2005 , diluted earnings per share are 14 expected to be $2.40 for fiscal 2005.
15 72. On November 15, 2004, the Company filed a Form 10-K with the SEC for the 16 fiscal year ended August 31, 2004, including the financial results previously reported for 17 2004, and its 2002-2003 financials results as well. 18 73. The Form 10-K stated in part: 19 From October 3, 2000, to August 27, 2004, we had a class of stock, University of Phoenix Online common stock, outstanding, that reflected the 20 separate performance of University of Phoenix Online, a campus within University ofPhoenix. On August 6, 2004, our Board ofDirectors authorized 21 the conversion of each share of University of Phoenix Online common stock to shares of Apollo Education Group Class A common stock effective 22 August 27, 2004. In accordance with the terms of our Articles of Incorporation, each outstanding share of University of Phoenix Online 23 common stock was converted into 1 . 11527 shares ofApollo Education Group Class A common stock as ofAugust 27, 2004. The conversion resulted in the 24 issuance ofapproximately 16.6 million new shares ofApollo Education Group Class A common stock. In addition, each unexercised option to purchase 25 University of Phoenix Online common stock at August 27, 2004, was converted to 1.0766 options to purchase Apollo Education Group Class A 26 common stock. The conversion ratio was based upon the relative market values of Apollo Education Group Class A common stock and University of 27 Phoenix Online common stock at the close ofthe market on August 12, 2004, prior to the announcement. The conversion resulted in a $114.2 million 28 reduction to income available to Apollo Education Group common stock
2:06-cv-02674-RCB Document 71 - ABed 11/23/2007 Page 46 of 103 related to the premium paid to convert outstanding shares of University of Phoenix Online common stock to Apollo Education Group Class A common stock and a non-cash stock-based compensation charge of $123.5 million related to the conversion of University of Phoenix Online stock options into Apollo Education Group Class A stock options. We have delisted University ofPhoenix Online common stock and will no longer report separate financial statements for University of Phoenix Online.
Board Compensation Committee Report on Executive Compensation
Our Compensation Committee (the "Committee ) is composed entirely of independent outside members of our Board of Directors. The committee reviews each of the elements of our executive compensation program related to our executive officers, including, Todd S. Nelson (the "Senior Executive ), and periodically assesses the effectiveness and competitiveness ofthe program in total. In addition, the committee administers the key provisions of the 10 executive compensation program and determines all aspects ofcompensation for our Senior Executive. The committee has furnished the following report 11 on executive compensation: 12 Overview and Philosophy. Our compensation program for executive officers is primarily comprised of base salary, annual bonus, and long-term 13 incentives in the form of stock option grants. Executive officers also participate in various other benefit plans, including medical and retirement 14 plans, generally available to all of our full-time employees. 15 16 Options. We believe that it is important for executive officers to have an equity stake in us, and, toward this end, we make option grants to key 17 executive officers from time to time under the 2000 Stock Incentive Plan. In making option awards, the Compensation Committee reviews our financial 18 performance during the past fiscal year, the awards granted to other executives, and the individual officer's specific role. 19 20 Chairman of the Board and Chief Executive Officer Compensation. 21 Todd S. Nelson is our Chairman of the Board, Chief Executive Officer, and President. Mr. Nelson' s base salary is determined annually on the same basis 22 discussed above for the executive officers. Mr. Nelson ' s bonus is tied solely to our earnings per share; at the beginning of each fiscal year, the 23 Compensation Committee establishes an earnings per share goal for us. Ifthat goal is achieved, Mr. Nelson earns a bonus up to 75% of his annual salary. 24 Mr. Nelson is entitled to an additional amount for every cent we are over our earnings per share goal. During 2004, Mr. Nelson received an annual base 25 salary of $750,000. Because the earnings per share goal for us was exceeded, Mr. Nelson earned a bonus for 2004 of $4,462,500 . As a result of 26 Mr. Nelson ' s performance during 2004, the Compensation Committee also granted Mr. Nelson options to acquire 700,000 shares of Apollo Education 27 Group Class A common stock and 100,000 shares of University of Phoenix Online common stock, at an exercise price based on the fair market value on 28 the date of grant. These options vest twenty-five percent (25%) per year for
2:06-cv-02674-RCB Document 71 - 1;4ed 11/23/2007 Page 47 of 103 1 four years, unless future earnings per share goals established by the Compensation Committee are achieved, in which case the vesting schedule for 2 these options will accelerate.
3 Compliance with Internal Revenue Code Section 162(m). Section 162(m) ofthe Code limits the deductibility ofexecutive compensation 4 paid by publicly held corporations to $1 million for each executive officer named in this report. The $1 million limitation generally does not apply to 5 compensation that is pursuant to a performance-based plan approved by shareholders. The Company' s policy is to comply with the requirements of 6 Section 162(m) and maintain deductibility for all executive compensation, except in circumstances where we conclude on an informed basis that it is in 7 the best interest of the Company and the shareholders to take actions with regard to the payment of executive compensation which do not qualify for tax 8 deductibility. 9 74. The statements made by defendants in ¶¶66-73 regarding fiscal 2004 were 10 false and misleading when made. The true facts known at the time were: 11 (a) Apollo's 2002, 2003 and 2004 financial results, including its net
12 I income, earnings per share, and profit and gross margins, were all materially overstated due 13 to contrivances and manipulations in the administration ofApollo' s stock options, including 14 backdating and failing to properly record or account for the actual amount and tax 15 consequences of compensation expenses of its executives;
16 (b) Apollo's financial and operating results reported during the Class Period 17 were not entirely due to the skill and business acumen of its top executives, their successful 18 management of its business or the outstanding performance of its business units, as 19 represented; in fact, a significant part was due to falsification of Apollo's financial 20 statements by not properly accounting for (and thus understating) the true compensation 21 expenses of its executive and management team;
22 (c) Apollo's top executives and directors were manipulating the Company's 23 stock option plans to provide themselves with millions of dollars in undisclosed income by 24 backdating stock option grants to a much lower exercise price thus giving them an instant, 25 riskless profit, while exposing the Company to the risk of regulatory investigations, tax 26 penalties and even criminal proceedings;
27 (d) Apollo' s internal financial and accounting controls were materially 28 deficient and not effective in providing the necessary and required degrees of assurance that
2:06-cv-02674-RCB Document 71 - J;Sed 11/23/2007 Page 48 of 103 1 Apollo's financial results and reports were fairly and accurately presented and free from 2 fraud;
3 (e) Apollo had not taken the required compensation expenses for its 4 conversion of University of Phoenix Online common stock;
5 (f) Senior management's salaries and option grants had not been 6 determined as a result ofarm's-length negotiation with Apollo's Compensation Committee, 7 but rather were the product of cronyism and undisclosed conflicts of interest; and 8 (g) Because Apollo' s historical and current financial results were
9 I overstated, defendants ' forecasts of Apollo' s future financial performance were false and 10 could not be achieved. 11 75. On December 16, 2004, the Company issued a press release entitled "Apollo 12 Group, Inc. Reports Fiscal 2005 First Quarter Results. These false financial results were
13 I repeated in Apollo's Form 10-Q, which was filed with the SEC on January 10, 2005. The 14 press release stated in part: 15 Total consolidated revenues for Apollo Group, Inc. for the three months ended November 30, 2004, rose 29.9% to $534.9 million, compared with $411.8 16 million in the first quarter of fiscal 2004. The University of Phoenix accounted for 94.0% of the $493.5 million in net tuition revenues from 17 students enrolled in degree programs for the quarter ended November 30, 2004. 18 Consolidated net income for Apollo Group, Inc. for the three months ended 19 November 30, 2004, increased 30.0% to $109.5 million, compared to $84.3 million for the same period last year. 20 Net cash provided by operating activities for Apollo Group, Inc. for the three 21 months ended November 30, 2004, was $136.2 million, compared to $134.2 million for the three months ended November 30, 2003. Net additions to 22 property and equipment for Apollo Group, Inc. (excluding the purchase and sale of land and buildings related to future Online expansion) for the three 23 months ended November 30, 2004, were $21.9 million, compared to $12.6 million for the three months ended November 30, 2003. 24 25
26 27 28
2:06-cv-02674-RCB Document 71 - 1;6ed 11/23/2007 Page 49 of 103 Business Outlook
2 Apollo Group, Inc.
3 We expect revenue for the quarter ending February 28, 2005, to be between $507 million and $511 million and to be between $2.288 4 billion and $2.292 billion for fiscal 2005.
5 Operating margin is expected to be between 27.0% and 27.5% for the quarter ending February 28, 2005 , and to be between 32.5% and 33.0% 6 for fiscal 2005. 7 Diluted earnings per share are expected to be $.46 for the quarter ending February 28, 2005. Excluding non-cash stock-based compensation charges 8 related to the conversion in 2004 of University of Phoenix Online stock options into Apollo Education Group Class A stock options anticipated to 9 occur when the options vest in the fourth quarter of fiscal 2005, diluted earnings per share are expected to be $2.42 for fiscal 2005. 10 76. On March 29, 2005, the Company issued a press release entitled, "Apollo 11 Group, Inc. Reports Fiscal 2005 Second Quarter Results. These false financial results were 12 repeated in Apollo's Form 10-Q, which was filed with the SEC on April 11, 2005. The press 13 release stated in part: 14 Total consolidated revenues for Apollo Group, Inc. for the three months ended 15 February 28, 2005, rose 27.4% to $505.7 million, compared with $396.9 million in the second quarter of fiscal 2004. The University of Phoenix 16 accounted for 90.8% of the $467.6 million in net tuition revenues from students enrolled in degree programs for the quarter ended February 28, 2005. 17 Total consolidated revenues for Apollo Group, Inc. for the six months ended 18 February 28, 2005 , rose 28.7% to $1.041 billion, compared with $808.7 million in the same period last year. The University ofPhoenix accounted for 19 92.5% of the $961 . 1 million in net tuition revenues from students enrolled in degree programs for the six months ended February 28, 2005. 20 Consolidated net income for Apollo Group, Inc. for the three months ended 21 February 28, 2005, increased 27.2% to $87.1 million, compared to $68.5 million for the same period last year. 22 Consolidated net income for Apollo Group, Inc. for the six months ended 23 February 28, 2005, increased 28.7% to $196.6 million, compared to $152.8 million for the same period last year. 24 Consolidated degree enrollments for all of the Apollo Group, Inc. institutions 25 at February 28, 2005 , increased by 25% to 283,800 students compared to 227,800 students at February 29, 2004.... 26 27 28
2:06-cv-02674-RCB Document 71 - 10ed 11/23/2007 Page 50 of 103 Business Outlook
2 Apollo Group, Inc.
3 We expect revenue for the quarter ending May 31 , 2005, to be between $622 million and $626 million and to be between $2.290 billion and 4 $2.294 billion for fiscal 2005.
5 Operating margin is expected to be between 35.5% and 36.0% for the quarter ending May 31 , 2005 , and to be between 32.5% and 33.0% for 6 fiscal 2005. 7 Diluted earnings per share are expected to be $.74 for the quarter ending May 31, 2005. Excluding non-cash stock-based compensation charges related 8 to the conversion in 2004 of University of Phoenix Online stock options into Apollo Education Group Class A stock options anticipated to occur when the 9 options vest in the fourth quarter of fiscal 2005, we are increasing our fiscal 2005 diluted earnings per share expectation from $2.42 to $2.46. 10 77. On June 28, 2005, the Company issued a press release entitled, "Apollo Group 11 Inc. Reports Fiscal 2005 Third Quarter Results. These false financial results were repeated 12 in Apollo's Form 10-Q, which was filed with the SEC on July 11, 2005. The press release 13 stated in part: 14 Total consolidated revenues for Apollo Group Inc. for the three months ended 15 May 31 , 2005 , rose 24. 6% to $619.0 million, compared with $497.0 million in the third quarter of fiscal 2004. The University of Phoenix accounted for 16 88.7% of the $576.6 million in net tuition revenues from students enrolled in degree programs for the quarter ended May 31, 2005. 17 Total consolidated revenues for Apollo Group Inc. for the nine months ended 18 May 31, 2005, rose 27. % to $1.660 billion, compared with $1.306 billion in the same period last year. The University ofPhoenix accounted for 91.1 % of 19 the $1.538 billion in net tuition revenues from students enrolled in degree programs for the nine months ended May 31, 2005. 20 Consolidated net income for Apollo Group Inc. for the three months ended 21 May 31, 2005, increased 29.7% to $141.8 million, compared to $109.3 million for the same period last year. 22 Consolidated net income for Apollo Group Inc. for the nine months ended 23 May 31, 2005, increased 29.1% to $338.5 million, compared to $262.1 million for the same period last year. 24 25 Apollo Group Inc. 26 - We expect revenue for the quarter ending Aug. 31, 2005, to be between $605 27 million and $620 million. 28
2:06-cv-02674-RCB Document 71 - Bed 11/23/2007 Page 51 of 103 - Operating margin is expected to be between 32.5% and 33.0% for the quarter ending Aug. 31, 2005. 2 Excluding non-cash stock-based compensation charges related to the 3 conversion in 2004 ofUniversity ofPhoenix Online stock options into Apollo Education Group Class A stock options anticipated to occur when the options 4 vest in the fourth quarter of fiscal 2005, diluted earnings per share are expected to be $.67 for the quarter ending Aug. 31, 2005, and $2.48 for fiscal 5 2005. 6 78. On September 19, 2005, the Company issued a press release entitled, "Apollo 7 Group, Inc. Reports Business Outlook for Fiscal 2006, Preliminary Fiscal 2005 Fourth 8 Quarter Results. The press release stated in part: 9 Business Outlook 10 We expect revenue for the quarter ending November 30, 2005 to be between $635 million and $640 million and to be between $2.685 11 billion and $2.705 billion for fiscal 2006 . Included in this revenue estimate is the effect of the impact of Hurricane Katrina on our Gulf 12 Coast campuses. 13 Excluding the estimated impact of stock option expensing, diluted earnings per share are expected to be $.72, including an estimated $.01 14 ($.73) impact from Hurricane Katrina, for the quarter ending November 30, 2005 and to be $3 .02, including an estimated $.04 15 ($3.06) impact from Hurricane Katrina, for fiscal 2006. 16 Including the estimated impact of stock option expensing, diluted earnings per share are expected to be $.70 for the quarter ending 17 November 30, 2005 and to be $2.92 for fiscal 2006.
18 Preliminary Results 19 These anticipated results are preliminary and based on partial information and management assumptions. Based on unaudited results: 20 Revenue is lower than previous guidance as a result of a higher 21 percentage of students enrolled in the new Western International University Axia College program. This program of study generates 22 less revenue per student than programs we have historically offered. We expect revenue for the quarter ending August 31, 2005 to be 23 between $591 million and $595 million and to be between $2.250 billion and $2.254 billion for fiscal 2005. 24 Consolidated degree enrollments for all of the Apollo Group, Inc. 25 institutions are expected to increase over 20%, including the impact of Hurricane Katrina, at August 31, 2005. 26 Excluding non-cash stock-based compensation charges related to the 27 conversion in 2004 ofUniversity ofPhoenix Online stock options into Apollo Education Group Class A stock options, diluted earnings per 28
2:06-cv-02674-RCB Document 71 - J;9ed 11/23/2007 Page 52 of 103 share are expected to be $.65 for the quarter ending August 31, 2005 and to be $2.46 for fiscal 2005. The non-cash stock-based compensation charges are expected to be $20 million ($.07 per share) related to the conversion in 2004 ofUniversity ofPhoenix Online stock options into Apollo Education Group Class A stock options.
79. On October 12, 2005, the Company issued a press release entitled, "Apollo Group Inc. Reports Fiscal 2005 Fourth Quarter and Year End Results. The press release stated in part: During the fourth quarter of fiscal 2004, we converted all outstanding shares of University of Phoenix Online common stock into shares of Apollo Education Group Class A common stock. During the fourth quarter of fiscal 2005 , the conversion resulted in a noncash stock-based compensation charge 10 of $19 . 8 million related to the conversion of University of Phoenix Online stock options to Apollo Education Group stock options . Excluding this 11 charge, net income attributed to Apollo Education Group common stock for the three months and year ended Aug. 31 , 2005, was $118.2 million, or $.65 12 per diluted share, and $456.7 million, or $2.46 per diluted share, respectively. 13 During the fourth quarter of fiscal 2004, the conversion resulted in a $114.2 million reduction to net income related to the premium paid to convert 14 outstanding shares of University of Phoenix Online common stock to Apollo Education Group Class A common stock and a noncash stock-based 15 compensation charge of $123.5 million related to the conversion ofUniversity of Phoenix Online stock options into Apollo Education Group Class A stock 16 options. In addition, during the fourth quarter of fiscal 2004, we accrued $9.8 million related to the resolution of a United States Department of Education 17 (ED) program review. Excluding these charges, net income attributed to Apollo Education Group common stock for the three months and year ended 18 Aug. 31 , 2004, was $93.1 million, or $.52 per diluted share, and $335.6 million, or $1.88 per diluted share, respectively. 19 Net income (loss) attributed to Apollo Education Group common stock 20 (including the stock-based compensation charge) for the three months ended Aug. 31 , 2005 , was $106.2 million, or $.58 per diluted share, compared to 21 ($104.7 million), or ($.59) per diluted share (including the stock-based compensation charge and related dividend and the ED settlement) reported for 22 the same period last year. 23 Net income attributed to Apollo Education Group common stock (including the stock-based compensation charge) for the year ended Aug. 31, 2005, was 24 $444.7 million, or $2.39 per diluted share, compared to $137.8 million, or $.77 per diluted share (including the stock-based compensation charge and related 25 dividend and the ED settlement) reported for the same period last year.
26 Total consolidated revenues for Apollo Group Inc. for the three months ended Aug. 31, 2005, rose 20. 1% to $591 . 8 million, compared with $492.8 million 27 in the fourth quarter of fiscal 2004. The University of Phoenix accounted for 86.6% of the $550.7 million in net tuition revenues from students enrolled in 28 degree programs for the quarter ended Aug. 31, 2005.
2:06-cv-02674-RCB Document 71 - 6Ded 11/23/2007 Page 53 of 103 Total consolidated revenues for Apollo Group Inc. for the year ended Aug. 31, 2005, rose 25.2% to $2.251 billion, compared with $1.798 billion in the 2 same period last year. The University of Phoenix accounted for 89.9% ofthe $2.088 billion in net tuition revenues from students enrolled in degree 3 programs for the year ended Aug. 31, 2005. 4 80. On November 14, 2005, the Company filed its Form 10-K with the SEC for 5 2005, including financial results previously reported for 2005, and its 2003-2004 financial 6 I results as well. The Form 10-K stated in part: 7 From October 3, 2000, to August 27, 2004, we had a class of stock, University of Phoenix Online common stock, outstanding , that reflected the 8 separate performance of University of Phoenix Online, a campus within University ofPhoenix. On August 6, 2004, our Board ofDirectors authorized 9 the conversion of each share of University of Phoenix Online common stock to shares of Apollo Education Group Class A common stock effective 10 August 27, 2004. In accordance with the terms of our Articles of Incorporation, each outstanding share of University of Phoenix Online 11 common stock was converted into 1 . 11527 shares ofApollo Education Group Class A common stock as ofAugust 27, 2004. The conversion resulted in the 12 issuance ofapproximately 16.6 million new shares ofApollo Education Group Class A common stock. In addition, each unexercised option to purchase 13 University of Phoenix Online common stock at August 27, 2004, was converted to 1.0766 options to purchase Apollo Education Group Class A 14 common stock. The conversion ratio was based upon the relative market values of Apollo Education Group Class A common stock and University of 15 Phoenix Online common stock at the close ofthe market on August 12, 2004, prior to the announcement. The conversion resulted in a $114.2 million 16 reduction to income available to Apollo Education Group common stock related to the premium paid to convert outstanding shares of University of 17 Phoenix Online common stock to Apollo Education Group Class A common stock. We recognized a non-cash stock-based compensation charge of 18 $123.5 million related to the conversion ofUniversity ofPhoenix Online stock options into Apollo Education Group Class A stock options in the fourth 19 quarter of 2004 and a $19. 8 million charge in the fourth quarter of 2005, and expect to recognize an additional $2 million compensation charge as the 20 remaining options vest in 2006 and 2007 . We have delisted the University of Phoenix Online common stock and no longer report separate financial 21 statements for University of Phoenix Online. 22 23 Our philosophy is to pay base salaries to the executive officers that enable us to attract, motivate, and retain highly qualified executives. The 24 annual bonus program is designed to reward for performance based on financial results. Stock option grants are intended to provide substantial 25 rewards to executives based on stock price appreciation and improved overall financial performance. The vesting ofthe options can be accelerated ifcertain 26 profit goals are achieved. 27 28
2:06-cv-02674-RCB Document 71 - Fled 11/23/2007 Page 54 of 103 1 81. The statements made by defendants set forth in ¶¶75-80 regarding fiscal 2005 2 were false and misleading when made. The true facts known at the time were: 3 (a) Apollo's 2003, 2004 and 2005 financial results, including its net
4 I income, earnings per share, and profit and gross margins, were all materially overstated due 5 to contrivances and manipulations in the administration ofApollo' s stock options, including 6 backdating and failing to properly record or account for the actual amount and tax 7 consequences of compensation expenses of its executives; 8 (b) Apollo's financial and operating results reported during the Class Period 9 were not entirely due to the skill and business acumen of its top executives, their successful 10 management of its business or the outstanding performance of its business units, as 11 represented; in fact, a significant part was due to falsification of Apollo's financial 12 statements by not properly accounting for (and thus understating) the true compensation 13 expenses of its executive and management team;
14 (c) Apollo's top executives and directors were manipulating the Company's
15 I stock option plans to provide themselves with millions of dollars in undisclosed income by 16 backdating stock option grants to a much lower exercise price thus giving them an instant, 17 riskless profit, while exposing the Company to the risk of regulatory investigations, tax 18 penalties and even criminal proceedings;
19 (d) Apollo' s internal financial and accounting controls were materially 20 deficient and not effective in providing the necessary and required degrees of assurance that
21 Apollo's financial results and reports were fairly and accurately presented and free from 22 fraud; 23 (e) Senior management's salaries and option grants had not been 24 determined as a result ofarm's-length negotiation with Apollo's Compensation Committee, 25 but rather were the product of cronyism and undisclosed conflicts of interest; and 26 (f) Because Apollo' s historical and current financial results were
27 I overstated, defendants ' forecasts of Apollo' s future financial performance were false and 28 could not be achieved.
2:06-cv-02674-RCB Document 71 - Red 11/23/2007 Page 55 of 103 82. On December 15, 2005, the Company issued a press release entitled, "Apollo 2 Group, Inc. Reports Fiscal 2006 First Quarter Results. These false financial results were
3 repeated in Apollo's Form 10-Q, which was filed with the SEC on January 9, 2006. The 4 press release stated in part:
5 Total consolidated revenues for Apollo Group, Inc. for the three months ended November 30, 2005, rose 17.6% to $628.9 million, compared with $534.9 6 million in the first quarter of fiscal 2005. The University of Phoenix accounted for 84.7% of the $582.1 million in net tuition revenues from 7 students enrolled in degree programs for the quarter ended November 30, 2005. We believe revenue was impacted approximately $5 million as a result 8 of Hurricane Rita and Hurricane Wilma. 9 10 Business Outlook 11 Apollo Group, Inc.
12 • We expect revenue for the quarter ending February 28, 2006, to be in excess of $584 million and to be in excess of $2.578 13 billion for fiscal 2006. 14 • Diluted earnings per share are expected to be between $.57 and 15 $.58 for the quarter ending February 28, 2006, and to be between $2.85 and $2.91 for fiscal 2006. 16 17 83. On January 11, 2006, the Company issued a press release entitled, "Apollo 18 Group Inc. Appoints Brian Mueller President and Announces Resignation ofTodd Nelson. 19 The press release stated in part: 20 Apollo Group Inc. [] today announced the appointment ofBrian Mueller to the position ofpresident. Mueller succeeds Todd S. Nelson, who submitted to the 21 board of directors his resignation as a director and officer. Dr. John G. Sperling, founder ofApollo Group, was appointed interim executive chairman 22 of the board. 23 "Brian is the right person to lead Apollo Group ' s next stage of growth, said Sperling. "With his instinct for innovation, his operational discipline, and his 24 resolute focus on academic quality, he possesses the perfect blend of skills, passion, and experience to take us forward. Apollo has excellent momentum 25 today due to the capable and decisive leadership he has demonstrated.
26 84. On March 23, 2006, the Company issued a press release entitled, "Apollo 27 Group, Inc. Reports Fiscal 2006 Second Quarter Results. These false financial results were 28
2:06-cv-02674-RCB Document 71 - 68ed 11/23/2007 Page 56 of 103 repeated in Apollo's Form 10-Q, which was filed with the SEC on April 10, 2006. The press 2 release stated in part: 3 Net income attributed to Apollo Education Group common stock for the three months ended February 28, 2006, was $80.6 million, or $.46 per diluted share, 4 compared to $87 . 1 million, or $.47 per diluted share reported for the same period last year. The expense related to the amounts paid to our former CEO 5 under the terms of the Separation Agreement reduced diluted earnings per share by $.09. $6.2 million related to the Separation Agreement was recorded 6 directly through shareholders ' equity. 7 Net income attributed to Apollo Education Group common stock for the six months ended February 28, 2006, was $211.4 million, or $1.19 per diluted 8 share, compared to $196.6 million, or $1.04 per diluted share reported for the same period last year. 9 Total consolidated revenues for Apollo Group, Inc. for the three months ended 10 February 28, 2006, rose 12.6% to $569.6 million, compared with $505.7 million in the second quarter of fiscal 2005. The University of Phoenix 11 accounted for 81.7% of the $526.7 million in net tuition revenues from students enrolled in degree programs for the quarter ended February 28, 2006. 12 Total consolidated revenues for Apollo Group, Inc. for the six months ended 13 February 28, 2006, rose 15.2% to $1.198 billion, compared with $1.041 billion in the same period last year. The University ofPhoenix accounted for 83.3% 14 of the $1.109 billion in net tuition revenues from students enrolled in degree programs for the six months ended February 28, 2006. 15 Commenting on the quarter, Brian Mueller, President, said, "Our revenue was 16 in line with the revised guidance we gave at the end of February. As we discussed then, we have undertaken a variety of focused initiatives to increase 17 top-line growth for the second half of the year and beyond. These three primary strategies include investing aggressively in our core business of 18 working adults , further developing the echo boomer business and leveraging our strategic relationship with advertising.com. We have already seen 19 progress in these key initiatives and are excited by the many growth opportunities that lie ahead. 20 85. On June 9, 2006, the Company issued a press release entitled, "Apollo Group, 21 Inc. to Hire Independent Firm to Review Stock Option Grants. The press release stated in 22 part: 23 Apollo Group, Inc. [] comments on a recent report that was issued by Lehman 24 Brothers, which questioned whether Apollo Group might have backdated four stock option grants during fiscal 2000-2004. 25 In response to the report, and as part of its normal Corporate Governance 26 practices, the Company performed a review of its stock option practices, including reviewing documents and interviewing employees. 27 Based upon this review, the Company' s initial conclusions are as follows: 28
2:06-cv-02674-RCB Document 71 - 6#ed 11/23/2007 Page 57 of 103 • The grants included a large number of employees and not just senior executives. 2
3 • Management believes that it has complied with all applicable laws, including the accelerated Form 4 filing requirements 4 mandated by the Sarbanes-Oxley legislation, in granting options to officers and it has not backdated options. 5 6 Apollo Group's Board ofDirectors plans to hire an outside firm to review and confirm these conclusions. 7 86. On June 20, 2006, the Company issued a press release entitled "Apollo Group, 8 Inc. Reports Fiscal 2006 Third Quarter Results. The press release stated in part: 9 Net income attributed to Apollo Education Group common stock for the three 10 months ended May 31, 2006, was $133.3 million, or $.77 per diluted share on 174.2 million weighted average shares outstanding, compared to $141.8 11 million, or $.77 per diluted share on 184.3 million weighted average shares outstanding reported for the same period last year. 12 Net income attributed to Apollo Education Group common stock for the nine 13 months ended May 31, 2006, was $344.8 million, or $1.95 per diluted share, compared to $338.5 million, or $1.81 per diluted share reported for the same 14 period last year. 15 Total consolidated revenues for Apollo Group, Inc. for the three months ended May 31 , 2006, rose 5.6% to $653.6 million, compared with $619.0 million in 16 the third quarter of fiscal 2005 . The third quarter of fiscal 2005 contained an extra week at the University ofPhoenix Online, thereby increasing revenue in 17 the related period by approximately $20 million. The University of Phoenix accounted for 83.3% of the $600. 1 million in net tuition revenues from 18 students enrolled in degree programs for the quarter ended May 31, 2006. 19 Total consolidated revenues for Apollo Group, Inc. for the nine months ended May 31, 2006, rose 11.6% to $1.852 billion, compared with $1.660 billion in 20 the same period last year. The University ofPhoenix accounted for 83.3% of the $1.709 billion in net tuition revenues from students enrolled in degree 21 programs for the nine months ended May 31, 2006. 22 87. The statements made by defendants in ¶M82-86 regarding fiscal 2006 were 23 false and misleading when made. The true facts known at the time were: 24 (a) Apollo's 2004, 2005, and 2006 financial results, including its net 25 income, earnings per share, and profit and gross margins, were all materially overstated due
26 to contrivances and manipulations in the administration ofApollo's stock options, including 27 backdating and failing to properly record or account for the actual amount and tax 28 consequences of compensation expenses of its executives;
2:06-cv-02674-RCB Document 71 - 5 ed 11/23/2007 Page 58 of 103 I (b) Apollo's financial and operating results reported during the Class Period 2 were not entirely due to the skill and business acumen of its top executives, their successful 3 management of its business or the outstanding performance of its business units, as 4 represented; in fact, a significant part was due to falsification of Apollo's financial 5 statements by not properly accounting for (and thus understating) the true compensation 6 expenses of its executive and management team; 7 (c) Apollo's top executives and directors were manipulating the Company's 8 stock option plans to provide themselves with millions of dollars in undisclosed income by 9 backdating stock option grants to a much lower exercise price thus giving them an instant, 10 riskless profit, while exposing the Company to the risk of regulatory investigations, tax 11 penalties and even criminal proceedings;
12 (d) Apollo' s internal financial and accounting controls were materially 13 deficient and not effective in providing the necessary and required degrees of assurance that
14 Apollo's financial results and reports were fairly and accurately presented and free from 15 fraud; 16 (e) Senior management's salaries and option grants had not been 17 determined as a result ofarm's-length negotiation with Apollo's Compensation Committee, 18 but rather were the product of cronyism and undisclosed conflicts of interest; 19 (f) Because Apollo's historical and current financial results were 20 overstated, defendants' forecasts of Apollo's future financial performance were false and
21 could not be achieved; 22 (g) Apollo's June 9, 2006 denial of stock option backdating was false and 23 misleading as discussed infra; and 24 (h) Apollo's January 11, 2006 press release regarding the resignation of 25 Nelson omitted material facts regarding the circumstances of Nelson's resignation.
26 VII. THE TRUTH BEGINS TO EMERGE
27 88. In late 2005 and early 2006, a number of incidents involving stock option 28 backdating and "spring loading by public companies began to surface, including SEC
2:06-cv-02674-RCB Document 71 - 66ed 11/23/2007 Page 59 of 103 1 investigations, executive resignations and financial restatements. On March 18, 2006, The
2 Wall Street Journal published an article titled, "The Perfect Payday raising questions over
3 I whether several public companies had been manipulating stock option grants to enrich 4 executives by backdating these grants to lower prices or granting options to executives ahead
5 I of the release of positive corporate news. While Apollo was not implicated in the growing 6 backdating scandal at the time, this was soon to change. In June and July 2006, Apollo's 7 stock price began to decline as the truth about backdating at Apollo began to leak out, 8 notwithstanding the fact that, throughout this period, and throughout the remainder of 9 calendar 2006, Apollo continued to issue false statements and half-truths about the 10 backdating at the Company. 11 89. On June 8, 2006, Gary Bisbee, an analyst at Lehman Brothers, published a
12 I report titled, "Did Apollo Backdate Options? The report stated that, "While it is impossible 13 to tell definitively from a company's proxy and other SEC filings whether or not it is guilty 14 of backdating, Apollo Group's option grant history looks highly questionable .... 15 (Emphasis added.) The report then presented tables showing that Apollo's option grant 16 prices occurred almost miraculously at the lowest price ofthe year in 2000, 2001, 2002 and 17 2004. On this news, Apollo's stock price fell 2.7% to close at $53.88 on June 8, 2006, from 18 a close of $55.47 on June 7, 2006. 19 90. That same day, in an effort to conceal the misconduct at Apollo, Norton, the 20 Chairman ofthe Compensation Committee, falsely stated that, "Our option policies are clean 21 and straightforward. We never backdated options. Never once. Ironically, he said he was 22 amazed at the lengths some executives would go "to steal from the shareholders. As would 23 later be revealed, Norton's denials were utterly false. 24 91. Just one day later, on June 9, 2006, in a continued effort to conceal its
25 I misconduct, the Company issued a news release denying that it had backdated stock options. 26 Apollo claimed that it had reviewed its stock option practices "including reviewing 27 documents and interviewing employees, and its "initial conclusions were that it "complied
28 with all applicable laws ... in granting options to officers and it has not backdated options.
2:06-cv-02674-RCB Document 71 - Red 11/23/2007 Page 60 of 103 1 Apollo's false denials, however, did not quell the growing speculation regarding its options 2 granting practices.
3 92. On June 19, 2006, the Company disclosed that it received a subpoena from the 4 U. S. Attorney for the Southern District of New York requesting documents relating to 5 Apollo's stock option grants. Apollo again denied any impropriety, stating that "Apollo's 6 board of directors has hired an outside firm to review and confirm the company's initial 7 conclusions that the Company acted appropriately regarding its stock option practices. This 8 disclosure caused Apollo's stock price to drop 5.3% on the next trading day to close at 9 $51.91 on June 20, 2006 from a close of $54.82 on June 18, 2006. 10 93. On June 28, 2006, defendants John and Peter Sperling appointed a special 11 committee ("SC ) of the Board to oversee a review of the Company's practices related to 12 stock option grants. The SC was comprised of only two Board members - Diethelm and 13 Govenar. Both of these Board members were subsequently removed from the SC due to 14 their conflicts of interest, and ultimately resigned from the Apollo Board. 15 94. On June 30, 2006, the Company received a letter from the SEC announcing an 16 informal investigation and requesting documents.4
17 95. On July 13, 2006, Apollo announced that the Company was unable to timely 18 file with the SEC its Form 10-Q for the fiscal quarter ended May 31, 2006, because of the 19 "ongoing investigation by the company's board of directors in response to a report that 20 questioned whether the company has backdated four stock option grants during fiscal 2000- 21 2004. 22 23 `` On July 3, 2007, Apollo announced that the SEC had ended its investigation into 24 stock option awards practices at the Company, and that it did not intend to recommend any enforcement action. Of course, according the SEC "Procedures Relating 25 to to .... Termination of Staff Investigations (1972 SEC LEXIS 238) the SEC's decision not to take action can "in no way be construed as indicating that the party has been exonerated and any 26 "attempted use ... as a purported defense in any action ... would be clearly inappropriate and improper since it may be based on SEC's "workload considerations, amongst other 27 factors. 28
2:06-cv-02674-RCB Document 71 - 68ed 11/23/2007 Page 61 of 103 1 96. In the two months after the first disclosures about the backdating at Apollo 2 began to leak out, and the truth about Apollo's option granting practices became known, 3 Apollo's stock had dropped 23.5% from a close of $55.47 on June 8, 2006, to a close of 4 $43.51 on August 8, 2006, in significant part due to the disclosures of backdating. 5 97. The drop was not due to conditions in the market generally, or to industry- 6 specific factors. During this same time period, the S&P 500 rose 1.4%, and Apollo's peer 7 group declined only 12%.5 8 98. On October 18, 2006, Apollo issued a news release and disappointing earnings
9 I announcement which stated, for the first time, and in contrast to Apollo's previous denials, 10 that "various deficiencies in theprocess ofgranting and documenting stock options have 11 been identified to date. The accounting impact of these matters has not been quantified.
12 There can be no assurances that the results ofthe investigation will not require apossible 13 restatement ofthe Company'sfinancial statements when the potential errors are quantified 14 and assessed. (Emphasis added.) Following this announcement, Apollo's stock price 15 dropped dramatically, falling 22.9% in one day to a 4-year low of $37.55, on a trading 16 volume ofover 28 million shares, over 14 times the average trading volume during the Class 17 Period.
18 99. On November 3, 2006, Apollo announced that CFO and Treasurer Gonzales
19 I resigned on November 1. Continuing the Company's attempts to conceal the backdating 20 which took place, defendant Mueller stated in a conference call that Gonzales resigned to 21 "spend more time with her family. However, Peter Sperling directly contradicted this
22 statement less than two weeks later, and testified that Gonzales was asked to leave due to the 23 backdating at Apollo, and that she would have been fired had she not resigned. Also on 24 November 3, 2006, Apollo announced the interim factual findings of the SC in their 8-K 25 filing, which stated in part: 26 5 Apollo ' s peer group consists of IT Educational Services, DeVry University, Career 27 Education, Corinthian Colleges, Inc. and Learning Tree International. 28
2:06-cv-02674-RCB Document 71 - Red 11/23/2007 Page 62 of 103 1 [T]he review has identified various deficiencies in the process of granting and documenting stock options. As a result of the deficiencies, certain 2 measurement dates related to stock option grants will need to be revised and adjustments to historical financial statements will be required. These 3 deficiencies include the following:
4 • In the accounting of certain stock option grants, the Company did not correctly apply the requirements of Accounting 5 Principles Board (APB) Opinion No. 25, Accounting for Stock 6 Issued to Employees....
7 • The Company misapplied Internal Revenue Code Section 162(m) with respect to the contemporaneous tax treatment of 8 certain stock option grants and may face significant tax liability 9 for prior years.
10 • The Company prepared and maintained inaccurate documentation concerning the date that grant award lists were 11 completed and approved. 12 100. Following this announcement, Apollo's stock price dropped another 2.72% to 13 close at $35.02 on November 3, 2006, from a close of $36.00 on November 2, 2006, or 14 approximately four times the average volume of shares traded. 15 101. While Mueller continued to deny that any backdating had occurred at Apollo, 16 stating in a conference call on the same day that "to date there has been no indication that 17 there has been any backdating, Apollo was forced to issue a clarification ofthis statement in 18 a Form 8-K filed November 6, 2006, stating that in fact, with respect to some options grants, 19 "there is little contemporaneous evidence to establish that the grant was made on the grant 20 date. Indeed, contrary to Mueller's statementjust three days earlier, Apollo stated that there 21 was in fact "a possibility that the grant date was retroactively selected. In other words, 22 backdating indeed occurred. 23 102. On November 9, 2006, Apollo announced that Bachus had resigned as CAO 24 and Controller on November 5, 2006. While Apollo gave no reason for Bachus's 25 resignation, John Sperling testified that Bachus resigned as a result ofhis involvement in the 26 backdating at Apollo shortly before Sperling had a chance to ask for Bachus's resignation. 27 Ex. D at 56-57. 28
2:06-cv-02674-RCB Document 71 - 60ed 11/23/2007 Page 63 of 103 1 103. During the seven days that Apollo was leaking this information about its 2 backdating investigation into the market, the stock price declined 6.2% from a close of $36 3 on November 2, 2006, to a close of $33.70 on November 10, 2006. Again, these declines
4 were not due to market or industry-specific events. In this period, the S&P 500 gained 1%, 5 and Apollo's peer group gained 2.7%. 6 104. On December 15, 2006, Mueller's November 3, 2006 statements were again
7 I contradicted when Apollo filed an 8-K stating that former Apollo officers had likely falsified 8 or altered documents in connection with the backdating at Apollo, and that addition grants 9 were likely backdated: 10 [T]he Special Committee, in connection with its final factual findings, reported to the Board that certain former officers took steps that may have 11 been intended to maskfailures in the grant approvalprocess with respect to the Company 's financial reporting and payment of taxes. The Special 12 Committee also recently discovered additional evidence that raises questions whether another grant date (in addition to the two grants referenced in the 13 Form 8-K dated November 6, 2006) may have been retroactively selected ....
14 (Emphasis added.) 15 105. The December 15, 2006 Form 8-K also called in question another ofMueller's
16 November 3, 2006 statements. When asked by Greg Cappelli, an analyst at Credit Suisse, on 17 a November 3, 2006 conference call, whether the Company's investigation was broader than 18 just stock option backdating, Mueller responded, "No. Absolutely not. The problems that 19 we're having from an accounting standpoint are strictly related to the stock option plan. 20 Yet the December 15, 2006 Form 8-K went on to state that Apollo had understated its 21 allowance for doubtful accounts and bad debt expenses by an estimated $34 million, and 22 would be taking a charge to account for this error. The next trading day after this 23 announcement, December 18, 2006, Apollo's shares again declined by 3.59% to close at 24 $38.60 from a close of $40.04 on December 14, 2006. 25 A. The Restatement
26 106. Over six months later, on May 22, 2007, Apollo finally filed its belated Form 27 10-K containing restated financial results. The Form 10-K describes an option granting
28 process conducted with a staggering degree ofdeliberate recklessness, ifnot intentional fraud
2:06-cv-02674-RCB Document 71 - Sled 11/23/2007 Page 64 of 103 and abandon, as well as attempts to deliberately cover-up and suppress the grant approval 2 process. Indeed, defendants' complete and utter abandonment oftheir stated grant approval 3 process resulted in the Company's investigation being unable to conclusively determine 4 correct measurement dates for stock option grants in many cases: 5 On December 15, 2006, we announced in a Form 8-K that the Special Committee presented the final factual findings of the Independent Review to 6 the Board disclosing, among other things, that:
7 • "In the accounting of certain stock option grants, the Company did not correctly apply the requirements of APB 25. In certain instances, 8 the Company used a measurement date for option awards that 9 corresponded with the [stated] grant date even though the approvals for those grants as set forth in the operative plans were not obtained until 10 after the reported grant date and the final lists of grantees and award 11 amounts were incomplete at the time of the reported grant date. • "The Company misapplied Internal Revenue Code Section 162(m) 12 with respect to the contemporaneous tax treatment of certain stock option grants and may face significant tax liability for prior years. 13 • "The Company prepared and maintained inaccurate documentation 14 concerning the date that grant award lists were completed and approved. 15 • "The Special Committee has found no direct evidence that the grant 16 date for any of the large Management Grants was selected with the benefit of hindsight. In two instances, though, the price on the grant 17 date is at a relative low point for the Company's stock, and there is little contemporaneous evidence to establish that the grant was made on 18 the grant date. While there is a possibility that the grant date was 19 retroactively selected, there is insufficient evidence to reach such a conclusion. 20 • "[T]he Special Committee, in connection with its factual findings, 21 reported to the Board that certain former officers took steps that may have been intended to mask failures in the grant approval process with 22 respect to the Company's financial reporting and payment of taxes. 23 The Special Committee also recently discovered additional evidence that raises questions whether another grant (in addition to the two 24 grants referenced in a previous Form 8-K dated November 6, 2006) may have been retroactively selected by a day, although there is 25 insufficient evidence to reach such a conclusion. 26 Based on the Independent Review and the Internal Review, we 27 determined that 57 of the 100 total grants made during this time period used incorrect measurement dates for accounting purposes. Ofthese 100 grants, 33 28 grants were Management Grants. We determined that incorrect measurement
2:06-cv-02674-RCB Document 71 - 62ed 11/23/2007 Page 65 of 103 dates were used for accounting purposes for 24 ofthe 33 Management Grants. As a result, revised measurement dates were selected for many grants and 2 resulted in exercise prices that were less than the fair market value ofthe stock on the most likely measurement dates. We recorded pre-tax compensation 3 expense of $52.9 million ($59.9 million after-tax) in the aggregate over the fiscal years 1994 through 2005 . The after-tax amount is higher due primarily 4 to disallowed deductions pursuant to IRS Section 162(m) and related penalties and interest. This incremental share based compensation expense results in a 5 cumulative decrease to pre-tax income of $21 . 1 million ($34.2 million after- tax) for the years ended August 31 , 2002 through 2005. 6 Based on the available documentation and evidence, the following 7 summarizes our understanding of our historical granting process and determination of the most likely measurement dates for our stock option 8 grants. 9 Historically, we made annual grants ofAPOL and UPX Online options. We have historically granted stock options to the following groups: 10 • Management and other employees (annual grants), including those 11 officers covered by Section 16 of the Securities and Exchange Act of 12 1934 ("Section 16 Officers ) and other employees; • Non-employee directors (the "Director Grants ); 13 • Faculty (full- and part-time employees) (the "Faculty Grants ); and 14 • Individual employees (new hires, promotions, transfers, etc.) (the "Individual Grants ). 15 Employee Stock Option Plans 16 We typically awarded stock options to certain employees (including the 17 Section 16 Officers) on an annual basis. From June 1994 to March 24, 2000, we issued Management Grants pursuant to the Long Term Incentive Plan 18 dated May 13, 1994, as amended on September 22, 1995 ("LTIP ). The LTIP required approval of all grants by the majority of the members of the 19 Compensation Committee. Subsequent to March 24, 2000, we awarded Management Grants pursuant to the 2000 Stock Incentive Plan ("2SIP ). The 20 2SIP required the approval ofall grants by the Compensation Committee or by both the President and CEO. Our former CEO became President of the 21 Company in 1998 and was promoted to President and CEO in August 2001, and he retained both offices until he resigned in January 2006 (the "Former 22 CEO ). The Former CEO had authority to approve the option grants for employees other than himself. Grant approval memoranda ("Approval 23 Memoranda or "Approval Memorandum ) were signed by the Former CEO or the Compensation Committee for a number of grants to employees. 24 Our Process for Granting Stock Options 25 Management Grants 26 Our annual Management Grant process followed a similar pattern each 27 year. Generally, near the end of each fiscal year (before the grant date), we began developing a list of grantees. Over a period of time the list was 28 finalized. Once the total number of shares to be issued to each grantee was
2:06-cv-02674-RCB Document 71 - Bed 11/23/2007 Page 66 of 103 known, the list was submitted to the Stock Option Manager ("Manager ) in our accounting department.
Over the next few weeks to a few months, changes were made to the list: names were added, shares were adjusted, and underlying vesting goals were developed. We understand that prior to August 2001, most grant dates were selected at Board or Compensation Committee meetings. We understand that beginning in August 2001, the Former CEO generally selected the grant date. The majority ofthe Management Grants have a 10-year term with 4-year standard vesting. The grants typically contained vesting acceleration provisions based upon meeting certain financial performance goals (e.g., earnings per share, stock price, net income, etc.). Once the list was finalized by the accounting department, the Former CEO communicated his approval; however, no contemporaneous evidence exists to support on what date this occurred. It was then communicated to the Manager that the list could be entered into Equity Edge, our stock option plan administration software.
Our Use of Equity Edge 10 We began using Equity Edge in approximately May 1997 and still use 11 it today. Data relating to pre-May 1997 grants was also entered into the system in 1997 for recordkeeping purposes. The date a grant is first entered in 12 Equity Edge is referred to as the "Equity Edge Record Added Date. After February 2000, the Equity Edge data was then uploaded to an external third- 13 party broker-dealer firm. On each day that activity occurred in Equity Edge, the third-party broker-dealer's system would automatically download the 14 option grant information into the individual employee brokerage accounts that night. The grantees could then view the options in their brokerage accounts 15 online. 16 Approval of Management Grants 17 Management Grants issued from June 1994 to August 2001 under both the LTIP and the 2SIP required approval by both members of the 18 Compensation Committee. Such approval was mostly documented by Compensation Committee minutes. However, often no list was attached to the 19 minutes. We believe that most grant dates were set at Board or Compensation Committee meetings . Based on a review of past granting practices, the 20 Compensation Committee did not and has not invalidated any grants and we have honored all grants. In 2000, instead of using Compensation Committee 21 minutes, we began using Approval Memoranda to memorialize grants to employees. Beginning in August 2001 , an Approval Memorandum was 22 prepared for grants to the Former CEO. At this time, the Former CEO also had the authority to approve the option grants for employees other than 23 himself. 24 In the course of the Independent Review and the Internal Review, two types ofApproval Memoranda were found. We found Approval Memoranda 25 signed by either the Compensation Committee or, beginning in August 2001, signed by the Former CEO approving grants to all employees. These 26 Approval Memoranda, in limited instances, indicate the specific number of shares to be received by each grantee. We also found Approval Memoranda 27 signed by the Compensation Committee for grants to the Former CEO. These Approval Memoranda typically stated the number of shares being granted to 28 the Former CEO.
2:06-cv-02674-RCB Document 71 - 64ed 11/23/2007 Page 67 of 103 Although there exists a general lack ofdocumentation surrounding the creation and execution ofApproval Memoranda, we understand that Approval Memoranda were created at some point in the grant-making process, and in certain cases, the Approval Memoranda were dated "as of the date of the grant it was approving, such that in certain cases, the date on the Memorandum contained a date before the actual creation date of the Memorandum. In many instances, the Approval Memorandum was signed by only the Chairman of the Compensation Committee and we lack evidence as to whether all ofthe grants issued were, in fact, approved by a majority of the members of the Compensation Committee. As a result of the Independent Review and Internal Review, we understand that the Approval Memoranda are not conclusive as to the actual date of approval, but they do reflect that the approval was given and that the grant was authorized. As a result of the review of our past granting practices, we determined the Equity Edge Record Added Date represents the most likely measurement date as to when the terms ofthe awards were finalized and approved. After the Former CEO resigned in January 2006, to the extent evidence exists of Compensation Committee approval of the final terms of the grant on the original grant date, we used the 10 original grant date. 11 Section 16 Officer Grants (Except the Former CEO) 12 Section 16 Officers received Management Grants according to the same general Management Grant process described above. After August 2002, we 13 filed timely Forms 4 for the Section 16 Officers within two days of a grant. When the list was finalized, grant information was provided to the Manager, 14 who would enter the grant into Equity Edge, which was used to prepare and file the Forms 4. The Section 16 Officers typically took up to but no longer 15 than two days to file the Forms 4. Beginning in August 2001 , the Former CEO had the authority to approve the grants to Section 16 Officers. We 16 generally determined the original stated grant date is the most likely measurement date for Section 16 Officer grants after August 2002. 17 Former CEO Grants 18 Under the LTIP and the 2SIP, only the Compensation Committee could 19 approve grants to the Former CEO. While Compensation Committee minutes generally stated approvals for grants, these minutes did not always specify the 20 shares the Former CEO was to receive in the grant. The Former CEO was typically in attendance at the Compensation Committee meetings where the 21 minutes reflect that option grants were discussed and approved. The minutes reflect the Former CEO was excused prior to his compensation being 22 discussed. 23 The number ofAPOL options granted to the Former CEO remained the same from 1998 through 2001 . From 2001, specific approval for grants to the 24 Former CEO was documented using Approval Memoranda signed by the Chairman of the Compensation Committee. By early 2001 , approval was 25 obtained verbally by the Former CEO and was typically later memorialized in an Approval Memorandum . Prior to August 2002, to the extent we were able 26 to determine that evidence of Board or Compensation Committee approval existed, we concluded the original grant date was the most likely measurement 27 date. If we were unable to determine that evidence of approval existed for a grant, we used the Equity Edge Record Added Date as the measurement date. 28
2:06-cv-02674-RCB Document 71 - 6Sed 11/23/2007 Page 68 of 103 As discussed above for the Section 16 Officers, after August 2002, the Former CEO began filing Forms 4 with the SEC within two days of a grant. We generally concluded the original stated grant date is the most likely measurement date after August 2002, based on the history ofthe filing process for Forms 4 after a grant. Director Grants
We grant options to non-employee directors on an annual basis. From December 6, 1994 through September 1, 2003, we granted annual Director Grants pursuant to the Apollo Director Stock Plan ("DSP ), which was approved on and effective as of August 5, 1994. The DSP provisions stated that each director received a defined number of stock options on a defined date and price on the date of grant. As a result, we generally concluded that the original stated grant date was the most likely measurement date for Director Grants made under the DSP.
Subsequent to September 1, 2003, the Director Grants were made 10 pursuant to the 2SIP. Forms 4 were prepared in the same manner as the Section 16 Officers discussed above, except that the forms were emailed to the 11 Directors for signatures. As a result, after September 2003, we concluded the original stated grant date is the most likely measurement date based on the 12 history of our granting process for Forms 4. 13 Faculty Grants 14 Each qualifying faculty member was eligible to receive one Faculty Grant per calendar year. Starting in fiscal year 1999, each qualifying faculty 15 member received a fixed number of shares annually. The Faculty Grants were issued to eligible faculty that met certain previously communicated criteria. 16 Faculty Grants were awarded under both the LTIP and 2SIP; however, provisions do not specifically address Faculty Grants. Detailed Faculty Grant 17 information was posted to the Company website and in the Faculty Handbook, including the frequency and timing of the grants for the upcoming year. The 18 strike price per share was to be equal to the closing price on the grant date or the nearest day before the grant date if it fell on a weekend or holiday, 19 pursuant to the plan. 20 In most cases, grants were entered into Equity Edge by the Manager and then a few days later Human Resources sent a grant email to faculty. 21 After 2000, Faculty Grants are also uploaded nightly to an external third-party broker-dealer' s system and automatically downloaded into the individual 22 employee brokerage accounts that same night. 23 As a result of the pre-defined criteria, we determined that the original stated grant date was generally the most likely measurement date. In certain 24 instances, we noted that certain faculty met the pre-established criteria but were not included in the appropriate quarterly/semi-annual stated grant. 25 Because they met all the criteria at the stated grant date and had completed an Eligibility Checklist, they should have received an award on that date but were 26 left offdue to administrative delay. Therefore, we determined the most likely measurement date was the date of the quarterly/semi-annual grant date in 27 which the award should have been included. 28
2:06-cv-02674-RCB Document 71 - 66ed 11/23/2007 Page 69 of 103 Individual Grants
We also granted options to certain employees on an ad hoc basis throughout the year for various reasons such as new hire, transfer, promotion, etc. These options were granted pursuant to the LTIP or the 2SIP, and the terms normally matched all terms in the grant agreements used for the Management Grant issued during that same fiscal year. Prior to 2001, all of the information and approvals required to establish a proper measurement date for certain grants were either not documented or we lacked sufficient evidence as to whether such information and approvals were obtained by the originally selected grant date. Beginning in August 2001 , the Former CEO picked the grant date and determined the number of shares. We normally-ormally did not document these types of option grants in a letter or in the employee's personnel file. The individuals were notified oftheir grants either verbally or via an email from Human Resources. Certain grants were documented via an Approval Memorandum signed by the Former CEO after August 2001, as discussed in the Management Grants discussion above. 10 The grant was entered into Equity Edge following the process described above for Management Grants. We similarly concluded that the Equity Edge 11 Record Added Date is the most likely measurement date for Individual Grants. 12 Income Tax Related Matters 13 Section 162(m) 14 In relation to the Restatement, certain tax deductions in prior years with respect to compensation attributable to the exercise ofcertain stock options by 15 executive officers may be in question. Under IRC Section 162(m), the amount of such deduction per covered executive officer is limited to $1.0 million per 16 year, except to the extent the compensation qualifies as performance-based. Compensation attributable to options with revised measurement dates may not 17 have qualified as performance-based compensation. Accordingly, we may have claimed deductions with respect to those exercised options that were in 18 excess of the limit imposed under IRC Section 162(m). As a result, we have accrued our best estimate with respect to potential tax liabilities, including 19 interest and penalties for the taxable years 2003 through 2005 (which are currently our only open years subject to adjustment for federal tax purposes), 20 of approximately $41.1 million as of August 31 , 2006 . These accruals have been recorded because we believe it is more likely than not that the deductions 21 will be disallowed by the IRS. For prior periods where a liability existed and where the statute of limitations has expired, the accrual relating to that period 22 has been reversed in the appropriate period. 23 Section 409A 24 The revised measurement dates for certain stock options discussed above may result in adverse tax consequences to holders of those options 25 under IRC Section 409A. Section 409A was enacted in 2004 to impose certain restrictions on deferred compensation arrangements, including 26 limitations on the subsequent distribution of deferred amounts. Deferred compensation for this purpose is defined very broadly and, as a result, includes 27 in that defmition, options granted at a discounted exercise price, to the extent those options vest after December 31, 2004 ("409A Affected Options ). 28 Therefore, the revised measurement dates for the options discussed above
2:06-cv-02674-RCB Document 71 - 67ed 11/23/2007 Page 70 of 103 could subj ect the options that vest after calendar year 2004 to treatment as 409A Affected Options. Each holder of a 409A Affected Option would recognize taxable income on the option spread at the time of vesting (or, for 409A Affected Options exercised in calendar years 2006 or 2007, at the time of exercise) and would incur, in addition to regular income taxes, an additional 20% penalty tax on such spread and interest. Similar penalty taxes could apply under state tax laws. We are subject to certain reporting and withholding obligations with respect to the taxable income on the option spread.
(1) Unexercised 409A Affected Options Section 16 Officers: In December 2006, we entered into irrevocable written agreements with each of our Section 16 Officers and certain Former Section 16 Officers, holding 409A Affected Options pursuant to which those options were to be brought into compliance with Section 409A, and thereby would avoid the adverse tax consequences summarized above, through either of the following alternatives: (a) amendment of the option to increase the 10 exercise price to the market price per share of our Class A common stock on the revised measurement date or (b the optionee 's commitment to exercise the 11 option (to the extent in the money) during the 2007 calendar year prior to its contractual expiration date. Generally, these amendments will be treated as a 12 modification of the option under SFAS 123(R). However, in this circumstance, there are no accounting consequences under SFAS 123(R). 13 Non-Section 16 Officers: An offer to amend the 409A Affected 14 Options held by non-Section 16 Officers to increase the exercise price to the market price per share ofthe underlying Class A common stock on the revised 15 measurement date cannot be made until after this Annual Report on Form 10- K and all other delinquent filings are filed with the SEC. In order to avoid 16 adverse taxation under Section 409A, this amendment must be made on or before the earlier of (i) December 31, 2007 or (ii) the exercise of the 409A 17 Affected Options during the 2007 calendar year. We anticipate that we will commence such an offer after the filing of this Annual Report and all other 18 delinquent filings. 19 As part of the offer and amendment process under IRC Section 409A, we may provide bonuses to the holders ofthe amended options to compensate 20 them for the resulting increase in their stock option exercise price. However, we have not yet made a decision to implement a bonus program to compensate 21 either the Section 16 Officers or the non-Section 16 Officers resulting from the increased exercise prices. A decision to compensate for increased prices 22 through a bonus would represent a modification to the grant and would result in accounting consequences under SFAS 123(R). 23 (2) Exercised 409A Affected Options 24 In February 2007, we elected to participate in a program announced by 25 the Internal Revenue Service in Notice 2007-30, which pertains to 409A Affected Options exercised by non-Section 16 Officers during the calendar 26 year 2006 and which allows us to pay the penalty tax and interest due to the related measurement date changes that would otherwise be payable by the 27 option holders who exercised the 409A Affected Options. The payment ofthe tax penalty and interest on behalf of the option holders in 2007 will result in 28 additional taxable income to the option holders. As such, we will pay on
2:06-cv-02674-RCB Document 71 - 68ed 11/23/2007 Page 71 of 103 behalf of or reimburse the option holders for applicable payroll and income taxes related to the additional income, as well as provide a gross up for any tax 2 consequences of the penalty tax and interest reimbursement we make. We recorded a pre-tax liability in the second quarter of 2007 for compensation 3 expense under this program totaling approximately $2.6 million. 4 Restatement Adjustments
5 (1) Share Based Compensation - As discussed above, we have restated our financial results to record additional share based compensation expense. 6 (2) Allowance or Doubtful Accounts - During the year ended August 31, 7 2006, we concluded that a significant increase in our allowance for doubtful accounts was required. A portion of the increase has been determined to be 8 the correction of an error from prior periods and is included in the accompanying financial statements as an element of the Restatement. This 9 error related to the fact that in prior years we did not properly consider available information related to (a)the cumulative differences between actual 10 write-offs and our allowance for doubtful accounts and (b) significant increases in the "Return to Lender dollars for Title IV recipients who 11 withdraw from UPX or WIU. When a student with Title IV loans withdraws from UPX or WIU, we are sometimes required to return a portion of Title IV 12 funds to the lenders. We are generally entitled to collect these funds from the students, but the collection ofthese receivables is significantly lower than our 13 collection of receivables from students who remain in our educational programs. Accordingly, we have restated our allowances for doubtful 14 accounts for all prior periods presented. This error resulted in adjustments to pre-tax bad debt expense in the amounts of $11 . 7 million ($7.1 million after- 15 tax) and $4.1 million ($2.5 million after-tax) for the fiscal years ended 2005 and 2004, respectively. 16 (3) Other Adjustments - We concluded that the accounting for various 17 accounts such as cash, revenue, property and equipment, lease accounting and other investments was not properly recorded in accordance with GAAP. 18 Specifically, the impairment in a venture capital fund investment should have been recorded in an earlier period; cash related to scholarships, grants, and 19 refunds should have been classified as restricted cash and student deposits; different assumptions should have been used in determining the fair value of 20 options; certain share based compensation was improperly amortized amongst quarters; auction rate securities were improperly classified as cash and cash 21 equivalents in certain periods; and certain revenue under tuition discount programs were not properly recorded. Certain of these errors resulted in 22 adjustments to pre-tax expense shown in other adjustments in the table below. 23 Adjustments to our lease accounting resulted in a net increase in expense of $2.6 million and $0.7 million for the years ended August 31, 2005 24 and 2004, respectively, and adjustments to the balance sheet of $2.6 million as of August 31, 2005 . Specifically, we determined that the accounting for our 25 tenant improvement allowances was not in accordance with GAAP. As part of the Restatement, the errors in our accounting for the tenant improvement 26 allowances were corrected and certain of our operating leases now have been properly accounted for as capital leases. These adjustment amounts are 27 included in Other Adjustments in the table below. 28 (Brackets and emphasis on original.)
2:06-cv-02674-RCB Document 71 - 69ed 11/23/2007 Page 72 of 103 1 107. While the Restatement avoided using the word "backdating, it nevertheless 2 described the practice and its consequences, stating for example that "the Company did not
3 I correctly apply the requirements of APB 25. Further, Apollo and defendants have 4 I elsewhere admitted that the Restatement was not due to innocent errors, but rather 5 backdating, which by definition is a deliberate act. 6 108. For example, in a November 17, 2006 deposition in Sekuk Global Ent., et al. v. 7 1Apollo Group Inc., et al., No. 04-cv-02147-JAT (D. Ariz.), John Sperling admitted that he 8 and all other Apollo Section 16 officers received backdated options: 9 Q: Do you know whether you received options on the dates when they were possibly backdating? 10 A: I don't know, but I think that there were - that all of the Section 16 11 officers received back[dated] options on the same day. So ifthey were Section 16 officers, I would have been among them, up until the time I 12 resigned as chairman. 13 Q: Ifbackdating had occurred, ... it would have been uniformly issued to the Section 16 officers? 14 A: Yes. As I recall, Mr. Rubin said that such backdating applied only to 15 Section 16 officers, that no one below Section 16 was involved in that at all.... 16 Ex. D at 56:1-15. 17 109. Further, in a motion in limine to exclude Apollo's Restatement from the same 18 case as in the above deposition, Apollo acknowledged that backdated options were the 19 principal reason for its massive restatement : "Apollo restated its SEC filings with regards, 20 primarily, to backdating of stock option grants. Ex. E at 3. 21 110. The impropriety of such backdating is obvious. Indeed, Judge Breyer held in 22 United States v. Reyes, No. C06-00556-1 CRB, (N.D. Cal. May 30, 2007) (unpublished order 23 denying a motion to dismiss indictment), a criminal trial regarding the backdating of stock 24 options: 25 The foal of APB 25 is straightforward: it requires companies to record the 26 "intrinsic value of an option at the time it is granted. In other words, if an in- the-money option is granted, then APB 25 requires a company to record as 27 compensation the amount by which the market price exceeds the strike price. 28
2:06-cv-02674-RCB Document 71 - F70ed 11/23/2007 Page 73 of 103 1 Whatever ambiguity may exist in APB 25, it is not possible to construe the rule's language as permitting the deliberate retroactive selection ofa particular 2 grant date and the intentional concealment of the date on which that retroactive selection was made. If APB 25 precludes anything, it prohibits 3 companies from deliberately choosing a strike price based on a favorable historical date and then, even under circumstances where the intrinsic value of 4 the grant is clear, pretending that the option was granted earlier than it actually was. 5 (Emphasis in original.) Ex. F at 8-9. Yet this is exactly the conduct to which Apollo has 6 admitted. 7 111. Thus it is impossible to "backdate an option by mistake. Indeed, determining 8 the measurement date for an option date is clear, simple and unambiguous, as the SEC Chief 9 Accountant has stated on September 19, 2006: 10 The guidance in APB 25 turns on the determination ofthe measurement date 11 for a stock option, which is defined as "the first date on which are known both (1) the number of shares that an individual employee is entitled to receive and 12 (2) the option or purchase price, if any.
13 (Emphasis in original .) As Apollo has now admitted, this was clearly not done. 14 VIII. ADDITIONAL ALLEGATIONS OF SCIENTER
15 112. As alleged herein, defendants acted with scienter in that they: (a) had access to
16 I all internal data concerning the Company's stock option plans; (b) directed and/or 17 participated in establishing the terms ofthe option grants, including the choice ofgrant dates 18 and exercise price; (c) knew or with deliberate recklessness disregarded that the public 19 documents and statements issued or disseminated in the name of the Company were 20 materially false, incomplete or misleading; (d) knew or with deliberate recklessness
21 disregarded that such statements or documents would be issued or disseminated to the 22 investing public; and (e) knowingly or with deliberate recklessness participated or 23 acquiesced in the issuance or dissemination of such statements or documents as primary 24 violations of the federal securities laws. 25 113. Additional facts provide actual and strong circumstantial evidence of
26 defendants' scienter including: (a) the Company's concessions and admissions; (b) 27 defendants' roles, responsibilities, and specifically articulated duties for granting and 28
2:06-cv-02674-RCB Document 71 - FFi1ed 11/23/2007 Page 74 of 103 1 administering option grants; (c) defendants' desire to personally obtain greater compensation
2 I without public scrutiny; and (d) the pervasiveness and nature of the fraud. 3 A. The Company' s Admissions and Recent Actions Establish Defendants ' Scienter 4 114. The Company has made admissions and taken actions that establish 5 defendants' scienter. The evasive nature of these admissions, which at times conflict with 6 the contemporaneous statements of John Sperling, were solely designed to further 7 defendants' efforts to avoid taking responsibility for their egregious misconduct: 8 (a) Apollo's public statements, for example in its 2007 Form 10-K, admit 9 that "certain former officers took steps that may have been intended to mask failures in the 10 grant approval process with respect to the Company's financial reporting and payment of 11 taxes, and that "[i]n the accounting of certain stock option grants, the Company did not 12 correctly apply the requirements ofAPB 25. While Apollo's public statements avoid using 13 the word "backdating in furtherance of defendants' efforts to avoid responsibility for their 14 misconduct, Apollo has elsewhere been forced to admit that such "failures in the grant 15 approval process, and misapplications ofAPB 25 were, in fact, due to "backdating ofstock 16 option grants. 17 (b) In the wake of the Company's backdating investigation, at least six 18 executives and directors "resigned from the Company, including the CFO, COO, the 19 entirety ofthe Company's Compensation Committee, and the two directors who made up the 20 original Special Committee. Further, Mueller deliberately misled Apollo's investors about 21 the nature ofat least certain ofthese "resignations in furtherance ofhis efforts to downplay 22 the significance of the deliberate misconduct which took place at Apollo. For example, 23 Mueller's statement that Gonzales resigned to spend more time with her family is directly 24 contradicted by John Sperling, who stated that he asked for her resignation because of her 25 involvement in the backdating at Apollo, and who stated that he would have fired her if she 26 had not resigned. The only plausible inference to be drawn from such inconsistencies is a 27 28
2:06-cv-02674-RCB Document 71 - F72ed 11/23/2007 Page 75 of 103 1 deliberate and concerted effort to mislead Apollo's investors regarding the nature of the 2 Company's options misconduct.
3 B. Defendants ' Specific Participation in the Backdating Establishes Their Scienter 4 115. Apollo's "investigation details the role of the Compensation Committee, 5 which included defendants Norton and Blair during the majority ofthe relevant period, in the 6 backdating at Apollo, as well as the deficiencies in the conduct of the Compensation 7 Committee with respect to the options granting process, including: 8 (a) "The Company prepared and maintained inaccurate documentation 9 concerning the date that grant award lists were completed and approved. (In other words, 10 the falsification of documents.); 11 (b) "[P]rior to August 2001, most grant dates were selected at Board or 12 Compensation Committee meetings. 13 (c) "Management Grants issued from June 1994 to August 2001 under both 14 the LTIP and the [2000 Plan] required approval by both members of the Compensation 15 Committee. 16 (d) "We also found Approval Memoranda signed by the Compensation 17 Committee for grants to the Former CEO. 18 (e) "In many instances, the Approval Memorandum was signed by only the 19 Chairman of the Compensation Committee and we lack evidence as to whether all of the 20 grants issued were, in fact, approved by a majority of the members of the Compensation 21 Committee. ; 22 (f) "Under the LTIP and the [2000 Plan] , only the Compensation 23 Committee could approve grants to the Former CEO. 24 116. As described above, defendants Blair and Norton, as members of the 25 Compensation Committee during the relevant period, were responsible for approving the 26 grant dates and exercise prices ofthe vast majority ofoption grants during the Class Period. 27 Both Norton and Blair subsequently resigned from Apollo' s Board. 28
2:06-cv-02674-RCB Document 71 - Red 11/23/2007 Page 76 of 103 1 117. Defendant Nelson, the "Former CEO who is so frequently discussed in the 2 Company's Restatement, was instrumental in the Company's backdating scheme. Further, 3 Nelson personally benefited from the backdating at Apollo by receiving at least 450,000 4 shares of backdated Apollo stock. The Company's Restatement reveals that:
5 (a) "The Former CEO had authority to approve the option grants for 6 employees other than himself. Grant approval memoranda ("Approval Memoranda or 7 "Approval Memorandum ) were signed by the Former CEO or the Compensation 8 Committee for a number of grants to employees. 9 (b) "We understand that beginning in August 2001, the Former CEO 10 generally selected the grant date. 11 (c) "We found Approval Memoranda signed by either the Compensation 12 Committee or, beginning in August 2001, signed by the Former CEO approving grants to all 13 employees.
14 (d) "[T]he Former CEO had the authority to approve the grants to 15 Section 16 Officers.
16 (e) "The Former CEO was typically in attendance at the Compensation 17 Committee meetings where the minutes reflect that option grants were discussed and 18 approved. 19 118. Defendant Nelson's involvement in the grant approval process is powerful
20 evidence of his scienter. In addition to the Company's admissions in the Form 10-K, the 21 testimony of John Sperling leaves no doubt whatsoever regarding Nelson's scienter. 22 119. First, John Sperling testified that Nelson "was preoccupied primarily with the
23 stock price and not with the functioning ofthe company. Ex. D at 59:17-19. Second, John 24 Sperling also testified that all Section 16 officers received backdated stock options, and,
25 according to the Form 10-K, Nelson was the individual who "had the authority to approve 26 the grants to Section 16 Officers. Thus, there can be no question that Nelson, who was so 27 intimately involved in the grant approval process, who received at least 450,000 backdated 28 stock options, who Apollo has admitted was responsible for granting backdated options to
2:06-cv-02674-RCB Document 71 - 14ed 11/23/2007 Page 77 of 103 1 the Company's Section 16 officers, and who was "preoccupied primarily with the stock 2 price of the Company, was not wholly aware that he was granting backdated options, and 3 was not at least deliberately reckless in his administration of the Company's stock options 4 plans.
5 120. Nelson also signed false and misleading SOX certifications which falsely
6 I attested to the adequacy of the Company' s internal controls, and the accuracy of the 7 Company's reported financial statements. In fact, as Apollo's Restatement makes clear, it 8 appears that Apollo did not have any internal controls whatsoever with respect to the 9 granting of stock options, and Apollo's financial statements were knowingly overstated for 10 the entirety of the Class Period. 11 121. Further, John Sperling testified that Norton and Blair, the chairs of the 12 Compensation and Audit Committees since 2001, had the "closest working relationship
13 with Nelson at Apollo. Their close working relationship, coupled with their responsibilities 14 to administer the Company's stock option programs as well as oversee the accuracy of the 15 Company's financial accounting, shows a concerted effort to conceal the backdating from 16 Apollo's shareholders. These defendants completely abdicated their fiduciary duties to 17 Apollo's shareholders in pursuit of their own personal profits.
18 122. Defendant Gonzales, as CFO at Apollo for the entirety ofthe period in which 19 plaintiffs' allege that backdating was occurring, was also at least deliberately reckless with 20 respect to her administration ofthe Company's option granting process, and her oversight of 21 the Company' s accounting. 22 123. Gonzales received at least 102,000 shares of backdated stock options before
23 I she was forced to resign due to her involvement in the backdating at Apollo. 24 124. Further, every year since 2002, in Apollo's Forms 10-K filed with the SEC,
25 Gonzales signed SOX certifications which stated that: 26 I, Kenda B. Gonzales, certify that: 27 1. I have reviewed this annual report on Form 10-K ofApollo Group, Inc. (the "registrant ); 28
2:06-cv-02674-RCB Document 71 - I ed 11/23/2007 Page 78 of 103 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make 2 the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by 3 this annual report; 4 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material 5 respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 6 4. The registrant's other certifying officers and I are responsible for 7 establishing and maintaining disclosure controls and procedures (aas defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: 8 a) designed such disclosure controls and procedures to ensure that material 9 information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the 10 period in which this annual report is being prepared; 11 b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual 12 report (the "Evaluation Date ); and 13 c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the 14 Evaluation Date; 15 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee 16 of registrant's board of directors (or persons performing the equivalent functions): 17 a) all significant deficiencies in the design or operation of internal controls 18 which could adversely affect the registrant' s ability to record, process, summarize and report financial data and have identified for the registrant's 19 auditors any material weaknesses in internal controls; and 20 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 21 c) The registrant' s other certifying officers and I have indicated in this annual 22 report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date 23 of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 24 125. Gonzales was at least deliberately reckless with respect to the options granting 25 process at Apollo because, contrary to the SOX certifications which each year affirmed the 26 adequacy of the Company' s internal controls and the accuracy of the Company's financial 27 results, Gonzales wholly failed to monitor the granting of stock options, or account for the 28
2:06-cv-02674-RCB Document 71 - I bed 11/23/2007 Page 79 of 103 1 backdated stock options at Apollo. According to John Sperling, the Special Committee 2 determined that Gonzales was "unaware of APB 25, and, therefore, administered an option 3 plan that did not meet the standards of 162M. Consequently, she caused - will be causing -
4 I will cause - or has caused - helped to cause. Let me put it that way. Helped to cause the 5 necessity to restate financials and to pay the IRS, return to the IRS the funds or the amounts
6 that were taken had the options been compliant with APB 25 Ex. D at 57:11-19. 7 126. APB 25 is an accounting rule which was originally published in 1972 - 25 8 years ago. APB is simple and unambiguous. It requires that compensation expense be 9 determined as the excess ofthe stock price at the measurement date over the option exercise 10 price. In turn, the measurement date is defined as "the first date on which are known both 11 (1) the number of shares that an individual employee is entitled to receive and (2) the option 12 or purchase price, if any.
13 127. Gonzales has a Bachelor of Accountancy degree from the University of 14 Oklahoma, was a Certified Public Accountant with Peat Marwick, Mitchell and Company, 15 and has been serving as a CFO since 1985 - over 20 years. Gonzales started work at Apollo 16 in 1998. Peter Sperling's testimony that Gonzales was "unaware of APB 25 shows that
17 I either Gonzales was unconscionably negligent and reckless in her failure to comprehend the 18 most basic of accounting rules, or that she misled the Special Committee regarding her
19 knowledge of APB 25. In either case, the evidence supports an overwhelming inference of 20 scienter with respect to Gonzales, and shows that Apollo was well deserving oftheir title, the 21 "poster child of poor [corporate] governance. 6 22 128. Mueller has been President ofApollo since January 2006. Mueller joined the
23 Company in 1987, serving in a variety ofpositions, including a variety ofexecutive positions 24 since 1993. 25 6 This dubious title was coined by Gavin Anderson, chairman and co-founder of 26 GovernanceMetrics, International, a New York research firm that grades 4,000 companies on governance issues, and appeared on Marketwatch article titled "Corporate governance as a 27 `risk-factor' by Herb Greenberg, dated May 29, 2007. 28
2:06-cv-02674-RCB Document 71 - F77ed 11/23/2007 Page 80 of 103 1 129. From at least June 2006, Mueller issued a series ofknowingly false statements
2 I regarding the backdating at Apollo, which were specifically designed to mislead Apollo's 3 investors. 4 130. On November 3, 2006, Mueller stated that Gonzales resigned to "spend more 5 time with her family. This statement was false. John Sperling directly contradicted this 6 statement less than two weeks later, and testified that Gonzales was asked to leave due to the 7 backdating at Apollo, and that she would have been fired had she not resigned. It is simply 8 inconceivable that Mueller, as President ofApollo, would not know why his CFO resigned. 9 Rather, Mueller deliberately misled investors to avoid having to tell them the truth - that 10 Gonzales was forced to resign because of the backdating at Apollo. 11 131. Mueller's deception continued on November 3, 2006 when he stated that "to 12 date there has been no indication that there has been any backdating. This statement too 13 was knowingly false. Indeed, one of the Company's analysts, Chris Gutek with Morgan 14 Stanley, questioned Mueller on this statement during the call, asking, "you said there was no 15 evidence ofbackdating yet. I guess I'm confused, based on the language in the 8-K, which 16 says in certain circumstances the Company used [the incorrect measurement date] .... Can 17 you reconcile the language in the 8-K with the comment that you just made, that there was 18 no evidence ofbackdating? Mueller could provide no explanation for his inconsistencies,
19 and merely answered, "The investigation is ongoing, and to say more than what I have said 20 to this point would not be - I just shouldn't do that. 21 132. Apollo was forced to issue a clarification ofMueller's statement in a Form 10- 22 I K dated November 6, 2006, stating that, in fact, with respect to some options grants, "there is 23 little contemporaneous evidence to establish that the grant was made on the grant date. 24 Indeed, contrary to Mueller's statementjust three days earlier, Apollo stated that there was in 25 fact "a possibility that the grant date was retroactively selected. In other words, backdating 26 indeed occurred. 27 28
2:06-cv-02674-RCB Document 71 - F78ed 11/23/2007 Page 81 of 103 1 C. Defendants' Personal Enrichment Through Lucrative Stock Option Grants and Insider Trading Supports a Finding of 2 Scienter
3 133. Defendants were motivated to commit the fraudulent scheme in order to reap
4 I significant personal profits. According to John Sperling, all ofApollo's Section 16 officers 5 I received backdated options. This is confirmed by Apollo' s Restatement, which states that 6 1 "24 ofthe 33 Management Grants during the relevant period required restating. Defendants
7 I cashed in on their backdated stock options, and the artificial inflation in Apollo's stock price 8 by selling millions of shares of Apollo stock for more insider trading proceeds. Ex. G. 9 134. Since this fraudulent scheme had commenced by at least 1998, no meaningful
10 I comparison ofprior trading patterns can be performed. However, it is clear that defendants 11 were motivated to perpetrate the backdating fraud due to the fact that the vast majority of 12 their overall compensation was through stock option grants. Defendants were also motivated 13 to falsify the Company's financial statements by failing to record the additional
14 I compensation expenses in order to meet their projected earnings goals and receive lucrative 15 bonus awards. 16 D. The Fact that Failing to Report Compensation Expenses from Backdated Options Was Essential to Maintaining Apollo's 17 Profitable Performance Supports a Strong Inference of Scienter
18 135. Given the enormous amount ofstock options issued as compensation to Apollo 19 executives, defendants were keenly aware of the negative impact on Apollo's financial 20 condition that would result ifthe Company did not comply with APB 25 and was required to 21 report compensation expenses for gains incurred in connection with misdated option grants.
22 I For example, in fiscal 2001, the Restatement reduced Apollo' s net income by $21 .8 million, 23 or 25.5%. Similarly, in 2002, the Restatement reduced Apollo's net income by $25.7
24 I million, or 19%. Indeed, as the chart below demonstrates, for the Class Period as a whole, 25 Apollo's net income was overstated by 5.6% due to the Company's backdating and 26 falsification of its financial statements. 27 28
2:06-cv-02674-RCB Document 71 - F79ed 11/23/2007 Page 82 of 103 1 Apollo Group Inc. 2 Impact of Restatement on Net Income (in thousands, except error %) 3 As Reported Adjs. As Restated % Overstated 4 Fiscal 1995 $12,600 $(105) $12,495 -0.8% Fiscal 1996 21,392 0 21,392 0.0% 5 Fiscal 1997 33,379 (237) 33,142 -0.7% 6 Fiscal 1998 46,297 (379) 45,918 -0.8% Fiscal 1999 59,005 (759) 58,246 -1.3% 7 Fiscal 2000 71,191 (2,275) 68,916 -3.3% 8 Fiscal 2001 107,817 (21,873) 85,944 -25.5% Fiscal 2002 161,150 (25,749) 135,401 -19.0% 9 Fiscal 2003 247,010 (11,127) 235,883 -4.7% 10 Fiscal 2004 277,774 2,311 280,085 0.8%
11 Q1 FY2005 130,774 ( 11,101 ) 119,673 -9.3% 12 Q2 FY2005 87,114 (5,638) 81,476 -6.9% Q3 FY2005 141,838 (4,575) 137,263 -3.3% 13 Q4 FY2005 85,005 4,516 99,521 5.0% 14 Fiscal 2005 444,731 (16,798) 427,933 -3.9%
15 Q1 FY2006 130,774 (2,195) 128,579 -1.7% 16 Q2 FY2006 80,635 (1, 545) 79,090 -2.0% 6 Mos. 2006 211,409 (3,740) 207,669 -1.8% 17 18 Total Restatement adjustments, 1995-Q206 (80,731) 19 Restatement ad'ustments, FYO1-Q206 (dlass Period) $1,449,891 $(76,976) $1,372,915 -5.6% 20
21 136. Accordingly, it was of enormous significance to Apollo 's earnings and 22 business model that the Company qualify for favorable tax treatment under APB 25. By
23 disguising backdated options by manipulating their grant dates, defendants were able to 24 receive additional immediate value for their options, which sometimes vested in as little as 25 six months, while Apollo continued to claim favorable account treatment, under-report 26 compensation expenses, and inflate its earnings. 27 28
2:06-cv-02674-RCB Document 71 - 90ed 11/23/2007 Page 83 of 103 1 E. The Mass "Retirements " of Apollo Directors and Executives Supports a Strong Inference of Scienter 2 137. Apollo' s knowledge and intent with respect to backdating and improper 3 accounting for stock options is further supported by the fact that defendants Gonzales, 4 Bachus, Norton, Blair, Govenar and Diethelm all "retired during or shortly after the Special 5 Committee's investigation regarding options backdating and the issuance ofthe Company's 6 Restatement. These defendants' involvement in the backdating at Apollo, as demonstrated 7 above, and the fact that Mueller misled Apollo's investors regarding the nature of these 8 "retirements, further supports a strong inference of scienter. 9 IX. LOSS CAUSATION 10 138. During the Class Period, as detailed herein, defendants engaged in a scheme to 11 deceive the market and a course ofconduct that artificially inflated Apollo's securities prices 12 and operated as a fraud or deceit on Class Period purchasers of Apollo securities by 13 misrepresenting the Company's business success and future business prospects. Defendants 14 achieved this fa ade of success, growth and strong future business prospects by 15 misrepresenting the Company's financial results and compensation practices. Later, 16 however, when defendants' prior misrepresentations and fraudulent conduct began to be 17 disclosed and became apparent to the market, Apollo's stock fell precipitously as the prior 18 artificial inflation came out of Apollo's securities prices. As a result of their purchases of 19 Apollo securities during the Class Period, plaintiffs and other members ofthe class suffered 20 economic loss. 21 139. During the Class Period, defendants presented a misleading picture ofApollo's 22 business and prospects. Thus, instead of truthfully disclosing during the Class Period that 23 Apollo's business was not as healthy as represented, defendants caused Apollo to 24 misrepresent the Company's earnings and compensation and tax expenses, among other 25 important financial metrics. During the Class Period, defendants also repeatedly but falsely 26 emphasized Apollo's compensation practices aligned the interests of management with 27 28
2:06-cv-02674-RCB Document 71 - Riled 11/23/2007 Page 84 of 103 1 shareholders, and that Apollo' s compensation and accounting practices were overseen by 2 independent, competent directors.
3 140. These false and misleading representations concerning Apollo's financial 4 I results and management compensation - plus defendants' non-disclosure of material facts 5 concerning the Company's compensation practices, which facts demonstrated defendants 6 were not acting in the best interests of shareholders but, rather, were acting dishonestly and 7 in violation of Company, New York Stock Exchange and SEC policies and regulations - 8 caused and maintained the artificial inflation of Apollo 's securities prices throughout the 9 Class Period and until the truth was slowly revealed to the market. 10 141. Defendants' false and misleading statements had the intended effect and
11 caused Apollo's common stock to trade at artificially inflated levels throughout the Class 12 Period. 13 142. Starting in June 2006 through the end ofthe Class Period on October 18, 2006,
14 I investors began to learn the truth upon a number of disclosures, including defendants' own 15 admissions, revealing, among other things: (1) defendants had caused Apollo to engage in 16 substantial backdating of stock option grants issued to, among others, senior management; 17 (2) Apollo's published financial statements during and prior to the Class Period were 18 materially misleading for failure to properly account for these stock option grants; (3) senior 19 management and directors had not conducted themselves with integrity nor in the best 20 interest of the Company's shareholders; (4) the Company's Board of Directors had been
21 derelict in performing its duties; and (5) defendants sold shares ofApollo based on material, 22 non-public information. These revelations did not happen all at once, but rather were the 23 result ofan investigation by one ofApollo's analysts. Further, the revelations ofbackdating 24 were dragged-out and deliberately obfuscated by Mueller and the other defendants in an 25 attempt to continue to artificially prop-up Apollo's inflated stock price. As investors and the 26 market became aware of the true facts, the prior artificial inflation came out of Apollo's 27 securities prices, damaging investors. 28
2:06-cv-02674-RCB Document 71 - Bled 11/23/2007 Page 85 of 103 1 143. As a direct result of these disclosures and the public revelations regarding 2 Apollo 's issuance of stock options, and the falsity about Apollo's previous Class Period
3 I representations and its actual business prospects going forward, Apollo's stock price dropped 4 from its trading range between $50-$60 in the first half of 2006, to as low as $37.55 on 5 October 18, 2006 . This drop removed the inflation from Apollo' s stock price, causing real 6 economic loss to investors who had purchased the securities during the Class Period. In 7 sum, as the truth about defendants' fraud and Apollo's business performance was revealed, 8 the Company's stock price plummeted, the artificial inflation came out of the stock, and 9 plaintiffs and other members of the class were damaged. 10 X. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE 11 144. At all relevant times, the market for Apollo' s securities was an efficient market 12 for the following reasons, among others: 13 (a) Apollo' s stock met the requirements for listing, and was listed and 14 actively traded on the National Association of Securities Dealers Automated Quotations 15 ("NASDAQ ), a highly efficient and automated market; 16 (b) As a regulated issuer, Apollo filed periodic public reports with the SEC 17 and NASDAQ; 18 (c) Apollo regularly communicated with public investors via established 19 market communication mechanisms, including through regular dissemination of press 20 releases on the national circuits of major newswire services and through other wide-ranging 21 public disclosures, such as communications with the financial press and other similar 22 reporting services; and 23 (d) Apollo was followed by numerous securities analysts employed by 24 major brokerage firms who wrote reports which were distributed to the sales force and 25 certain customers of their respective brokerage firms. Each of these reports was publicly 26 available and entered the public marketplace. 27 28
2:06-cv-02674-RCB Document 71 - 93ed 11/23/2007 Page 86 of 103 1 145. As a result of the foregoing, the market for Apollo 's securities efficiently 2 digested current information regarding Apollo from all publicly available sources and
3 reflected such information in Apollo's stock price. Under these circumstances, all purchasers of 4 Apollo's securities during the Class Period suffered similar injury through their purchase of 5 Apollo securities at artificially inflated prices and a presumption of reliance applies. 6 XI. APPLICABILITY OF THE AFFILIATED UTE PRESUMPTION OF RELIANCE 7 146. Plaintiffs are also entitled to the Affiliated Ute presumption of reliance? 8 because defendants' fraudulent scheme primarily involved a failure to disclose and/or 9 concealment of material facts concerning defendants' backdating of options grants, which 10 information plaintiffs would have wanted to have known and which would have caused 11 investors to not have purchased shares ofApollo at the prices they traded at during the Class 12 Period. 13 XII. NO SAFE HARBOR 14 147. The statutory safe harbor provided for forward-looking statements under 15 certain circumstances does not apply to any ofthe allegedly false statements pleaded in this 16 Complaint. Many of the specific statements pleaded herein were not identified as "forward- 17 looking statements when made. To the extent there were any forward-looking statements, 18 there were no meaningful cautionary statements identifying important factors that could cause 19 actual results to differ materially from those in the purportedly forward-looking statements. 20 Alternatively, to the extent that the statutory safe harbor does apply to any forward-looking 21 statements pleaded herein, defendants are liable for those false forward-looking statements 22 because at the time each ofthose forward-looking statements was made, the particular speaker 23 knew that the particular forward-looking statement was false, and/or the forward-looking 24 25
26 7 A U. S. Supreme Court precedent relating to presumed reliance held in Affiliated Ute 27 Citizens v. U.S., 406 U.S. 128 (1972). 28
2:06-cv-02674-RCB Document 71 - R4ed 11/23/2007 Page 87 of 103 1 statement was authorized and/or approved by an executive officer of Apollo who knew that 2 those statements were false when made.
3 XIII. PLAINTIFFS' CLASS ACTION ALLEGATIONS 4 148. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil 5 Procedure 23(a) and (b)(3) on behalf of a class consisting of all those who purchased or
6 I otherwise acquired the publicly traded securities ofApollo during the Class Period and who 7 were damaged thereby (the "Class ). Excluded from the Class are defendants, the officers 8 and directors ofthe Company, at all relevant times, members oftheir immediate families and 9 their legal representatives, heirs, successors or assigns and any entity in which defendants 10 have or had a controlling interest. 11 149. The members of the Class are so numerous that joinder of all members is 12 impracticable. Disposition of their claims in a class action will provide substantial benefits 13 to the parties and the Court. 14 150. Throughout the Class Period, Apollo's common stock was actively traded on 15 the NASDAQ, an active and efficient market. While the exact number of Class members is
16 unknown to plaintiffs at this time and can only be ascertained through appropriate discovery, 17 plaintiffs believe that there are hundreds or thousands of members in the proposed Class.
18 Record owners and other members of the Class may be identified from records maintained 19 by Apollo or its transfer agent and may be notified of the pendency of this action by mail, 20 using the form of notice similar to that customarily used in securities class actions. 21 151. Plaintiffs' claims are typical of the claims of the members of the Class as all 22 I members ofthe Class are similarly affected by defendants' wrongful conduct in violation of 23 federal law complained of herein. 24 152. Plaintiffs will fairly and adequately protect the interests ofthe members ofthe 25 Class and have retained counsel competent and experienced in class and securities litigation.
26 153. Common questions of law and fact exist as to all members of the Class and 27 predominate over any questions solely affecting individual members of the Class. Among
28 the questions of law and fact common to the Class are:
2:06-cv-02674-RCB Document 71 - Rued 11/23/2007 Page 88 of 103 1 (a) whether federal securities laws were violated by defendants' acts as 2 alleged herein;
3 (b) whether defendants acted with negligence or with scienter; 4 (c) whether the prices of Apollo common stock and other publicly traded 5 securities were artificially inflated during the Class Period; 6 (d) whether the ownership share ofpublic stockholders in Apollo stock was 7 improperly diluted as a result of Apollo's stock option grants; 8 (e) whether equitable remedies are available to remedy defendants' 9 allegedly negligent, improper and/or fraudulent conduct, and to what extent these equitable 10 remedies should be applied and how they should be fashioned; 11 (f) to what extent the members of the Class have sustained economic loss
12 I and/or damages and the proper measure of damages; 13 (g) whether defendants should be required to disgorge their trading profits 14 to contemporaneous purchasers of Apollo stock; and 15 (h) how to define contemporaneous purchasers for purposes of the 16 Exchange Act.
17 154. A class action is superior to all other available methods for the fair and 18 efficient adjudication of this controversy since joinder of all members is impracticable.
19 Furthermore, as the damages suffered by individual Class members may be relatively small, 20 the expense and burden ofindividual litigation make it impossible for members ofthe Class
21 to individually redress the wrongs done to them. There will be no difficulty in the 22 management of this action as a class action. 23 FIRST CLAIM FOR RELIEF 24 For Violation of §10(B) of the Exchange Act and Rule 10b-5 Against All Defendants 25 155. Plaintiffs incorporate by reference and reallege each and every allegation set 26 forth above, as though fully set forth herein. 27 28
2:06-cv-02674-RCB Document 71 - Riled 11/23/2007 Page 89 of 103 1 156. Defendants named herein are liable for: (i) making false statements; (ii) failing
2 to disclose adverse facts known to them about Apollo; and (iii) participating in, permitting or 3 causing contrivances and manipulative acts regarding Apollo' s stock option plans and its 4 financial statements. Defendants' fraudulent scheme and course of business operated as a 5 fraud or deceit on purchasers of Apollo's publicly traded securities, as it: (i) deceived the 6 investing public regarding Apollo's business, compensation practices and finances; (ii) 7 artificially inflated the prices of Apollo's publicly traded securities; (iii) allowed Apollo 8 executives named as defendants to obtain undeserved and/or illegal options, at low option 9 exercise prices and inflated bonuses which were directly tied to the reported performance of 10 Apollo; (iv) allowed Apollo executives to insider trade by getting options based on non- 11 public information and allowed defendants to sell millions of dollars worth of their own 12 Apollo stock at artificially inflated prices; and (v) caused plaintiffs and other members ofthe 13 Class to purchase Apollo's publicly traded securities at inflated prices which caused 14 plaintiffs losses when the artificial inflation was removed, and unlawfully and improperly 15 diluted their holdings in Apollo. 16 157. During the Class Period, defendants disseminated or approved the false
17 statements specified above, which they knew or deliberately disregarded were misleading in 18 that they contained misrepresentations and failed to disclose material facts necessary in order 19 to make the statements made, in light ofthe circumstances under which they were made, not 20 misleading.
21 158. During the Class Period, each of the defendants named herein occupied a 22 position at Apollo and was privy to non-public information concerning the Company. Each 23 of them knew or recklessly disregarded the adverse facts specified herein and omitted to 24 disclose these facts. Notwithstanding their duty to refrain from selling Apollo stock while in 25 possession ofmaterial, adverse, non-public information concerning the Company, the insider
26 selling defendants sold millions of shares of Apollo stock at grossly inflated prices, 27 improperly personally profiting and benefiting from their wrongful course of conduct and 28 false and misleading statements.
2:06-cv-02674-RCB Document 71 - Red 11/23/2007 Page 90 of 103 1 159. While Apollo's top insiders and directors were issuing favorable, yet false and
2 I misleading statements about Apollo, defendants sold millions of shares oftheir Apollo stock 3 to personally profit from the artificial inflation in Apollo's stock price. Notwithstanding 4 their access to material non-public information and their duty to disclose the same before
5 I acquiring or selling Apollo stock, certain of the defendants obtained option grants at 6 I artificially low prices or knew positive corporate news was coming which would boost the 7 stock price and they also sold significant amounts oftheir Apollo stock at artificially inflated 8 prices and at highly suspicious times. 9 160. Public investors who purchased Apollo stock and other publicly traded 10 securities at prices inflated by the false representations and omissions have suffered millions 11 in damages. Apollo and Apollo' s insiders who knew the truth fared much better. 12 161. At the same time that these defendants sold their shares of Apollo common
13 I stock on the open market, contemporaneous purchases were made by plaintiffs and other 14 members of the Class.
15 162. In committing the wrongful acts alleged herein, defendants have pursued or 16 joined in the pursuit ofa common course ofconduct and acted in concert with one another in 17 furtherance of their common plan.
18 163. Defendants initiated and pursued a scheme and course of conduct which was 19 designed to and did: (i) conceal the fact that the Company was allowing insiders to 20 manipulate its stock option plans and was misrepresenting its financial results; (ii) maintain 21 defendants' executive and directorial positions at Apollo and the profits, power and prestige 22 which defendants enjoyed as a result ofthese positions; and (iii) deceive the investing public, 23 including shareholders of Apollo, regarding defendants' compensation practices and 24 Apollo's financial performance. 25 164. The purpose and effect ofdefendants' scheme and common course of conduct
26 was, among other things, to disguise defendants' violations of law, abuse of control, 27 mismanagement, and unjust enrichment, to conceal adverse information concerning the 28 Company's operation and financial condition, and to artificially inflate the price of Apollo
2:06-cv-02674-RCB Document 71 - R8ed 11/23/2007 Page 91 of 103 1 common stock and other publicly traded securities so they could dispose of millions of 2 dollars of their own Apollo stock, and enhance their executive and directorial positions and
3 I receive the substantial compensation they obtained as a result thereof. 4 165. Defendants accomplished their common enterprise and/or common course of
5 I conduct by causing the Company to purposefully and/or recklessly engage in the option 6 backdating scheme alleged herein and misrepresent Apollo's financial results. Each of the 7 defendants was a direct, necessary and substantial participant in the common enterprise 8 and/or common course of conduct complained of herein. 9 166. Each of the defendants herein was a direct and necessary participant in the
10 I wrongs complained of herein. In taking such actions to substantially assist the commission 11 of the wrongdoing complained of herein, each defendant acted with knowledge of the 12 primary wrongdoing, and was aware ofhis or her overall contribution to and furtherance of 13 the wrongdoing.
14 167. Defendants named herein acted with scienter in that they knew that the public 15 documents and statements issued or disseminated in the name of the Company were
16 materially false and misleading, knew that such statements or documents would be issued or 17 disseminated to the investing public, and knowingly and substantially participated or 18 acquiesced in the issuance or dissemination of such statements or documents as primary 19 violations ofthe federal securities laws. As set forth elsewhere herein in detail, defendants, 20 by virtue of their receipt of information reflecting the true facts regarding Apollo, their 21 control over, and/or receipt and/or modification ofApollo's allegedly materially misleading
22 statements and/or their associations with the Company which made them privy to 23 confidential proprietary information concerning Apollo and the options backdating scheme, 24 participated in the fraudulent scheme alleged herein. 25 168. These defendants knew and/or recklessly disregarded the falsity and
26 I misleading nature of the information which they caused to be disseminated to the investing 27 public. The ongoing fraudulent scheme described in this Complaint could not have been
28 perpetrated over the substantial time period, as has occurred, without the knowledge and
2:06-cv-02674-RCB Document 71 - Red 11/23/2007 Page 92 of 103 1 complicity of the insiders and personnel at the highest levels of the Company, including 2 defendants.
3 169. Each defendant perpetuated and furthered the scheme and contrivance, failing 4 to disclose the material facts alleged herein to inflate Apollo's stock price and thus increase 5 their own profits. Further, defendants failed to disclose material facts alleged herein so as to 6 allow Apollo to report financial results and profits which were materially inflated and in turn 7 reap inflated bonuses and other performance-related compensation, the extent ofwhich was 8 determined by Apollo' s financial results and profits. 9 170. Defendants' affirmative actions and conduct to backdate and time their option 10 grants, as alleged herein, were based on a deliberate and concerted effort and course of 11 conduct intended to benefit and enrich themselves to the detriment of plaintiffs and the 12 members of the Class.
13 171. Defendants violated § 10(b) of the Exchange Act and Rule l Ob-5 in that they: 14 (a) employed devices, schemes and artifices to defraud; 15 (b) made untrue statements of material facts or omitted to state material 16 facts necessary in order to make the statements made, in light of the circumstances under 17 which they were made, not misleading; or
18 (c) engaged in acts, practices and a course of business that operated as a 19 fraud or deceit upon plaintiffs and others similarly situated in connection with their 20 purchases of Apollo common stock during the Class Period. 21 172. Plaintiffs and the Class have suffered damages in that, in reliance on the 22 integrity of the market, they paid artificially inflated prices for Apollo common stock.
23 Plaintiffs and the Class would not have purchased Apollo common stock at the prices they 24 paid, or at all, ifthey had been aware that the market prices had been artificially and falsely 25 inflated by defendants' misleading statements and/or failure to disclose material facts. 26 173. During the Class Period, defendants named in this claim deceived investors and 27 the market and engaged in a course of conduct that artificially inflated Apollo's stock price 28
2:06-cv-02674-RCB Document 71 - POed 11/23/2007 Page 93 of 103 1 and operated as a fraud or deceit on Class Period purchasers ofApollo securities by falsifying 2 the Company's financial results.
3 174. By misrepresenting the Company's financial statements, failing to inform the 4 I market ofthe improper and manipulative options backdating scheme and the resulting impact 5 it was having on the Company's financial results and profits, and making other false
6 I statements, these defendants presented a misleading picture of Apollo' s business, 7 compensation practices, financial results and prospects . This caused and maintained 8 artificial inflation in the trading prices ofApollo's publicly traded securities throughout the 9 Class Period and until the truth came out. 10 175. Defendants' false and misleading statements had the intended effect and
11 I caused Apollo securities to trade at artificially inflated levels throughout the Class Period. 12 176. As the truth about the extent and severity ofApollo' s stock option abuses and 13 prior overstatement of income and the extent of the harm to its reputation and credibility in 14 the market was disclosed and became apparent to the market, Apollo's common stock price 15 plummeted as the prior artificial inflation came out of the Company's stock price, falling 16 from its Class Period high. This price decline occurred as the market fully digested the 17 impact and meaning of defendants' "backdating scheme and its impact on Apollo. A
18 significant portion of the decrease in Apollo's stock price was due to the disclosure, 19 revelation and/or leakage of information inconsistent with defendants' prior financial 20 disclosures and Company releases. This drop removed the inflation from Apollo's stock
21 price, causing real economic loss and damage to investors who had purchased the stock 22 during the Class Period. 23 177. Asa result oftheir purchases ofApollo stock during the Class Period, plaintiffs
24 I and other members of the Class suffered economic loss, i.e., damages, under the federal 25 securities laws.
26 178. The Class Period-ending public revelations indicated that there had been prior
27 falsification of Apollo's financial results due to options backdating, accounting 28 manipulations, defendants' manipulative conduct and otherwise; and thus, the Company's
2:06-cv-02674-RCB Document 71 - Bi1ed 11/23/2007 Page 94 of 103 1 prospects for business success and earnings growth were severely diminished. As investors
2 I and the market became aware that Apollo's prior financial results had been falsified, and 3 that Apollo's actual financial results. The prior artificial inflation came out ofApollo's stock 4 price, damaging investors.
5 179. As a direct result of defendants' admissions and the public revelations
6 I regarding the truth about Apollo' s improper options backdating practices, false financial 7 results and its actual earnings prospects going forward, Apollo's stock price plummeted, 8 causing damage to plaintiffs and the Class. This decline in response to these revelations 9 removed the inflation from the price ofApollo's shares, causing real economic loss to investors 10 who had purchased Apollo securities during the Class Period.
11 180. In sum, as the truth about defendants' prior misstatements and fraudulent
12 I conduct and Apollo's actual financial business performance was revealed, the Company's 13 stock price plummeted, the artificial inflation came out of the stock and plaintiffs and other 14 members of the Class were damaged, suffering economic losses.
15 181. The decline in Apollo's stock price near and at the end of the Class Period 16 was a direct result ofthe nature and extent ofdefendants' prior misstatements and fraudulent 17 conduct finally being revealed to investors and the market. The timing and magnitude of 18 Apollo's stock price declines negate any inference that the loss suffered by plaintiffs and other 19 Class members was caused by changed market conditions, macroeconomic or industry 20 factors, or Company-specific facts unrelated to defendants' fraudulent conduct. 21 182. As a direct and proximate result of these defendants' wrongful conduct, 22 plaintiffs and the other members of the Class suffered damages in connection with their 23 purchases of Apollo common stock during the Class Period. 24 SECOND CLAIM FOR RELIEF 25 For Violation of §20a of the Exchange Act Against All Defendants 26 183. Plaintiffs incorporate by reference and reallege each and every allegation set 27 forth above, as though fully set forth herein. 28
2:06-cv-02674-RCB Document 71 - Bled 11/23/2007 Page 95 of 103 1 184. Defendants named in this claim for relief are defendants that sold Apollo stock 2 during the Class Period.
3 185. While Apollo securities traded at artificially inflated and distorted prices, 4 defendants personally profited by selling over nine million shares ofApollo securities while 5 in possession ofadverse, material non-public information about Apollo, pocketing over $472 6 million in illegal insider trading proceeds, as detailed above. 7 186. By contrast, for example, plaintiffs purchased Apollo securities 8 contemporaneously with some of the defendants as follows: 9 (a) Lead Plaintiff Operating Engineers and members of the Class traded 10 contemporaneously with defendants Blair, Bachus and Govenar by purchasing Apollo 11 securities at artificially inflated prices on January 6-7, 2005 and suffered damages. 12 (b) Lead Plaintiff Operating Engineers and members of the Class traded 13 contemporaneously with defendants Bachus and Govenar by purchasing Apollo securities at 14 artificially inflated prices on January 10-12, 2005 and suffered damages.
15 187. By virtue of their participation in the scheme to defraud investors described 16 herein, and/or their sales of stock while in possession of material, non-public information
17 about the adverse information detailed herein, these defendants violated the Exchange Act 18 and applicable rules and regulations thereunder. 19 188. Plaintiffs and all other members ofthe Class who purchased shares ofApollo
20 stock contemporaneously with the sales ofApollo stock by the insider selling defendants: (i) 21 have suffered substantial damages in that they paid artificially inflated prices for Apollo
22 stock as a result ofthe violations of § § 10(b) and 20(a) and Rule 1 Ob-5 herein described; and 23 (ii) would not have purchased Apollo stock at the prices they paid, or at all, ifthey had been 24 aware that the market prices had been artificially inflated by defendants' false and 25 misleading statements.
26 27 28
2:06-cv-02674-RCB Document 71 - Pied 11/23/2007 Page 96 of 103 1 THIRD CLAIM FOR RELIEF 2 For Violation of §20(A) of the Exchange Act Against All Defendants 3 189. Plaintiffs incorporate by reference and reallege each and every allegation set 4 forth above, as though fully set forth herein. 5 190. Defendants acted as controlling persons of Apollo within the meaning of 6 §20(a) of the Exchange Act. By reason of their positions with the Company, and their 7 ownership of Apollo stock, defendants had the power and authority to cause Apollo to 8 engage in the wrongful conduct complained ofherein. Apollo controlled defendants and all 9 ofits employees. By reason of such conduct, defendants named herein are liable pursuant to 10 §20(a) of the Exchange Act. 11 FOURTH CLAIM FOR RELIEF 12 For Breach of Fiduciary Duty and/or Aiding and Abetting 13 Against All Defendants
14 191. Plaintiffs incorporate by reference and reallege each and every allegation set 15 forth above, as though fully set forth herein. 16 192. Each of the defendants agreed to and did participate with Sperling, Nelson, 17 Gonzales, Bachus, Blair, Norton and the other defendants and/or aided and abetted one
18 I another in a deliberate course of action designed to divert corporate assets in breach of 19 fiduciary duties defendants owed to Apollo shareholders. 20 193. Defendants have violated fiduciary duties of care, loyalty, candor and
21 independence owed to Apollo shareholders, have engaged in unlawful self-dealing and have 22 acted to put their personal interests and/or their colleagues' interests ahead ofthe interests of 23 Apollo shareholders.
24 194. As demonstrated by the allegations above, defendants failed to exercise the 25 care required, and breached their duties of loyalty, good faith, candor and independence 26 owed to Apollo shareholders , and they failed to disclose material information and/or made 27 material misrepresentations to shareholders regarding defendants' option backdating scheme. 28
2:06-cv-02674-RCB Document 71 - R4ed 11/23/2007 Page 97 of 103 1 195. By reason of the foregoing acts, practices and course of conduct, defendants 2 have failed to exercise ordinary care and diligence in the exercise of their fiduciary
3 I obligations toward Apollo shareholders. 4 196. Asa proximate result ofdefendants' conduct, plaintiffs have been injured and
5 are entitled to damages. 6 FIFTH CLAIM FOR RELIEF 7 Civil Conspiracy to Commit Fraud Against Defendants Nelson, Blair, Norton, Gonzales, Bachus and Mueller 8 197. Plaintiffs incorporate by reference and reallege each and every allegation set 9 forth above, as though fully set forth herein. 10 198. Defendants Nelson, Blair, Norton, Bachus and Gonzales, each agreed to 11 participate in the backdating scheme at Apollo, including the making of statements which 12 were, at the time and in light of the circumstances under which they were made, false or 13 misleading with respect to material facts and/or omitted material facts necessary to make the 14 statements made in light ofthe circumstances in which they were made not misleading, and 15 defendants knew or had reasonable grounds to believe that such statements and/or omissions 16 were false or misleading. In particular, these false statements were made directly in SEC 17 filings and public statements as set forth above. 18 199. Defendants Nelson, Blair, Norton, Bachus and Gonzales each knowingly 19 participated with each other in backdating options at Apollo, and in misstating the 20 Company's accounting for failing to record the proper compensation expenses for 21 backdating options, and concealed Apollo's true financial conditions by signing the allegedly 22 false and misleading Forms 10-K and 10-Q. 23 200. Plaintiffs were damaged by defendants' conspiracy when the backdating was 24 disclosed, Apollo true financial condition was revealed, and Apollo's stock price fell. 25 PRAYER FOR RELIEF 26 WHEREFORE, plaintiffs pray for judgment as follows: 27 A. Declaring this action to be a proper class action pursuant to Fed. R. Civ. P. 23; 28
2:06-cv-02674-RCB Document 71 - 9 ed 11/23/2007 Page 98 of 103 1 B. Awarding compensatory and punitive money damages against all defendants,
2 jointly and severally, for all losses and damages suffered as a result of the acts and 3 transactions complained ofherein, together with prejudgment interest, to ensure defendants 4 do not participate therein or benefit thereby; 5 C. Directing all defendants to account for all damages caused by them and all 6 profits and special benefits and unjust enrichment they have obtained as a result of their 7 unlawful conduct, including all salaries, bonuses, fees, stock awards, options and common 8 stock sale proceeds, and imposing a constructive trust thereon; 9 D. Ordering an accounting to force a complete accounting ofall the stock options 10 granted to Apollo executives, the disposition and/or exercise ofthose options, and proceeds 11 and profits obtained; 12 E. Ordering the disgorgement ofall stock option proceeds and/or profits obtained
13 by Apollo executives relating to all options issued pursuant to the polluted stock-option plans 14 which were improperly backdated;
15 F. Ordering that all outstanding unexercised stock options held by defendants be 16 cancelled or rescinded;
17 G. Voiding all existing stock option plans, including all options, vested or 18 unvested, which were issued pursuant to such plans; 19 H. Ordering the implementation of an increased disclosure mechanism for the 20 transparency ofApollo's compensation practices, including semi-annual or annual disclosure
21 of all options granted and exercised detailing the grant and exercise prices, dates, etc.; 22 1. Ordering that defendants personally bear their own legal fees in defending any 23 and all claims arising out of these matters, whether asserted by stockholders or the 24 government, and not be indemnified by the corporation or any insurance; 25 J. Awarding plaintiffs reasonable costs and attorneys' fees; and 26 K. Awarding such other equitable, injunctive and/or other relief as the Court may 27 deem just and proper. 28
2:06-cv-02674-RCB Document 71 - Bled 11/23/2007 Page 99 of 103 1 JURY DEMAND
2 Plaintiffs demand a trial by jury. 3 DATED: November 23, 2007 COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP 4 JEFFREY W. LAWRENCE
5 6 s/ Jeffrey W. Lawrence JEFFREY W. LAWRENCE 7 100 Pine Street, Suite 2600 8 San Francisco, CA 94111 Telephone: 415/288-4545 9 415/288-4534 (fax) [email protected] 10 Lead Counsel for Lead Plaintiff 11 BUCKLEY KING 12 MICHAEL SALCIDO 2020 North Central Avenue, Suite 1120 13 Phoenix, AZ 85004 Telephone: 602/424-2550 14 602/424-2566 (fax) [email protected] 15 Liaison Counsel 16 T:\CasesSF\Apo11o 06\CPT00047175.doc 17 18 19 20 21 22 23 24 25
26 27 28
a 2:06-cv-02674-RCB Document 71 -F9[bd 11/23/2007 Page 100 of 103 1 CERTIFICATE OF SERVICE 2 I hereby certify that on November 23, 2007, I electronically filed the foregoing with
3 the Clerk ofthe Court using the CM/ECF system which will send notification of such filing 4 to the e-mail addresses denoted on the attached Electronic Mail Notice List, and I hereby 5 certify that I have mailed the foregoing document or paper via the United States Postal 6 Service to the non-CM/ECF participants indicated on the attached Manual Notice List. 7 I further certify that I caused this document to be forwarded to the following
8 designated Internet site at: hqp://securities.csgrr.com/. 9 I certify under penalty ofperjury under the laws ofthe United States ofAmerica that 10 the foregoing is true and correct. Executed on November 23, 2007. 11 s/ Jeffrey W. Lawrence 12 JEFFREY W. LAWRENCE 13 COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP 14 100 Pine Street, 26th Floor San Francisco, CA 94111 15 Telephone: 415/288-4545 16 415/288-4534 (fax) E-mail: [email protected] 17 18 19 20 21 22 23 24 25
26 27 28
a 2:06-cv-02674-RCB Document 71 Filed 11/23/2007 Page 101 of 103 Mailing Information for a Case 2:06-cv-02674-RCB
Electronic Mail Notice List
The following are those who are currently on the list to receive e-mail notices for this case.
• Ramzi Abadou [email protected]
• Lauren S Antonino [email protected]
• James W Barnhouse [email protected]@cox.net
• Patrick V Dahlstrom [email protected]
• Robert 0 Dyer [email protected],[email protected]
• Michael J Farrell mfarrell@j sslaw. com,kroberts@j sslaw. com,MinuteEntries@j sslaw.com
• Joseph E Floren [email protected],[email protected]
• Joshua Ray Forest [email protected],[email protected]
• Marc I Gross [email protected]
• Brian A Herman [email protected]
• Ashley H Kim [email protected]
• Jeffrey W Lawrence j effreyl@lerachlaw .com,FileRoomSF @lerachlaw .com,j [email protected]
• Steven Charles Lawrence [email protected],[email protected]
• Christopher Lometti [email protected]
• Louisiana District Attorneys Retirement System [email protected]
• Susan Joan Martin smartin@martinbonnett. com,tmahabir@martinbonnett. com,mblawfirm@aol. com
• Robert D Mitchell robertmitch6lfW41 %itl)(dQ.2^ 11 *@Awor.do7nl Filed 11/23/2007 Page 102 of 103 • Peter B Morrison [email protected]@skadden.com
• Fei-Lu Qian [email protected]
• David A Rosenfeld [email protected]
• Samuel H Rudman [email protected],E file [email protected]
• Michael Salcido [email protected],[email protected]
• Jay P Saltzman [email protected]
• Samuel P Sporn [email protected],[email protected]
• Eric S Waxman [email protected],[email protected]
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Case 2:06-cv-02674-RCB Document 71 Filed 11/23/2007 Page 103 of 103 INDEX OF EXHIBITS
A. Apollo Group, Inc.’s “Code of Ethical Conduct.
B. Apollo Group, Inc.’s “Long-Term Incentive Plan.
C. Apollo Group, Inc.’s “2000 Stock Incentive Plan.
D. Excerpts of deposition transcript of John Sperling, dated November 17, 2006.
E. Defendants’ Motion in Limine No. 9: To Exclude the Restatement of SEC Filings, from In re Apollo Group Inc. Securities Litigation , Master File No. CV- 04-2147-PHX-JAT (D. Ariz. Oct. 9, 2007).
F. Order Denying Defendant’s Motion for a Judgment of Acquittal, from U.S. v. Reyes, No. C 06 00556-1 CRB (N.D. Cal. Aug. 27, 2007).
G. Apollo Group, Inc., Insider Sales 11/28/01 – 10/18/06.
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EXHIBIT 14
CODE OF ETHICAL CONDUCT
INTRODUCTION
It is the Company's belief that a strong commitment to principles of ethical conduct is essential for its success. Accordingly, Apollo has adopted the Code of Ethical Conduct to outline expectations and provide standards for all employees, directors, and officers, regardless of the position he or she holds. The Code promotes:
- Honest and ethical conduct;
- Full, fair, accurate, timely, and understandable disclosure in reports and public communications;
- Compliance with applicable laws, rules and regulations;
- The prompt reporting of violations of this Code to appropriate individuals identified in this Code; and
- Accountability for adherence to this Code.
While this Code cannot address every issue that may arise, it is designed to establish basic principles that every individual is expected to observe in the performance of his or her role as an employee, director, or officer of Apollo Group, Inc. In the event an employee, director, or officer is unsure about a proper course of conduct, he or she should consult a Human Resources representative, or company vice-president or president or access the confidential Hotline referenced on the Internal Audit page on the Source, which is available on a 24 hour basis. If an employee, director, or officer is aware of a violation of this code, he or she should consult the procedures described in the section titled "Reporting a Violation or Suspected Violation". Violation of this code may result in disciplinary action up to and including termination.
LAWS, RULES, REGULATIONS AND COMPANY POLICIES
It is the Company's philosophy that being informed about the legal environment in which Apollo does business and conducting business in a manner that is lawful is vital to continued success. Every employee, director, and officer of the Company is expected to comply with all applicable local, state and federal laws and regulations, in the cities, states and countries in which Apollo or one of its subsidiaries operates. While an employee, director, or officer is not expected to be on familiar terms with every law or regulation, such person is expected to utilize reasonable judgment when determining when it is appropriate to seek advice or clarification on laws, rules and regulations. Further, the employee, officer or director is expected to follow both the letter and spirit of these laws, rules and regulations. Employees, directors, and officers are expected to be familiar with and comply with the terms, conditions and policies set forth in the Apollo Group, Inc. Employee Handbook.
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BUSINESS INFORMATION AND DISCLOSURES TO INVESTORS
As a public company, it is critical that Apollo's filings with the Securities
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and Exchange Commission as well as other public communications be full, fair, accurate, complete, timely and understandable. To assist in meeting the reporting standards detailed above, for all material information, including information relating to the Company's financial records and reports, an internal system of controls and procedures, as well as a Disclosure Committee has been established. Each individual is expected to follow these controls and procedures to the extent they apply to his or her role.
Employees, directors, and officers are expected to always record information accurately, honestly and in accordance with all applicable legal requirements as well as the Company's internal system of controls. An employee, director, or officer of the Company will never be granted authorization to knowingly enter into or maintain any false or misleading information in the corporate books, records, accounts or financial statements.
If an employee is aware that public disclosures are not accurate, complete or timely, or if an employee becomes aware of a transaction or development that he or she believes may require disclosure, that employee should report the information immediately to a member of the Disclosure Committee. The Disclosure Committee includes the President and Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, Director of Internal Audit, and the Financial Reporting Manager.
In the event the President and Chief Executive Officer and/or one of the senior financial officers or any other officer becomes aware of information that has been filed or disclosed regarding the Company's business and/or financial condition that does not meet the standards set forth above, he or she is expected to promptly report the violation to the Audit Committee of the Board of Directors.
RECORD RETENTION
Records should always be retained or destroyed as outlined in the Integrity, Security , and Confidentiality of Institutional Records Policy ( Employee Handbook , Section 9 . 9) as well as the Record Retention Policies (http:// source . apollogrp . edu/ corpacctg / 963517 . pdf). In accordance with those policies , in the event of litigation or governmental investigation, each employee , director and officer is expected to preserve all possibly relevant documents.
CONFLICTS OF INTEREST
The Company respects all individuals' rights to engage in activities outside their employment that are private in nature (social, community, political, or religious). However, each employee, director, and officer is expected to avoid situations and relationships that involve the appearance of a conflict of interest or actual or potential conflicts of interest. A "conflict of interest" exists when private interests interfere in any way with the interests of Apollo or when an employee, director, or officer takes actions or has interests that may make it difficult to perform his or her work objectively and effectively.
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PERSONAL OR BUSINESS OPPORTUNITIES
Employees, directors, and officers are prohibited from taking advantage of personal opportunities that are discovered through use of company property, access to company information or as a result of their position with Apollo without the consent of the Board of Directors. No employee, director, or officer may use corporate property, information, or position for improper personal gain, and no employee, director, or officer may compete with Apollo directly or indirectly. Employees, directors, and officers have a duty to the Company to advance its legitimate interests when the opportunity to do so arises.
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SECURITIES LAWS AND INSIDER TRADING
Employees, directors, and officers are not allowed to purchase or sell Apollo stock, including Apollo Class A common stock and University of Phoenix Online common stock, while in the possession of material, non-public information concerning Apollo. In general, information will be considered "material" if a reasonable investor would consider it important in making his or her investment decision. This information includes but is not limited to, earnings results, acquisitions, divestitures, or pending changes in management or control. In addition, to use any material non-public information to "tip" others who might make an investment decision on the basis of this information is not only unethical, but also illegal.
These rules also apply to the use of material, non-public information about other companies including but not limited to clients, competitors and potential business partners. These rules also apply to an employee's, director's, or officer's spouse, children, parents and siblings, as well as any other family members living in his or her household.
The Company also maintains a separate Insider Trading Policy (Employee Handbook, Section 9.14) that employees, directors, and officers are expected to become familiar with and comply with at all times. Questions regarding this policy should be directed to the Chief Financial Officer.
ANTITRUST LAWS
The antitrust laws of the United States are intended to protect and promote vigorous and fair competition. Employees, directors, and officers are expected to adhere to applicable antitrust laws. A violation of these laws may give rise to civil or criminal prosecution. Because the antitrust laws are broad and far-reaching, employees should always obtain the advice from a member of management before engaging in any conduct or practice that may involve antitrust laws.
ENTERTAINMENT AND GIFTS
The purpose of business entertainment and gifts is to create good will and sound working relationships. The purpose is not to gain unfair advantage with customers, suppliers or personnel who work for the government or an organization that regulates the Company's business or business operations. No gift or entertainment should ever be offered, given,
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provided or accepted by any employee, officer, or director, or family member of such person unless it:
- Is not a cash gift;
- Is consistent with customary business practices;
- Is of nominal value;
- Cannot be construed as a bribe or payoff;
- Does not violate any laws or regulations; and
- Does not imply that additional business opportunities are contingent upon the gift/gratuity.
The promise, offer or delivery to an official or employee of the United States government of a gift, favor or other gratuity in violation of any federal laws, rules or regulations would not only violate the Code but could also be a criminal offense. State and local governments or other regulating agencies may have similar rules.
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EQUAL OPPORTUNITY
The Apollo Group, Inc. is guided by the principle of equal opportunity and respect for others. The Company is firmly committed to providing equal opportunity in all aspects of employment and will not tolerate any discrimination or harassment of any kind with regard to race, color, religion, sex, age , national origin, disability, veteran status or any other category protected by federal, state or local law.
CONFIDENTIALITY, PROTECTION AND PROPER USE AND TREATMENT OF COMPANY INFORMATION
Confidentiality, protection and the appropriate treatment of information is critical to the Company's ability to grow and compete. Every employee, director, and officer is expected to take measures to protect or assist in the protection of all confidential and proprietary information, including technical, financial, marketing and other business information, which, if made available to our competitors or the public, would be advantageous to such competitors and detrimental to Apollo. Each individual is expected to maintain the confidentiality of information entrusted to him or her by the Company or its customers, suppliers and competitors, except when disclosure is authorized by management or legally mandated. The obligation to preserve confidential information continues even after employment with Apollo ends.
AMENDMENTS AND WAIVERS TO THE CODE FOR DIRECTORS AND EXECUTIVE OFFICERS
The Company will promptly disclose, in the manner required by law or NASDAQ regulation, any of the following:
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- The nature of any amendment to the Code that applies to any of our directors or executive officers; and
- The nature of any waiver, including an implicit waiver, from a provision of the Code that is granted by the Board of Directors to any director or officer.
REPORTING A VIOLATION OR SUSPECTED VIOLATION
Any employee, director, or officer, regardless of his or her position, that suspects a violation of the Code or has knowledge of a suspected violation of the Code is expected to bring forward any pertinent information, regardless of the identity or position of the suspected offender. To report a suspected violation of the Code, contact a Human Resources representative, or company vice-president or president or access the confidential Hotline referenced in the Internal Audit page on the Source, which is available on a 24 hour basis.
All information regarding a suspected violation will be treated with the utmost privacy and in a confidential manner, consistent with the appropriate evaluation and investigation. If it is determined, upon the appropriate evaluation and investigation, that a provision the Code has been violated, the person(s) violating the Code, disciplinary action will be taken, up to and including termination of employment.
The Company has a zero tolerance policy for retaliation or retribution against any person who reports a suspected violation of the Code (even if the report is mistaken but was submitted in the good faith belief it was correct) or against any person who participates in the investigation of a violation of the Code. Any person who has been found to have engaged in an act(s) of retaliation will be subject to disciplinary action, up to and including termination.
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Case 2:06-cv-02674- RCB Document 71-4 Filed 11/23/2007 Page 1 of 13 APOLLO GROUP, INC. LONG-TERM INCENTIVE PLAN
ARTICLE 1 PURPOSE .
1.1. GENERAL. The purpose of the Apollo Group, Inc. Long-Term Incentive Plan (the "Plan") is to promote the success, and enhance the value, of Apollo Group, Inc., an Arizona corporation (the "Company"), by linking the personal interests of Participants to those of Company shareholders, and by providing Participants with an incentive for outstanding performance. The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of Participants upon whose judgment, interest, and special effort the successful conduct of its operation is largely dependent. Accordingly, the Plan permits the grant of incentive awards from time to time to selected officers and key employees.
ARTICLE 2 EFFECTIVE DATE
2.1. EFFECTIVE DATE . The Plan is effective as of May 13, 1994, provided that within one year after such date, the Plan is approved by the affirmative vote of a majority of the securities of the Company present, or represented , and entitled to vote at a meeting duly held, or by the written consent of the holders of a majority of the securities of the Company entitled to vote, in each case in accordance with the applicable provisions of the Arizona Corporation Law. Any Awards granted under the Plan prior to the stockholder' s approval are effective when made (unless the Committee specifies otherwise at the time of grant), but no Award may be exercised or settled and no restrictions relating to any Award may lapse before the stockholder approval. If stockholders fail to approve the Plan , any Award is canceled.
ARTICLE 3 DEFINITIONS AND CONSTRUCTION.
3.1. DEFINITIONS . In addition to the terms defined elsewhere in the Plan, the following shall be defined terms under the Plan:
(a) "Award" means any Option, Stock Appreciation Right, Restricted Stock Award, Performance Share Award, Dividend Equivalent Award, or Other Stock-Based Award, or any other right or interest relating to Stock granted to a Participant under the Plan.
(b) "Award Agreement" means any written agreement, contract, or other instrument or document evidencing an Award.
(c) "Board" means the Board of Directors of the Company.
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Case 2:06-cv-02674- RCB Document 71-4 Filed 11/23/2007 Page 2 of 13117 (d) "Code" means the Internal Revenue Code of 1986, as amended from time to time.
(e) "Committee" means the committee of the Board described in Section 4.
(f) "Company" means Apollo Group, Inc.
(g) "Dividend Equivalent" means a right granted to a Participant under Section 11.
(h) "Fair Market Value" means with respect to Stock or any other property, the fair market value of such Stock or other property determined by such methods or procedures established from time to time by the Committee.
(i) "Incentive Stock Option" means an Option that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto.
(j) "Non-Qualified Stock Option" means an Option that is not intended to be an Incentive Stock Option.
(k) "Option" means a right granted to a Participant under Section 7 of the Plan to purchase Stock or other Awards at a specified price during specified time periods. An Option may be either an Incentive Stock Option or a Non-Qualified Stock Option.
(I) "Other Stock-Based Award" means a right, granted to a Participant under Section 12, that relates to or is valued by reference to Stock or other Awards relating to Stock.
(m) "Participant" means a person who, as an officer or key employee of the Company or any Subsidiary, has been granted an Award under the Plan.
(n) "Performance Share" means a right granted to a Participant under Article 9, to receive cash, Stock, or other Awards, the payment of which is contingent upon achieving certain performance goals established by the Committee.
(o) "Plan" means the Apollo Group, Inc. Long-Term Incentive Plan, as amended from time to time.
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Case 2:06-cv-02674-RCB Document 71-4 Filed 11/23/2007 Page 3 of 1311 8 (p) "Restricted Stock Award" means Stock granted to a Participant under Article 10 that is subject to certain restrictions and to risk of forfeiture.
(q) "Stock" means Class A Common Stock of the Company and such other securities of the Company that may be substituted for Stock pursuant to Article 13.
(r) "Stock Appreciation Right" or "SAR" means a right granted to a Participant under Article 8 to receive a payment equal to the increase in the Fair Market Value of a share of Stock subsequent to the date of grant of the Award.
(s) "Subsidiary" means any corporation of which a majority of the outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company.
ARTICLE 4 ADMINISTRATION
4.1. COMMITTEE . The Committee has the authority to administer the Plan and is appointed by, and shall serve at the discretion of, the Board . The Committee must consist of at least two individuals who are members of the Board provided that, when and if Awards are to be made to employees of the Company or its Subsidiaries who are subject to the provisions of Section 16 of the Securities Exchange Act of 1934, as amended (the "1934 Act " ), the Committee shall consist of at least two individuals who are members of the Board and who are "disinterested persons," as such term is defined in Rule 16b-3 promulgated under the 1934 Act, or any successor provision , except as may be otherwise permitted under Section 16 of the 1934 Act and the regulations and rules promulgated thereunder.
4.2. ACTION BY THE COMMITTEE . A majority of the Committee constitutes a quorum. The acts of a majority of the members present at any meeting at which a quorum is present and acts approved in writing by a majority of the Committee in lieu of a meeting shall be deemed the acts of the Committee. Each member of the Committee is entitled to, in good faith, rely or act upon any report or other information furnished to that member by any officer or other employee of the Company or any Subsidiary, the Company's independent certified public accountants, or any executive compensation consultant or other professional retained by the Company to assist in the administration of the Plan.
4.3. AUTHORITY OF COMMITTEE , The Committee has the exclusive power, authority and discretion to:
(a) Designate Participants;
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119 Case 2:06-cv-02674-RCB Document 71-4 Filed 11 /23/2007 Page 4 of 13 (b) Determine the type or types of Awards to be granted to each Participant;
(c) Determine the number of Awards to be granted, the number of shares of Stock to which an Award will relate, the terms and conditions of any Award granted under the Plan (including but not limited to, any exercise price, grant price, or purchase price, any restriction or limitation, any schedule for lapse of forfeiture restrictions or restrictions on the exercisability, and accelerations or waivers thereof, based in each case on such considerations as the Committee in its sole discretion determines), and all other matters to be determined in connection with an Award;
(d) Determine whether, to what extent, and under what circumstances an Award may be settled in, or the exercise price of an Award may be paid in, cash, Stock, other Awards, or other property, or an Award may be canceled, forfeited, or surrendered;
(e) Prescribe the form of each Award Agreement, which need not be identical for each Participant;
(f) Establish, adopt or revise any rules and regulations as it may deem necessary or advisable to administer the Plan; and
(g) Make all other decisions and determinations that may be required under the Plan or as the Committee deems necessary or advisable to administer the Plan.
4.4. DECISIONS BINDING . The Committee's interpretation of the Plan, any Awards granted under the Plan, any Award Agreement and all decisions and determinations by the Committee with respect to the Plan are final, binding, and conclusive on all parties.
ARTICLE 5 SHARES SUBJECT TO THE PLAN
5.1. NUMBER OF SHARES . Subject to adjustment provided in Section 15, the aggregate number of shares of Stock reserved and available for Awards or providing the basis for determining the extent of an Award under the Plan may not exceed 600,000.
5.2. LAPSED AWARDS. To the extent that an Award terminates, expires or lapses for any reason, any shares of Stock subject to the Award will be available for the grant of an Award under the Plan and shares subject to SARs or other Awards settled in cash will be available for the grant of an Award under the Plan, in each case to the full
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i Case 2:06-cv-02674- RCB Document 71-4 Filed 11/23/2007 Page 5 of 13 extent available pursuant to the rules and interpretations of the Securities and Exchange Commission under Section 16 of the 1934 Act, as amended.
5.3. STOCK DISTRIBUTED . Any Stock distributed pursuant to an Award may consist, in whole or in part, of authorized and unissued Stock, treasury Stock or Stock purchased on the open market.
ARTICLE 6 ELIGIBILITY
6.1. GENERAL . Awards may be granted only to individuals who are officers or other key employees (including employees who also are directors or officers) of the Company or a Subsidiary, as determined by the Committee.
ARTICLE 7 STOCK OPTIONS
7.1. GENERAL . The Committee is authorized to grant Options to Participants on the following terms and conditions:
(a) EXERCISE PRICE . The exercise price per share of Stock under an Option shall be determined by the Committee, provided that in the case of an Incentive Stock Option, the option price per share of Stock may not be less than the Fair Market Value of a share of Stock on the date of grant of the Option.
(b) METHOD OF EXERCISE. The Committee shall determine the time or times at which an Option may be exercised in whole or in part, provided, that no Option may be exercisable prior to six months following the date of the grant of such Option.
(c) PAYMENT . The Committee shall determine the methods by which the exercise price of an Option may be paid, the form of payment, including, without limitation, cash, shares of Stock, or other property (including "cashless exercise" arrangements), and the methods by which shares of Stock shall be delivered or deemed to be delivered to Participants.
(d) INCENTIVE STOCK OPTIONS. The terms of any Incentive Stock Options granted under the Plan must comply with the provisions of Section 422 of the Code and the applicable regulations thereunder , including but not limited to the requirement that Incentive Stock Options shall neither be granted more than ten years after the effective date of the Plan nor be exercisable more than ten years after the date of grant.
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121
Case 2:06-cv-02674- RCB Document 71-4 Filed 11 /23/2007 Page 6 of 13 ARTICLE 8 STOCK APPRECIATION RIGHTS
8.1. GRANT OF SARs . The Committee is authorized to grant SARs to Participants on the following terms and conditions:
(a) RIGHT TO PAYMENT . Upon the exercise of a Stock Appreciation Right, the Participant to whom it is granted has the right to receive the excess, if any, of:
(1) the Fair Market Value of one share of Stock on the date of exercise; over
(2) the grant price of the Stock Appreciation Right as determined by the Committee, which shall not be less than the Fair Market Value of one share of Stock on the date of grant in the case of any SAR related to any Incentive Stock Option.
(b) OTHER TERMS . The terms, methods of exercise, methods of settlement, form of consideration payable in settlement, and any other terms and conditions of any Stock Appreciation Right shall be determined by the Committee at grant or thereafter.
ARTICLE 9 PERFORMANCE SHARES
9.1. GRANT OF PERFORMANCE SHARES . The Committee is authorized to grant Performance Shares to Participants on the terms and conditions as selected by the Committee. The Committee shall have the complete discretion to determine the number of Performance Shares granted to each Participant.
9.2. RIGHT TO PAYMENT. A grant of Performance Shares gives the Participant rights, valued as determined by the Committee, and payable to, or exercisable by, the Participant to whom the Performance Shares are granted, in whole or in part, as the Committee shall establish at grant or thereafter. The Committee shall set performance goals and other terms or conditions to payment of the Performance Shares in its discretion which, depending on the extent to which they are met, will determine the number and value of Performance Shares that will be paid to the Participant, provided that, the time period during which the performance goals must be met shall, in all cases, exceed six months.
9.3. OTHER TERMS . Performance Shares may be payable in cash, Stock, or other property, and have such other terms and conditions as determined by the Committee.
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122 Case 2:06-cv-02674-RCB Document 71-4 Filed 11/23/2007 Page 7 of 13 ARTICLE 10 RESTRICTED STOCK AWARDS
10.1. GRANT OF RESTRICTED STOCK. The Committee is authorized to grant shares of Restricted Stock to Participants in such amounts and subject to the terms and conditions as selected by the Committee.
10.2. ISSUANCE AND RESTRICTIONS . Restricted Stock shall be subject to such restrictions on transferability and other restrictions as the Committee may impose (including, without limitation, limitations on the right to vote Restricted Stock or the right to receive dividends on the Restricted Stock). These restrictions may lapse separately or in combination at such times, under such circumstances, in such installments, or otherwise, as the Committee determines at the time of grant or thereafter.
10.3. FORFEITURE . Except as otherwise determined by the Committee at the time of grant or thereafter, upon termination of employment during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited and reacquired by the Company, provided, however, that the Committee may provide in any Award Agreement that restrictions or forfeiture conditions relating to Restricted Stock will be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part restrictions or forfeiture conditions relating to Restricted Stock.
10.4. CERTIFICATES FOR RESTRICTED STOCK . Restricted Stock granted under the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing shares of Restricted Stock are registered in the name of the Participant, these certificates must bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, and the Company shall retain physical possession of the certificate.
ARTICLE 11 DIVIDEND EQUIVALENTS
11.1. GRANT OF DIVIDEND EQUIVALENTS. The Committee is authorized to grant Dividend Equivalents to Participants subject to the terms and conditions as selected by the Committee. Dividend Equivalents shall entitle the Participant to receive payments equal to dividends with respect to a number of shares of Stock determined by the Committee. The Committee may provide that Dividend Equivalents be paid or distributed when accrued or be deemed to have been reinvested in additional shares of Stock or Awards, or otherwise reinvested.
ARTICLE 12 OTHER STOCK-BASED AWARDS
12.1. GRANT OF OTHER STOCK-BASED AWARDS . The Committee is authorized, subject to limitations under applicable law, to grant to Participant such other Awards that are payable in, valued in whole or in part by reference to, or otherwise
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Case 2:06-cv-02674-RCB Document 71-4 Filed 11/23/2007 Page 8 of 132 3 based on, or related to shares of Stock, as deemed by the Committee to be consistent with the purposes of the Plan, including without limitation, shares of Stock awarded purely as a "bonus" and not subject to any restrictions or conditions, convertible or exchangeable debt securities, other rights convertible or exchangeable into shares of Stock, and Awards valued by reference to book value of shares of Stock or the value of securities of or the performance of specified Subsidiaries, The Committee shall determine the terms and conditions of such Awards.
ARTICLE 13 PROVISIONS APPLICABLE TO AWARDS
13.1. STAND-ALONE, TANDEM, AND SUBSTITUTE AWARDS . Awards granted under the Plan, may in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution for, any other Award granted under the Plan. If an Award is granted in substitution for another Award, the Committee may require the surrender of such other Award in consideration of the grant of the new Award. Awards granted in addition to or in tandem with other Awards may be granted either at the same time as or at a different time from the grant of such other Awards.
13.2. EXCHANGE PROVISIONS . The Committee may at any time offer to exchange or buy out any previously granted Award for a payment in cash, Stock, or another Award (subject to Section 13.1), based on the terms and conditions the Committee determines and communicates to the Participant at the time the offer is made.
13.3. TERM OF AWARD . The term of each Award shall be for the period as determined by the Committee, provided that, in no event shall the term of any Incentive Stock Option or a Stock Appreciation Right granted in tandem with the ISO exceed a period of ten years from the date of its grant.
13.4. FORM OF PAYMENT FOR AWARDS . Subject to the terms of the Plan and any applicable Award Agreement, payments or transfers to be made by the Company or a Subsidiary on the grant or exercise of an Award may be made in such forms as the Committee determines at or after the time of grant, including without limitation, cash, Stock, other Awards, or other property, or any combination, and may be made in a single payment or transfer, in installments, or on a deferred basis, in each case determined in accordance with rules adopted by, and at the discretion of, the Committee.
13.5. LIMITS ON TRANSFER . No right or interest of a Participant in any Award may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or a Subsidiary, or shall be subject to any lien, obligation , or liability of such Participant to any other party other than the Company or a Subsidiary. No Award shall be assignable or transferable by a Participant other than by will or the laws of decent and distribution or, except in the case of an Incentive Stock Option, pursuant
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124 13 Case 2:06-cv-02674-RCB Document 71-4 Filed 11/23/2007 Page 9 of to a domestic relations order as defined in Section 414(p)(1)(B) of the Code, if the order satisfies Section 414(p)(1)(A) of the Code.
13.6 BENEFIC#ARIES . Notwithstanding Section 13.5, a Participant may, in the manner determined by the Committee, designate a beneficiary to exercise the rights of the Participant and to receive any distribution, with respect to any Award upon the Participant's death. A beneficiary, legal guardian, legal representative, or other person claiming any rights under the Plan is subject to all terms and conditions of the Plan and any Award Agreement applicable to the Participant, except to the extent the Plan and Award Agreement otherwise provide, and to any additional restrictions deemed necessary or appropriate by the Committee.
13.7. STOCK CERTIFICATES . All Stock certificates delivered under the Plan are subject to any stop-transfer orders and other restriction as the Committee deems necessary or advisable to comply with federal or state securities laws, rules and regulations and the rules of any national securities exchange or automated quotation system on with the Stock is listed or quoted. The Committee may place legends on any Stock certificate to reference restrictions applicable to the Stock.
ARTICLE 14 CHANGE OF CONTROL
14.1. ACCELERATION UPON A CHANGE OF CONTROL , If a Change of Control ( as defined in Section 14.2) occurs without the prior approval of the Board, all outstanding Options , Stock Appreciation Rights, and other Awards in the nature of rights that may be exercised shall become fully exercisable and all restrictions on outstanding Awards shall lapse and all deferral periods on outstanding Awards shall terminate.
14.2. CHANGE OF CONTROL DEFINED . For purposes of this Article 14, a Change of Control means:
(a) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Stock immediately before the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger;
(b) the shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company; or
(c) substantially all of the assets of the Company are sold or otherwise transferred to parties that are not within a "controlled group of corporations" (as defined in Section 1563 of the Code) in which the Company is a member.
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125 Case 2:06-cv-02674-RCB Document 71-4 Filed 11 /23/2007 Page 10 of 13 ARTICLE 15 CHANGES IN CAPITAL STRUCTURE
15.1. GENERAL . In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, stock split-up, combination of shares of Stock, or other change in the Company's corporate structure affecting the Stock, such adjustment shall be made in the number and class of shares of Stock that may be delivered under the Plan, and in the number and class and/or price of shares of Stock subject to outstanding Awards granted under the Plan, as determined to be appropriate and equitable by the Committee, in its sole discretion, to preserve the proportionate interest of the Participant in an Award and to prevent dilution or enlargement of rights.
ARTICLE 16 AMENDMENT, MODIFICATION AND TERMINATION
16.1. AMENDMENT, MODIFICATION AND TERMINATION . With the approval of the Board, at any time and from time to time, the Committee may terminate, amend or modify the Plan . However , without approval of the stockholders of the Company or other conditions ( as may be required by the Code, by the insider trading rules of Section 16 of the 1934 Act, by any national securities exchange or system on which the Stock is listed or reported , or by a regulatory body having jurisdiction), no such termination , amendment, or modification may:
(a) materially increase the total number of share of Stock that may be issued under the Plan, except as provided in Section 15;
(b) materially modify the eligibility requirements for participation in the Plan; or
(c) materially increase the benefits accruing to Participants under the Plan.
16.2. AWARDS PREVIOUSLY GRANTED . No termination , amendment, or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan , without the written consent of the Participant.
ARTICLE 17 GENERAL PROVISIONS
17.1. NO RIGHTS TO AWARDS . No Participant or employee shall have any claim to be granted any Award under the Plan, and the Company or the Committee is not obligated to treat Participants and employees uniformly.
17.2. NO STOCKHOLDERS RIGHTS . No Award gives the Participant any of the rights of a stockholder of the Company unless and until shares of Stock are in fact issued to such person in connection with such Award.
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Case 2:06-cv-02674- RCB Document 71-4 Filed 11 /23/2007 Page 11 of 13^ 17.3. WITHHOLDING . The Company or any Subsidiary shall have the authority and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state, and local taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any taxable event arising as a result of this Plan. With respect to withholding required upon any taxable event under the Plan, Participants may elect, subject to the Committee's approval, to satisfy the withholding requirement, in whole or in part, by having the Company or any Subsidiary withhold shares of Stock having a Fair Market Value on the date of withholding equal to the amount to be withheld for tax purposes in accordance with such procedures as the Committee establishes. The Committee may, at the time any Award is granted, require that applicable tax withholding by withholding shares of Stock as abovesaid shall be mandatory.
17.4. NO RIGHT TO EMPLOYMENT . Nothing in the Plan or any Award Agreement shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company or any Subsidiary.
17.5. UNFUNDED STATUS OF AWARDS. The Plan is intended to be an $'unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award Agreement shall give the Participant any rights that are greater than those of a general creditor of the Company or any Subsidiary.
17.6. INDEMNIFICATION . To the extent allowable under applicable law, each member of the Committee or of the Board shall be indemnified and held harmless by the Company from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such member in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action or failure to act under the Plan and against and from any and all amounts paid by him or her in satisfaction of judgment in such action, suit, or proceeding against him or her provided he or she gives the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Articles of Incorporation or By-Laws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.
17.7. RELATIONSHIP TO OTHER BENEFITS . No payment under the Plan shall be taken into account in determining any benefits under any pension, retirement, savings, profit sharing, group insurance, welfare or other benefit plan of the Company or any Subsidiary.
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Case 2:06-cv-02674- RCB Document 71-4 Filed 11/23/2007 Page 12 of 1 427 17.8. EXPENSES . The expenses of administering the Plan shall be borne by the Company and its Subsidiaries.
17.9. TITLES AND HEADINGS . The titles and headings of the Sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.
17.10. FRACTIONAL SHARES . No fractional shares of stock shall be issued and the Committee shall determine, in its discretion, whether cash shall be given in lieu of fractional shares or whether such fractional shares shall be eliminated by rounding up or rounding down.
17.11. SECURITIES LAW COMPLIANCE . Until the Stock subject to this Plan is registered under all applicable federal and state securities laws, no. Stock shall be issued to any Participant and no Award may be exercised as to such Stock, provided that this limitation shall not apply to the issuance of Stock in any particular situation that, in the opinion of legal counsel to the Company does not require such registration. With respect to any person who is, on the relevant date, obligated to file reports under Section 16 of the 1934 Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be void to the extent permitted by law and voidable as deemed advisable by the Committee.
17.12. GOVERNING LAW. To the extent not preempted by Federal law, the Plan and all Award Agreements shall be construed in accordance with and governed by the laws of the State of Arizona.
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128 Case 2:06-cv-02674-RCB Document 71-4 Filed 11/23/2007 Page 13 of 13 EXHIBIT C
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ANNEX C
APOLLO GROUP, INC.
2000 STOCK INCENTIVE PLAN
ARTICLE 1
PURPOSE
1.1 GENERAL. The purpose of the Apollo Group, Inc. 2000 Stock Incentive Plan (the "Plan ) is to promote the success and enhance the value of Apollo Group, Inc. (the "Company ) by linking the personal interests of its directors, employees, officers, and executives of, and consultants and advisors to, the Company to those of Company shareholders and by providing such individuals with an incentive for outstanding performance in order to generate superior returns to shareholders of the Company. The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of directors, employees, officers, and executives of, and consultants and advisors to, the Company upon whose judgment, interest, and special effort the successful conduct of the Company's operation is largely dependent.
ARTICLE 2
EFFECTIVE DATE
2.1 EFFECTIVE DATE. The Plan is effective as of the date the Plan is approved by the Board (the "Effective Date ). Within 12 months of the Effective Date, the Plan must be approved by the Company's shareholders. The Plan will be deemed to be approved by the shareholders if it receives the affirmative vote of the holders of a majority of the shares of stock of the Company present or represented and entitled to vote at a meeting duly held in accordance with the applicable provisions of the Company's Bylaws or by action of the unanimous written consent of the Company's shareholders. Any Awards granted under the Plan prior to shareholder approval are effective when made (unless the Committee specifies otherwise at the time of grant), but no Award may be exercised or settled and no restrictions relating to any Award may lapse before shareholder approval. If the shareholders fail to approve the Plan, any Award previously made shall be automatically canceled without any further act.
ARTICLE 3
DEFINITIONS AND CONSTRUCTION
3.1 DEFINITIONS. When a word or phrase appears in this Plan with the initial letter capitalized, and the word or phrase does not commence a sentence, the word or phrase shall generally be given the meaning ascribed to it in this Section or in Sections 1.1 or 2.1 unless a clearly different meaning is required by the context. The following words and phrases shall have the following meanings:
(a) "Award means any Option, Stock Appreciation Right, Restricted Stock Award, Performance Share Award, or Performance-Based Award granted to a Participant under the Plan.
(b) "Award Agreement means any written agreement, contract, or other instrument or document evidencing an Award.
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(c) "Board means the Board of Directors of the Company.
(d) "Cause means (except as otherwise provided in an Award Agreement) if the Committee, in its reasonable and good faith discretion, determines that the employee, consultant, or advisor (i) fails to substantially perform his duties (other than as a result of Disability), after the Board or the executive to which the Participant reports delivers to the Participant a written demand for
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substantial performance that specifically identifies the manner in which the Participant has not substantially performed his duties; (ii) engages in willful misconduct or gross negligence that is materially injurious to the Company or a Subsidiary; (iii) breaches his duty of loyalty to the Company or a Subsidiary; (iv) unauthorized removal from the premises of the Company or a Subsidiary of a document (of any media or form) relating to the Company or a Subsidiary or the customers of the Company or a Subsidiary; or (v) has committed a felony or a serious crime involving moral turpitude.
(e) "Change of Control of Apollo Education Group means and includes each of the following (except as otherwise provided in an Award Agreement):
(1) there shall be consummated any consolidation or merger of the Company in which the Company is not the continuing or surviving entity, or pursuant to which Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company's Stock immediately prior to the merger have the same proportionate ownership of beneficial interest of common stock or interests of the surviving entity immediately after the merger;
(2) there shall be consummated any sale, lease , exchange or other transfer (in one transaction or a series of related transactions) of assets aggregating more than 80% of the assets of the Company;
(3) the shareholders of the Company shall approve any plan or proposal for liquidation or dissolution of the Company;
(4) any person (as such term is used in Section 13(d) and 14(d)(2) of the Exchange Act), other than (A) an employee benefit plan of the Company or any Subsidiary or any entity holding shares of capital stock of the Company for or pursuant to the terms of any such employee benefit plan in its role as an agent or trustee for such plan, or (B) any affiliate of the Company as of the Effective Date becomes the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of 50% or more of the Class A common stock of the Company (the "Apollo Education Group Class A common stock ); or
(5) during any two-year period, individuals who at the beginning of the period do not constitute a majority of the Board at the end of such period, unless the appointment or the nomination for election by the Company's shareholders of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period.
(f) "Change of Control of University of Phoenix Online means and includes each of the following (except as otherwise provided in an Award Agreement):
(1) any event that constitutes a Change of Control of Apollo Education Group;
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(2) there shall be consummated any sale, lease , exchange or other transfer (in one transaction or a series of related transactions) of assets aggregating more than 80% of the assets of University of Phoenix Online; or
(3) any person (as such term is used in Section 13(d) and 14(d)(2) of the Exchange Act), other than (A) an employee benefit plan of the Company or any Subsidiary or any entity holding shares of capital stock of the Company for or pursuant to the terms of any such employee benefit plan in its role as an agent or trustee for such plan, or (B) any affiliate of the Company as of the Effective Date becomes the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of 50% or more of University of Phoenix Online common stock, or (C) Apollo Education Group. For purposes of clause (3), in determining whether any person becomes the beneficial owner of 50% or more of University of Phoenix Online common stock, the "Number of Shares Issuable with Respect to Apollo Education Group's Retained Interest in University of Phoenix Online (as defined in the Company's amended and
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restated articles of incorporation) shall be deemed outstanding common stock of University of Phoenix Online.
(g) "Code means the Internal Revenue Code of 1986, as amended.
(h) "Committee means the committee of the Board described in Article 4.
(i) "Covered Employee means an Employee who is a "covered employee within the meaning of Section 162(m) of the Code.
(j) "Disability shall mean any illness or other physical or mental condition of a Participant which renders the Participant incapable of performing his customary and usual duties for the Company, or any medically determinable illness or other physical or mental condition resulting from a bodily injury, disease, or mental disorder that in the judgment of the Committee is permanent and continuous in nature. The Committee may require such medical or other evidence as it deems necessary to judge the nature and permanency of the Participant's condition.
(k) "Exchange Act means the Securities Exchange Act of 1934, as amended.
(1) "Fair Market Value means, as of any given date, the fair market value of Stock on a particular date determined by such methods or procedures as may be established from time to time by the Committee. Unless otherwise determined by the Committee, the Fair Market Value of Stock as of any date shall be the closing price for the Stock as reported on The Nasdaq National Market System (or on any national securities exchange on which the Stock is then listed) for that date or, if no closing price is reported for that date, the closing price on the next preceding date for which a closing price was reported.
(m) "Incentive Stock Option means an Option that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto.
(n) "Non-Employee Director means a member of the Board who qualifies as a "Non-Employee Director as defined in Rule 16b-3(b)(3) of the Exchange Act, or any successor definition adopted by the Board.
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(o) "Non-Qualified Stock Option means an Option that is not intended to be an Incentive Stock Option.
(p) "Option means a right granted to a Participant under Article 7 of the Plan to purchase Stock at a specified price during specified time periods. An Option may be either an Incentive Stock Option or a Non-Qualified Stock Option.
(q) "Participant means a person who, as a director, employee, officer, or executive of, or consultant or advisor providing services to, the Company or any Subsidiary, has been granted an Award under the Plan.
(r) "Performance-Based Awards means the Performance Share Awards and Restricted Stock Awards granted to selected Covered Employees pursuant to Articles 9 and 10, but which are subject to the terms and conditions set forth in Article 11. All Performance-Based Awards are intended to qualify as "performance-based compensation under Section 162(m) of the Code.
(s) "Performance Criteria means the criteria that the Committee selects for purposes of establishing the Performance Goals for a Participant for a Performance Period. The Performance Criteria that will be used to establish Performance Goals are limited to the following: pre- or after-tax net earnings, sales growth, operating earnings, operating cash flows, return on net assets, return on stockholders' equity, return on assets, return on capital, Stock price growth, stockholder returns, gross or net profit margin, earnings per share, price per share of Stock, and market share, any of which may be measured either in absolute terms or as compared to any incremental increase or as compared to results of a peer group. The Committee shall, within the time prescribed by Section 162(m) of the
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Code, define in an objective fashion the manner of calculating the Performance Criteria it selects to use for such Performance Period for such Participant.
(t) "Performance Goals means, for a Performance Period, the goals established in writing by the Committee for the Performance Period based upon the Performance Criteria. Depending on the Performance Criteria used to establish such Performance Goals, the Performance Goals may be expressed in terms of overall Company performance or the performance of a division, business unit, or an individual. The Committee, in its discretion, may, within the time prescribed by Section 162(m) of the Code, adjust or modify the calculation of Performance Goals for such Performance Period in order to prevent the dilution or enlargement of the rights of Participants (i) in the event of, or in anticipation of, any unusual or extraordinary corporate item, transaction, event, or development, or (ii) in recognition of, or in anticipation of, any other unusual or nonrecurring events affecting the Company, or the financial statements of the Company, or in response to, or in anticipation of, changes in applicable laws, regulations, accounting principles, or business conditions.
(u) "Performance Period means the one or more periods of time, which may be of varying and overlapping durations, as the Committee may select, over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant's right to, and the payment of, a Performance-Based Award.
(v) "Performance Share means a right granted to a Participant under Article 9, to receive cash, Stock, or other Awards, the payment of which is contingent upon achieving certain Performance Goals
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established by the Committee.
(w) "Plan means the Apollo Group, Inc. 2000 Stock Incentive Plan, as amended.
(x) "Restricted Stock Award means Stock granted to a Participant under Article 10 that is subject to certain restrictions and to risk of forfeiture.
(y) "Stock means either Apollo Education Group Class A common stock or University of Phoenix Online common stock, and such other securities of the Company that may be substituted for such Apollo Education Group Class A common stock or University of Phoenix Online common stock, respectively, pursuant to Article 13.
(z) "Stock Appreciation Right or "SAR means a right granted to a Participant under Article 8 to receive a payment equal to the difference between the Fair Market Value of a share of Stock as of the date of exercise of the SAR over the grant price of the SAR, all as determined pursuant to Article 8.
(aa) "Subsidiary means any corporation or other entity of which a majority of the outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company.
ARTICLE 4
ADMINISTRATION
4.1 COMMITTEE. The Plan shall be administered by the Board or a Committee appointed by, and which serves at the discretion of, the Board. If the Board appoints a Committee, the Committee shall consist of at least two individuals, each of whom qualifies as (i) a Non-Employee Director, and (ii) an "outside director under Code Section 162(m) and the regulations issued thereunder. Reference to the Committee shall refer to the Board if the Board does not appoint a Committee. In addition to the foregoing, however, the President and the Chief Executive Officer (acting jointly if such offices are held by two persons) of the Company shall have the authority (i) to grant Awards to individuals who are not subject to Section 16 of the Exchange Act and (ii) to grant Awards to employees of the Company or a Subsidiary other than themselves who are subject to Section 16 of the Exchange Act on the condition that such Awards be held for a period of six months following the date of grant. When the President and Chief
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Executive Officer act to grant Awards under this Plan, solely for purposes of this Plan, the President and Chief Executive Officer shall be deemed to be acting as the Committee.
4.2 ACTION BY THE COMMITTEE. A majority of the Committee shall constitute a quorum. The acts of a majority of the members present at any meeting at which a quorum is present, and acts approved in writing by a majority of the Committee in lieu of a meeting, shall be deemed the acts of the Committee. Each member of the Committee is entitled to, in good faith, rely or act upon any report or other information furnished to that member by any officer or other employee of the Company or any Subsidiary, the Company's independent certified public accountants, or any executive compensation consultant or other professional retained by the Company to assist in the administration of the Plan.
4.3 AUTHORITY OF COMMITTEE.
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Subject to any specific designation in the Plan, the Committee has the exclusive power, authority and discretion to:
(a) Designate Participants to receive Awards;
(b) Determine the type or types of Awards to be granted to each Participant;
(c) Determine the number of Awards to be granted and the number of shares of Stock to which an Award will relate;
(d) Determine whether the Shares of Stock subject to an Award will be Apollo Education Group Class A common stock or University of Phoenix Online common stock.
(e) Determine the terms and conditions of any Award granted under the Plan including but not limited to, the exercise price, grant price, or purchase price, any restrictions or limitations on the Award, any schedule for lapse of forfeiture restrictions or restrictions on the exercisability of an Award, and accelerations or waivers thereof, based in each case on such considerations as the Committee in its sole discretion determines; provided, however, that the Committee shall not have the authority to accelerate the vesting or waive the forfeiture of any Performance-Based Awards;
(f) Amend, modify, or terminate any outstanding Award, with the Participant' s consent unless the Committee has the authority to amend, modify, or terminate an Award without the Participant' s consent under any other provision of the Plan.
(g) Determine whether, to what extent, and under what circumstances an Award may be settled in, or the exercise price of an Award may be paid in, cash, Stock, other Awards, or other property, or an Award may be canceled, forfeited, or surrendered;
(h) Prescribe the form of each Award Agreement, which need not be identical for each Participant;
(i) Decide all other matters that must be determined in connection with an Award;
(j) Establish, adopt, or revise any rules and regulations as it may deem necessary or advisable to administer the Plan; and
(k) Make all other decisions and determinations that may be required under the Plan or as the Committee deems necessary or advisable to administer the Plan.
4.4 DECISIONS BINDING. The Committee's interpretation of the Plan, any Awards granted under the Plan, any Award Agreement and all decisions and determinations by the Committee with respect to the Plan are final, binding, and conclusive on all parties.
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ARTICLE 5
SHARES SUBJECT TO THE PLAN
5.1 NUMBER OF SHARES.
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Subject to adjustment as provided in Section 13.1, the aggregate number of shares of Stock reserved and available for grant under the Plan shall be fourteen million (14,000,000). Of this aggregate amount, five million (5,000,000) shares shall be shares of Apollo Education Group Class A common stock and nine million (9,000,000) shares shall be shares of University of Phoenix Online common stock.
5.2 LAPSED A WARDS. To the extent that an Award terminates, expires, or lapses for any reason, any shares of Stock subject to the Award will again be available for the grant of an Award under the Plan.
5.3 STOCK DISTRIBUTED. Any Stock distributed pursuant to an Award may consist, in whole or in part, of authorized and unissued Stock, treasury Stock or Stock purchased on the open market.
5.4 LIMITATION ON NUMBER OF SHARES SUBJECT TO A WARDS. Notwithstanding any provision in the Plan to the contrary, and subject to the adjustment in Section 13.1, the maximum aggregate number of shares of Stock with respect to one or more Awards that may be granted to any one Participant during the Company's fiscal year shall be two million (2,000,000). Of this aggregate amount, the maximum shares of Apollo Education Group Class A common stock granted shall be one million (1,000,000), and the maximum shares of University of Phoenix Online common stock granted shall be one million (1,000,000).
ARTICLE 6
ELIGIBILITY AND PARTICIPATION
6.1 ELIGIBILITY.
(a) GENERAL. Persons eligible to participate in this Plan include all directors, employees, officers, and executives of, and consultants and advisors to, the Company or a Subsidiary, as determined by the Committee.
(b) FOREIGN PARTICIPANTS. In order to assure the viability of Awards granted to Participants employed in foreign countries, the Committee may provide for such special terms as it may consider necessary or appropriate to accommodate differences in local law, tax policy, or custom. Moreover, the Committee may approve such supplements to, or amendments, restatements, or alternative versions of the Plan as it may consider necessary or appropriate for such purposes without thereby affecting the terms of the Plan as in effect for any other purpose; provided, however, that no such supplements, amendments, restatements, or alternative versions shall increase the share limitations contained in Section 5.1 of the Plan.
6.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the Committee may, from time to time, select from among all eligible individuals, those to whom Awards shall be granted and shall determine the nature and amount of each Award. No individual shall have any right to be granted an Award under this Plan.
ARTICLE 7
STOCK OPTIONS
7.1 GENERAL. The Committee is authorized to grant Options to Participants on the following terms and conditions:
(a) EXERCISE PRICE. The exercise price per share of Stock under an Option shall be determined by the Committee and set forth in the Award Agreement. It is the intention under the Plan that the exercise
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price for any Option shall not be less than the Fair Market Value as of the date
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of grant; provided, however that the Committee may, in its discretion, grant Options (other than Options that are intended to be Incentive Stock Options or Options that are intended to qualify as performance-based compensation under Code Section 162(m)) with an exercise price of less than Fair Market Value on the date of grant.
(b) TIME AND CONDITIONS OF EXERCISE. The Committee shall determine the time or times at which an Option may be exercised in whole or in part. The Committee shall also determine the performance or other conditions, if any, that must be satisfied before all or part of an Option may be exercised. Unless otherwise provided in an Award Agreement, an Option will lapse immediately if a Participant's employment or services are terminated for Cause.
(c) PAYMENT. The Committee shall determine the methods by which the exercise price of an Option may be paid, the form of payment, including, without limitation, cash, promissory note, shares of Stock (through actual tender or by attestation), or other property (including broker-assisted "cashless exercise arrangements), and the methods by which shares of Stock shall be delivered or deemed to be delivered to Participants.
(d) EVIDENCE OF GRANT. All Options shall be evidenced by a written Award Agreement between the Company and the Participant. The Award Agreement shall include such additional provisions as may be specified by the Committee.
7.2 INCENTIVE STOCK OPTIONS. Incentive Stock Options shall be granted only to employees and the terms of any Incentive Stock Options granted under the Plan must comply with the following additional rules:
(a) EXERCISE PRICE. The exercise price per share of Stock shall be set by the Committee, provided that the exercise price for any Incentive Stock Option may not be less than the Fair Market Value as of the date of the grant.
(b) EXERCISE. In no event may any Incentive Stock Option be exercisable for more than ten years from the date of its grant.
(c) LAPSE OF OPTION. An Incentive Stock Option shall lapse under the following circumstances.
(1) The Incentive Stock Option shall lapse ten years from the date it is granted, unless an earlier time is set in the Award Agreement.
(2) The Incentive Stock Option shall lapse upon termination of employment for Cause or for any other reason, other than the Participant's death or Disability, unless otherwise provided in the Award Agreement.
(3) If the Participant terminates employment on account of Disability or death before the Option lapses pursuant to paragraph (1) or (2) above, the Incentive Stock Option shall lapse, unless it is previously exercised, on the earlier of (i) the date on which the Option would have lapsed had the Participant not become Disabled or lived and had his employment status (i.e., whether the Participant was emnloved by the Comnanv on the date of his Disability or death or had nreviouslv terminated
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r--r --- -r r---r r r r employment) remained unchanged; or (ii) 12 months after the date of the Participant's termination of employment on account of Disability or death. Upon the Participant's Disability or death, any Incentive Stock Options exercisable at the Participant's Disability or death may be exercised by the Participant's legal representative or representatives, by the person or persons entitled to do so under the Participant's last will and testament, or, if the Participant fails to make testamentary disposition of such Incentive Stock Option or dies intestate, by the person or persons entitled to receive the Incentive Stock Option under the applicable laws of descent and distribution.
(d) INDIVIDUAL DOLLAR LIMITATION. The aggregate Fair Market Value (determined as of the time an Award is made) of all shares of Stock with respect to which Incentive Stock
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Options are first exercisable by a Participant in any calendar year may not exceed $100,000.00 or such other limitation as imposed by Section 422(d) of the Code, or any successor provision. To the extent that Incentive Stock Options are first exercisable by a Participant in excess of such limitation, the excess shall be considered Non-Qualified Stock Options.
(e) TEN PERCENT OWNERS. An Incentive Stock Option shall be granted to any individual who, at the date of grant, owns stock possessing more than ten percent of the total combined voting power of all classes of Stock of the Company only if such Option is granted at a price that is not less than 110% of Fair Market Value on the date of grant and the Option is exercisable for no more than five years from the date of grant.
(f) EXPIRATION OF INCENTIVE STOCK OPTIONS. No Award of an Incentive Stock Option may be made pursuant to this Plan after the tenth anniversary of the Effective Date.
(g) RIGHT TO EXERCISE. During a Participant's lifetime, an Incentive Stock Option may be exercised only by the Participant.
ARTICLE 8
STOCK APPRECIATION RIGHTS
8.1 GRANT OF SARS. The Committee is authorized to grant SARs to Participants on the following terms and conditions:
(a) RIGHT TO PAYMENT. Upon the exercise of a Stock Appreciation Right, the Participant to whom it is granted has the right to receive the excess , if any, of:
(1) The Fair Market Value of a share of Stock on the date of exercise; over
(2) The grant price of the Stock Appreciation Right as determined by the Committee, which shall not be less than the Fair Market Value of a share of Stock on the date of grant in the case of any SAR related to any Incentive Stock Option.
(b) OTHER TERMS. All awards of Stock Appreciation Rights shall be evidenced by an Award Agreement. The terms, methods of exercise, methods of settlement, form of consideration payable in settlement, and any other terms and conditions of any Stock Appreciation Right shall be determined by the Committee at the time of the grant of the Award and shall be reflected in the Award Agreement.
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ARTICLE 9
PERFORMANCE SHARES
9.1 GRANT OF PERFORMANCE SHARES. The Committee is authorized to grant Performance Shares to Participants on such terms and conditions as may be selected by the Committee. The Committee shall have the complete discretion to determine the number of Performance Shares granted to each Participant. All Awards of Performance Shares shall be evidenced by an Award Agreement.
9.2 RIGHT TO PAYMENT. A grant of Performance Shares gives the Participant rights, valued as determined by the Committee, and payable to, or exercisable by, the Participant to whom the Performance Shares are granted, in whole or in part, as the Committee shall establish at grant or thereafter. The Committee shall set performance goals and other terms or conditions to payment of the Performance Shares in its discretion which, depending on the extent to which they are met, will determine the number and value of Performance Shares that will be paid to the Participant.
9.3 OTHER TERMS. Performance Shares may be payable in cash, Stock, or other property, and have such other terms and conditions as determined by the Committee and reflected in the Award Agreement.
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ARTICLE 10
RESTRICTED STOCK AWARDS
10.1 GRANT OF RESTRICTED STOCK. The Committee is authorized to make Awards of Restricted Stock to Participants in such amounts and subject to such terms and conditions as determined by the Committee. All Awards of Restricted Stock shall be evidenced by a Restricted Stock Award Agreement.
10.2 ISSUANCE AND RESTRICTIONS. Restricted Stock shall be subject to such restrictions on transferability and other restrictions as the Committee may impose (including, without limitation, limitations on the right to vote Restricted Stock or the right to receive dividends on the Restricted Stock). These restrictions may lapse separately or in combination at such times, under such circumstances, in such installments, or otherwise, as the Committee determines at the time of the grant of the Award or thereafter.
10.3 FORFEITURE. Except as otherwise determined by the Committee at the time of the grant of the Award or thereafter, upon termination of employment during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited, provided, however, that the Committee may provide in any Restricted Stock Award Agreement that restrictions or forfeiture conditions relating to Restricted Stock will be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part restrictions or forfeiture conditions relating to Restricted Stock.
10.4 CERTIFICATES FOR RESTRICTED STOCK. Restricted Stock granted under the Plan maybe evidenced in such manner as the Committee shall determine. If certificates representing shares of Restricted
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Stock are registered in the name of the Participant, certificates must bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, and the Company may, at its discretion, retain physical possession of the certificate until such time as all applicable restrictions lapse.
ARTICLE 11
PERFORMANCE-BASED AWARDS
11.1 PURPOSE. The purpose of this Article 11 is to provide the Committee the ability to qualify the Performance Share Awards under Article 9 and the Restricted Stock Awards under Article 10 as "performance-based compensation under Section 162(m) of the Code. If the Committee, in its discretion, decides to grant a Performance-Based Award to a Covered Employee, the provisions of this Article 11 shall control over any contrary provision contained in Articles 9 or 10.
11.2 APPLICABILITY. This Article 11 shall apply only to those Covered Employees selected by the Committee to receive Performance-Based Awards. The Committee may, in its discretion, grant Restricted Stock Awards or Performance Share Awards to Covered Employees that do not satisfy the requirements of this Article 11. The designation of a Covered Employee as a Participant for a Performance Period shall not in any manner entitle the Participant to receive an Award for the period. Moreover, designation of a Covered Employee as a Participant for a particular Performance Period shall not require designation of such Covered Employee as a Participant in any subsequent Performance Period and designation of one Covered Employee as a Participant shall not require designation of any other Covered Employees as a Participant in such period or in any other period.
11.3 DISCRETION OF COMMITTEE WITH RESPECT TO PERFORMANCE A WARDS. With regard to a particular Performance Period, the Committee shall have full discretion to select the length of such Performance Period, the type of Performance-Based Awards to be issued, the kind and/ or level of the Performance Goal, and whether the Performance Goal is to apply to the Company, a Subsidiary or any division or business unit thereof.
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11.4 PA YMENT OF PERFORMANCE A WARDS. Unless otherwise provided in the relevant Award Agreement, a Participant must be employed by the Company or a Subsidiary on the last day of the Performance Period to be eligible for a Performance Award for such Performance Period. Furthermore, a Participant shall be eligible to receive payment under a Performance-Based Award for a Performance Period only if the Performance Goals for such period are achieved. In determining the actual size of an individual Performance-Based Award, the Committee may reduce or eliminate the amount of the Performance-Based Award earned for the Performance Period, if in its sole and absolute discretion, such reduction or elimination is appropriate.
11.5 MAXIMUMAWARD PAYABLE. The aggregate maximum Performance-Based Award payable to any one Participant under the Plan for a Performance Period is two million (2,000,000) shares of Stock. Of this aggregate amount, up to one million (1,000,000) shares of Apollo Education Group Class A common stock, and up to one million (1,000,000) shares of University of Phoenix Online common stock may be payable as Performance-Based Awards. In the event the Performance-Based Award is paid in cash, such maximum Performance-Based Award shall be determined by multiplying one million (1,000,000) by the Fair Market Value of one share of the applicable C4nn1r Qe of fh ,Q+,- of rrrcn4 of fh Uarcn% mQ"na_RQeaA A cz»r,
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I.)LVVl^ WV Vl L11 # I.LGLLV Vl S1 G,11L Vl L11V 1 #11 V1111G,11VV- L U.3%S .L L 1YY GL1 l.L.
ARTICLE 12
PROVISIONS APPLICABLE TO AWARDS
12.1 STAND-ALONE AND TANDEMA WARDS. Awards granted under the Plan may, in the discretion of the Committee, be granted either alone, in addition to, or in tandem with, any other Award granted under the Plan. Awards granted in addition to or in tandem with other Awards may be granted either at the same time as or at a different time from the grant of such other Awards.
12.2 EXCHANGE PROVISIONS. The Committee may at any time offer to exchange or buy out any previously granted Award for a payment in cash, Stock, or another Award, based on the terms and conditions the Committee determines and communicates to the Participant at the time the offer is made.
12.3 TERM OF AWARD. The term of each Award shall be for the period as determined by the Committee, provided that in no event shall the term of any Incentive Stock Option or a Stock Appreciation Right granted in tandem with the Incentive Stock Option exceed a period of ten years from the date of its grant.
12.4 FORM OF PA YMENT FOR A WARDS. Subject to the terms of the Plan and any applicable law or Award Agreement, payments or transfers to be made by the Company or a Subsidiary on the grant or exercise of an Award may be made in such forms as the Committee determines at or after the time of grant, including without limitation, cash, promissory note, Stock, other Awards, or other property, or any combination, and may be made in a single payment or transfer, in installments, or on a deferred basis, in each case determined in accordance with rules adopted by, and at the discretion of, the Committee.
12.5 LIMITS ON TRANSFER. No right or interest of a Participant in any Award may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or a Subsidiary, or shall be subject to any lien, obligation, or liability of such Participant to any other party other than the Company or a Subsidiary. Except as otherwise provided by the Committee, no Award shall be assignable or transferable by a Participant other than by will or the laws of descent and distribution.
12.6 BENEFICIARIES. Notwithstanding Section 12.5, a Participant may, in the manner determined by the Committee, designate a beneficiary to exercise the rights of the Participant and to receive any distribution with respect to any Award upon the Participant's death. A beneficiary, legal guardian, legal representative, or other person claiming any rights under the Plan is subject to all terms and conditions of the Plan and any Award Agreement applicable to the Participant, except to the extent the Plan and Award Agreement otherwise provide, and to any additional restrictions deemed necessary or appropriate by the Committee. If the Participant is married, a designation of a person other than the
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Participant's spouse as his beneficiary with respect to more than 50% of the Participant's interest in the Award shall not be effective without the written consent of the Participant's spouse. If no beneficiary has been designated or survives the Participant, payment shall be made to the person entitled thereto under the Participant's will or the laws of descent and distribution. Subject to the foregoing, a beneficiary designation
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II1ay DC W1aIIgeU UI IC V UKCU Uy Q rar LIC11Jai1L UL d,Ily LIII1C 1JIU V 1UCU LI1C GIIalIge UI IC V CULIUI1 1S 111CU W I LI1 LI1C Committee.
12.7 STOCK CERTIFICATES. All Stock certificates delivered under the Plan are subject to any stop-transfer orders and other restrictions as the Committee deems necessary or advisable to comply with Federal or state securities laws, rules and regulations and the rules of any national securities exchange or automated quotation system on with the Stock is listed, quoted, or traded. The Committee may place legends on any Stock certificate to reference restrictions applicable to the Stock.
12.8 ACCELERATION UPONA CHANGE OF CONTROL.
(a) Apollo Education Group AWARDS. If a Change of Control of Apollo Education Group occurs, all outstanding Options, Stock Appreciation Rights, and other Awards that relate to the grant of Apollo Education Group stock shall become fully exercisable and all restrictions on such outstanding Awards shall lapse. To the extent that this provision causes Incentive Stock Options to exceed the dollar limitation set forth in Section 7.2(d), the excess Options shall be deemed to be Non-Qualified Stock Options. Upon, or in anticipation of, such an event, the Committee may cause every Award that relates to the grant of Apollo Education Group stock outstanding hereunder to terminate at a specific time in the future and shall give each Participant the right to exercise such Awards during a period of time as the Committee, in its sole and absolute discretion, shall determine.
(b) UOP ONLINE AWARDS. If a Change of Control of University of Phoenix Online occurs, all outstanding Options, Stock Appreciation Rights, and other Awards that relate to the grant of University of Phoenix Online stock shall become fully exercisable and all restrictions on such outstanding Awards shall lapse. To the extent that this provision causes Incentive Stock Options to exceed the dollar limitation set forth in Section 7.2(d), the excess Options shall be deemed to be Non-Qualified Stock Options. Upon, or in anticipation of, such an event, the Committee may cause every Award that relates to the grant of University of Phoenix Online stock outstanding hereunder to terminate at a specific time in the future and shall give each Participant the right to exercise such Awards during a period of time as the Committee, in its sole and absolute discretion, shall determine.
ARTICLE 13
CHANGES IN CAPITAL STRUCTURE
13.1 GENERAL. In the event a stock dividend is declared upon the Stock, the shares of Stock then subject to each Award (and the number of shares subject thereto) shall be increased proportionately without any change in the aggregate purchase price therefor. In the event the Stock shall be changed into or exchanged for a different number or class of shares of Stock or of another corporation, whether through reorganization, recapitalization, stock split-up, reverse stock split up, combination of shares, merger or consolidation, or any other increase or decrease in the number of shares of Stock effected without receipt of consideration by the Company, the Board, in its discretion, shall have the authority to substitute for each such share of Stock then subject to each Award the number and class of shares of Stock into which each outstanding share of Stock shall be so exchanged, all without any change in the aggregate purchase price for the shares then subject to each Award. Notwithstanding the above, the conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration.
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ARTICLE 14
AMENDMENT, MODIFICATION, AND TERMINATION
14.1 AMENDMENT, MODIFICATION, AND TERMINATION. With the approval of the Board, at any time and from time to time, the Committee may terminate, amend or modify the Plan; provided, however, that to the extent necessary and desirable to comply with any applicable law, regulation, or stock exchange rule, the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required.
14.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment, or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant.
ARTICLE 15
GENERAL PROVISIONS
15.1 NO RIGHTS TO AWARDS. No Participant, employee, or other person shall have any claim to be granted any Award under the Plan, and neither the Company nor the Committee is obligated to treat Participants, employees, and other persons uniformly.
15.2 NO SHAREHOLDER RIGHTS. No Award gives the Participant any of the rights of a shareholder of the Company unless and until shares of Stock are in fact issued to such person in connection with such Award.
15.3 WITHHOLDING. The Company or any Subsidiary shall have the authority and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state, and local taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any taxable event arising as a result of this Plan. With the Committee's consent, a Participant may elect to have the Company withhold from the Stock that would otherwise be received upon the exercise of any Option, a number of shares having a Fair Market Value equal to the minimum statutory amount necessary to satisfy the Participant's applicable federal, state, local and foreign income and employment tax withholding obligations.
15.4 NO RIGHT TO EMPLOYMENT OR SERVICES. Nothing in the Plan or any Award Agreement shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate any Participant's employment or services at any time, nor confer upon any Participant any right to continue in the employ of the Company or any Subsidiary.
15.5 UNFUNDED STATUS OF AWARDS. The Plan is intended to be an "unfunded plan for incentive compensation. With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award Agreement shall give the Participant any rights that are greater than those of a general creditor of the Company or any Subsidiary.
15.6 INDEMNIFICATION. To the extent allowable under applicable law, each member of the Committee or of the Board shall be indemnified and held harmless by the Company from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such member in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action
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or failure to act under the Plan and against and from any and all amounts paid by him or her in satisfaction of judgment in such action, suit, or proceeding against him or her provided he or she gives the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Articles of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.
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15.7 RELATIONSHIP TO OTHER BENEFITS. No payment under the Plan shall be taken into account in determining any benefits under any pension, retirement, savings, profit sharing, group insurance, welfare or other benefit plan of the Company or any Subsidiary.
15.8 EXPENSES. The expenses of administering the Plan shall be borne by the Company and its Subsidiaries.
15.9 TITLES AND HEADINGS. The titles and headings of the Sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.
15.10 FRACTIONAL SHARES. No fractional shares of stock shall be issued and the Committee shall determine, in its discretion, whether cash shall be given in lieu of fractional shares or whether such fractional shares shall be eliminated by rounding up or down as appropriate.
15.11 SECURITIES LAW COMPLIANCE. With respect to any person who is, on the relevant date, obligated to file reports under Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be void to the extent permitted by law and voidable as deemed advisable by the Committee.
15.12 GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company to make payment of awards in Stock or otherwise shall be subject to all applicable laws, rules, and regulations, and to such approvals by government agencies as may be required. The Company shall be under no obligation to register under the Securities Act of 1933, as amended, any of the shares of Stock paid under the Plan. If the shares paid under the Plan may in certain circumstances be exempt from registration under the Securities Act of 1933, as amended, the Company may restrict the transfer of such shares in such manner as it deems advisable to ensure the availability of any such exemption.
15.13 GOVERNING LAW. The Plan and all Award Agreements shall be construed in accordance with and governed by the laws of the State of Arizona.
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15 of 15 11/13/2007 11:17 AM EXHIBIT D
Case 2:06-cv-02674- RCB Document 71-6 Filed 11/23/2007 Page 1 of 15 UNITED STATES DISTRICT COURT
DISTRICT OF ARIZONA
In re APOLLO GROUP, INC. ) Case No . CV 04- 2147-PHX-JAT
SECURITIES LITIGATION
DEPOSITION OF JOHN SPERLING
November 17, 2006
REPORTED BY: LAWRENCE PAUL NELSON, CSR 12144
550 West C Street, Suite 600 San Diego , CA 92101 00-514-2714 Case 2:06-cv-02674- RCB Document 71-6 Filed 11 /23/2007 Page 2 0 15 1 BE IT REMEMBERED that, pursuant to
2 Notice of Taking Deposition, and on November 17,
3 2006 , commencing at the hour of 8 : 57 a.m . thereof,
4 at One Montgomery Street, Suite 2600, San Francisco,
5 Cali fornia , before me , LAWRENCE PAUL NELSON , CSR No.
6 12144 , duly authorized to administer oaths, there
7 personally appeared
a JOHN SPERLING,
9 call ed as a witness by the Plaintiffs, and who,
10 being first administered an oath , was thereupon
1 1 examined and testified as hereinafter set forth.
12
13 THE VIDEOGRAPHER: Here begins video disk 08:57:51
14 No. 1, Volume 1, in the deposition of John Sperling 08:57:53
15 in the matter of Apollo Group, Incorporated, 08:57:56
16 securities litigation in the United States District 08:58:01
17 Court, District of Arizona, case number of which is 08:58:03
18 CV 042147 PHXJAT. 08:58:08
19 Today's date is November 17th, 2006, and 08:58:15
20 the time on the video monitor is 8:59 a.m. This 08:58:18
21 deposition is being taken at 1 Montgomery Street, 08:58:24
22 26th Floor, San Francisco, California, and was made 08:58:28
23 to request of the plaintiffs represented by the law 08:58:31
24 office of Bonnett, Fairbourn, Friedman 6 Balint. 08:58:35
25 The court reporter producing the official 08:58:39
5
EASTWOOD-STEIN Deposition 'Management (800) 514-2714 Case 2:06-cv-02674- RCB Document 71-6 Filed 11/23/2007 Page 3 of 15 1 transcript of today's deposition is Larry Nelson of 08:58:40
2 Eastwood Stein Deposition Management. The 08:58:40
3 videographer is Joseph Mourgos representing Eastwood 08:58:46
4 Stein Deposition Management. The phone number is 08:58:49
5 800-514-2714. 08:58:52
6 would counsel please identify yourselves 08:58:57
7 and state whom you represent. 08:58:58
9 MR. FRIEDMAN: My name is Andy Friedman. I 08:59:01
9 represent the lead plaintiff and the class in this 08:59:03
10 case. 08:59:06
MR. WARD: Sam Ward of Barrack, Rodos & 08:59:06
12 Bacine, on behalf of lead plaintiff in the class. 08:59:09
13 MR. SMITH: Wayne Smith of Gibson, Dunn & 08:59:12
14 Crutcher on behalf of defendants and the witness. 08:59:15
15 MR. DIULIO: Kristopher Diulio of Gibson, 08:59:16
16 Dunn & Crutcher on behalf of defendants. 08:59:20
17 THE VIDEOGRAPHER: Would the court reporter 08:59:21
1s please swear in the witness. 08:59:22
19 08:59:22
20 EXAMINATION 08:59:35
21 BY MR. FRIEDMAN: 08:59:35
22 Q. Good morning, Mr. Sperling. 08:59:35
23 A. Good morning, Andy. 08:59:37
24 Q. My name is Andy Friedman. As I said a 08:59:39
25 little bit ago, I represent the plaintiffs and the 08:59:43
6
EASTWOOD-STEIN Deposition Management ( 800) 514-2714
Case 2:06-cv-02674-RCB Document 71-6 Filed 11 /23/2007 Page 4 of 15 1 A. Eventually. 09:47:01
2 Q. What's your understanding as to the 09:47:01
3 evolution of the compensation system? 09:47:03
4 A. I know that the evolution -- changed 09:47:05
5 democratically when the U.S. Department of Education 09:47:10
6 ruled that enrollment counselors could not be 09:47:15
7 compensated solely on the number of students they 09:47:20
8 enrolled, but they never had been, so I don't think 09:47:24
9 there was -- there was probably changes, but I don't 09:47:32
10 know whether they were major changes. 09:47:35
11 Q. When you say they never had been based -- 09:47:36
12 A. Solely. 09:47:40
13 Q. -- solely on that was because there was 09:47:41
14 always the maintenance, not just the enrollment? 09:47:42
15 A. Yes. 09:47:46
16 Q. Thanks. You were initially the president 09:47:48
17 of the company? 09:47:52
18 A. T7h-huh. 09:47:53
19 Q. I'm sorry, you have to -- 09:47:53
20 A. Yes. 09:47:55
21 Q. And how long did you remain as president? 09:47:55
22 A. I remained as president until, oh, I can't 09:47:58
23 even remember. I hired the first president- What 09:48:03
24 in heaven's name would it be? It was before I 09:48:16
25 created Apollo Group, I'm pretty sure. I know where 09:48:20
40
EASTWOOD-STEIN Deposition Management (800) 514-2714
Case 2:06-cv-02674- RCB Document 71-6 Filed 11/23/2007 Page 5 of 15 1 Q. Do you know whether you received options 10:17:26
2 on the dates when they were possibly backdating? 10:17:29
3 A. I don't know, but I think that there 10:17:33
4 were -- that all of the Section 16 officers received 10:17:42
5 back options on the same day. So if they were 10:17:49
6 Section 16 officers, I would have been among them , 10:17:54
7 up until the time I resigned as chairman . 10:17:57
8 Q. If backdating had occurred or ultimately 10:17:59
9 it turns out that backdating had occurred , it would 10:18:02
10 have been uniformly issued to the Section 16 10:18:05
11 officers? 10:18:08
12 A. Yes . As I recall, Mr. Rubin said that 10:18:09
13 such backdating applied only to Section 16 officers , 10:18:13
14 that no one below Section 16 was involved in that at 10:18:20
15 all, but I don't know . I'm not sure . 10:18:25
16 Q. was anyone asked to leave the company as a 10:18:27
17 result of the backdating option issue ? 10:18:30
18 A. You . 10:18:32
19 Q. Who was? 10:18;33
20 A. Rends Gonzales and Dan Bacchus . 10:18:34
21 Q. Did you participate in the decision to ask 10:18:38
2 2 them to leave ? 10:18:41
23 A. No, I simply carried it out, but I asked 10:18:42
24 for their resignations and -- but I only got as far 10:18:47
25 as Kenda because Dan Bacchus resigned before I got a 10:18:55
56
EASTWOOD-STEIN Deposition Management ( SOIL) 514-2714 Case 2:06-cv-02674-RCB Document 71-6 Filed 11 /23/2007 Page 6 of 15 1 chance to speak to him. 10:19:00
2 Q. So you went to Kenda and asked for her 10:19:01
3 resignation? 10:19:04
4 A. As per the instructions, Lee Rubin's 10:19:04
5 instructions. 10:19:09
6 Q. Is that counsel -- I'm sorry. 10:19:09
7 Mr. Rubin -- 10:19:10
8 A. Was counsel to the special committee. 10:19:11
9 0. And why was she asked to leave? 10:19:14
10 A. She was asked to leave because, according 10:19:23
11 to Mr. Rubin, she was unaware of APB 25 and, 10:19:26
12 therefore, administered an option plan that did not 10:19:32
13 meet the standards of 162M. Consequently, she 10:19:39
14 caused -- will be causing -- will cause -- or has 10:19:51
15 caused -- helped to cause. Let me put it that way. 10:19:55
16 Helped to cause the necessity to restate financials 10:19:59
17 and to pay the IRS, return to the IRS the funds or 10:20:06
18 the amounts that were taken had the options been 10:20:17
19 compliant with APB 25. 10:20:26
20 0. What's APB 25? 10:20:27
21 A. It is the -- they're the rules of the 10:20:30
22 Financial Principles Board concerning the procedures 10:20:39
23 that must be followed if an option is to qualify for 10:20:40
24 162(m) treatment. 10:20:46
25 Q. And what in 162(m) treatment? 10:20:49
57
EASTWOOD-STEIN Deposition Management (800) 514-2714
Case 2:06-cv-02674-RCB Document 71-6 Filed 11/23/2007 Page 7 of 15 1 A. 162(m) treatment is that the option has 10:20:53
2 been issued in compliance with APB 25. 10:20:56
3 Q. And was a determination made that 10:20:59
4 Ms. Gonzalez, as the CFO of the company, should have 10:21:04
5 known about those things to comply with them? 10:21:07
6 A. I don't know what Lee Rubin's line of 10:21:10
7 reasoning was. I just know that he asked -- well, 10:21:18
8 he recommended highly that I ask for her 10:21:24
9 resignation. 10:21:27
10 Q. Was there a vote on those resignations or 10:21:28
11 whether to ask for resignations? 10:21:30
12 A. No, there was no vote on them. 10:21:32
13 Q. If they had declined to resign, I assume 10:21:33
14 they would have been terminated? 10:21:38
15 A. Yeah. 10:21:39
16 Q. Mr. Nelson also left the company? 10:21:40
17 A. But he left back in December or something. 10:21:45
18 Q. I understand. I wasn't trying to tie it 10:21:48
19 to this last discussion. 10:21:50
20 Do you know who made the decision to ask 10:21:53
21 Mr. Nelson to leave? 10:21:57
22 A. The board. 10:21:59
23 Q. Did you recommend that to the board? 10:22:00
24 A. I did. 10:22:01
25 Q. And why did you recommend to the board 10:22:03
58
EASTWOOD-STEIN Deposition Management (800) 514-2714 Case 2:06-cv-02674- RCB Document 71-6 Filed 11/23/2007 Page 8 of 15 1 that he be terminated? 10:22:07
1 A. I did not believe he was performing his 10:22:08
3 CEO functions in a proper manner. 10:22:16
4 Q. And what bothered you about his 10:22:19
5 perfo rmance? 10:22:22
6 A. He was risk averse. He did not perceive 10:22:22
7 or respond to changing demographics. He did not 10:22:29
8 respond to the increasing problem of the law of 10:22:38
9 large numbers. He did not even know he had the 10:22:41
10 opportunity to close a number of transactions. He 10:22:45
11 was psychologically, I guess, incapable of closing 10:22:53
12 the transactions because he was so risk averse. 10:22:55
13 Q. Any other reasons? 10:23:00
14 A. I think he was mainly concerned with 10:23:02
15 anything that would cause the stock to drop. 10:23:04
16 Q. Preoccupied with that? 10:23:08
17 A. That he was-preoccupied primarily with the 10:23:11
18 stock price and not with the functioning of the 10:23:13
19 company. 10:23:20
20 Q. Now, in terms of his being risk averse, 10:23:20
21 can you describe what you mean by that? I know what 10:23:23
22 risk averse means, but how -- in what respect was he 10:23:26
23 risk averse? 10:23:29
24 A. Well, he did not respond to changing 10:23:30
25 demographics by changing the focus of the marketing 10:23:34
59
EAST WOOD-STEIN Deposition Management (8(K)) 514-2714 Case 2:06-cv-02674- RCB Document 71-6 Filed 11/23/2007 Page 9 of 15 1 acquired and the acquires, a whole host of reasons 10:27:37
2 why there was a general prejudice on Wall Street 10:27:42
3 toward acquisitions. 10:27:46
4 Q. Did you -- excuse me. Did you have 10:27:48
S discussions with Mr. Nelson before he was terminated 10:27:51
6 about these problems? 10:27:55
7 A. I discussed it on a couple of occasions, 10:27:56
8 and then it was pretty clear, as my mother would 10:28:00
9 have said, "You might as well be talking to the 10:28:04
10 wall," and I terminated the discussions. X 10:28:07
11 didn't -- I just gave up. 10:28:10
12 Q. Was there any acrimony between the two of 10:28:11
13 you? 10:28:15
14 A. No, we were good friends. 10:28:15
15 Q. So it was not a happy occasion for you to 10 :28:17
16 have to let him go, I take it? 10:28:20
17 A. No. 10:28:22
18 Q. Do you know who told Mr. Nelson that he 10:28:22
19 was to leave? 10:28:26
20 A. I'm not sure. I think it might have been 10:28:27
21 John Norton, but I'm not sure. It was the 10:28:33
22 independent directors who finally made that decision 10:28:37
23 and carried it out. 10:28:42
24 Q. Was there a board meeting at which that 10:28:43
25 decision was made? 10:28:46
63 EASTWOOD-STEIN Deposition Management (800) 514.2714 Case 2:06-cv-02674- RCB Document 71-6 Filed 11 /23/2007 Page 10 of 15 I A. Yes. 10:28:47
2 Q. Other than you, was there anyone else who 10:28:48
3 was part of the recommendation? 10:28:50
4 A. I think that by the close of the 10:28:53
5 discussion there was a general agreement. 10;28:59
6 Q. Did you lead the discussion? 10:29:01
7 A. I started it, but I didn't lead it. 10:29:03
8 Q. Were you the person on the board who had 10:29:07
9 the closest working relationship with Mr. Nelson and 10:29:11
10 therefore in a position to know about his 10:29:15
11 performance? 10:29:19
12 A. No, I was not the person that -- it would 10:29:19
13 have been Norton and Blair, the chair of the 10:29:22
14 compensation committee and the audit committee that 10:29:25
15 had the closest working relationship. I kept my 10:29:28
16 hands totally out of it. 10:29:31
17 Q. Did anybody disagree with your 10:29:33
18 recommendation about Mr. Nelson? 10:29:35
19 A. Not at the end. 10:29:37
20 Q. Did anybody disagree at the beginning? 10:29:39
21 A. Huh? 10:29:41
22 Q. Did anybody disagree at the beginning? 10:29:42
23 A. Well, you would say there was a good deal 10:29:45
24 of concern. He had been there since dirt, as it 10:29:49
25 were. He had performed admirably for many, many 10:29:54
64
EASTWOOD-STEIN Deposition Management (800) 514-2714 Case 2:06-cv-02674- RCB Document 71-6 Filed 11 /23/2007 Page 11 of 15 1 A. Because it became simply a highly 13:12:16
2 regulated activity that I believe was ill-conceived, 13:12:20
3 ill-administered, and destructive of the industry. 13:12:29
4 Q. The prohibition of incentive compensation? 13:12:34
5 A. I thought it was stupid. 13:12:37
6 Q. You thought that the company should be 13:12:39
7 free to award people based solely on enrollments 13:12:42
8 because that's what their business was? 13:12:46
9 A. That's what every business that I've ever 13:12:48
10 read about, had anything to do with, honored, 13:12:51
11 applauded, given accolades -- shall I continue? 13:12:57
12 This was a -- this was a violation of everything 13:13:07
13 that made America great, one of the things that made 13:13:10
14 America great, and was a violation of human nature. 13:13:14
15 It was, I would say, equivalent to some cause that 13:13:20
16 had been passed down by a demented czar back in the 13:13:30
17 19th century. 13:13:37 is 0. So it sounds like you have pretty strong 13:13:38
19 feelings on the subject? 13:13:41
20 A. Right. 13:13:42
21 Q. Did you share those with your staff? I 13:13:43
22 assume people knew how you felt. 13:13:45
23 A. I made no effort to disguise my feeling. 13:13:47
24 Q. Going back to this exhibit, does it appear 13:13:53
25 to you that this would have violated the 13:14:00
150
EASTWOOD-STEIN Deposition Management (800) 514-2714 Case 2:06-cv-02674- RCB Document 71-6 Filed 11/23/2007 Page 12 of 15 1 THE WITNESS: Well, the reason is it could 13:57:31
2 have a material impact. It could have a material 13:57:33
3 impact on the company. 13:57:37
4 BY M. FRIEDMAN; 13:57:38
5 Q. And why did you think it was important to 13:57:38
6 disclose to investors the existence and contents of 13:57:40
7 a final program review report? 13:57:44
8 A. Because, as a matter of fact, if it was 13:57:46
9 not material, if it merely was something that I -- a 13:57:54
10 change of procedure here or do that, I would merely 13:58:03
11 say that the final report was issued asking for 13:58:07
12 procedural changes and they were made, and that was 13:58:12
13 it. 13:58:15
14 Q. Why did you think it was important for 13:58:15
15 investors to know that? 13:58:20
16 A. Because you announce a report, there's a 13:58:21
17 possibility of material impact, and when there's no 13:58:23
18 material impact, you simply inform them that the 13:58:26
19 review is over and there's been no material impact. 13:58:30
20 Q. And that in and of itself would be 13:58:35
21 important for investors to know; correct? 13:58:38
22 A. Sure. 13:58:41
23 Q. And if this report had been a final 13:58:41
24 report -- 13:58:44
25 A. I would have inneediately released it. 13:58:44
181
EASTWOOD-STEIN Deposition Management ( 800) 514-2714 Case 2:06-cv-02674-RCB Document 71-6 Filed 11/23/2007 Page 13 of 15 1 Q. And why is that? 13:58:49
2 A. Because in this case it's pretty clear 13:58:50
3 that there's going to be a material -- potentially 13:58:55
4 material impact. 13:59:01
5 Q. And what was that potential impact? 13:59:02
6 A. All you have to do is read the first 13:59:06
7 sentence and the cover letter. 13:59:10
8 Q. Did anyone during -- after the program 13:59:12
9 review report was issued ever tell you what the 13:59:17
10 potential financial exposure to the company in the 13:59:20
11 way of a fine might be? 13:59:24
12 A. No, the only thing they talked about was 13:59:25
3.3 the term "settlement." 13:59:29
14 Q. Nobody ever told you -- did anyone ever 13:59:32
15 tell you there was a statutory violation per 13:59:33
16 occurrence? 13:59:36
17 A. No. 13:59:39
16 Q. Did anybody ever tell you that if one were 13:59:39
19 to add up the statutory, potential statutory fines, 13:59:42
20 they could amount to hundreds of millions of 13:59:48
21 dollars? 13:59:50
22 A. That's common knowledge. 13:59;51
23 Q. So you knew that when this program -- 13:59:53
24 A. Anyone who runs even a tech school knows 13:59:55
25 if the Department wishes to count every instance of 14:00:00
182
EASTWOOD-STEIN Deposition Management (8(M)) 534.2714 Case 2:06-cv-02674- RCB Document 71-6 Filed 11/23/2007 Page 14 of 15 1 C E R T I F I C A T I O N
2
3 I, LAWRENCE PAUL NELSON , duly authorized to
4 administer oaths pursuant to Section 2093 ( b) of the
5 California Code of Civil Procedure , do hereby certify:
6 That the witness in the foregoing deposition was
7 administered an oath to testify the truth in the
8 within-entitled cause ; that said deposition was taken
9 at the time and place therein stated ; that the to testimony of the said witness was reported by me and
11 was thereafter transcribed under my direction into
12 typewriting ; that the foregoing is a complete and
:3 accurate record of said testimony ; and that the witness
14 was given an opportunity to read and correct said
15 deposition and to subscribe the same.
16 Should the signature of the witness not be
17 affixed to the deposition, the witness shall not have
18 availed himself / herself of the opportunity to sign or
19 the signature has been waived.
20 I further certify that I am not of counsel nor
21 attorney for any of the parties in the foregoing
22 deposition and caption named nor in any way interested
23 in the outcome of the cause named in said caption.
![P.^/J-^V1 24 DATED : ► W,Uh'L2
25 LAWRENCE PAUL NELSON, CSR NO. 12144
191
EASTWOOD-STEIN Deposition Management (800) 514-2714 Case 2:06-cv-02674- RCB Document 71-6 Filed 11/23/2007 Page 15 of 15 EXHIBIT E
Case 2:06-cv-02674- RCB Document 71-7 Filed 11/23/2007 Page 1 of 10 1 GIBSON, DUNN & CRUTCHER LLP WAYNE W. SMITH 2 JOSEPH P. BUSCH, III JARED M. TOFFER 3 KRISTOPHER P. DIULIO 3161 Michelson Drive 4 Irvine, CA 92612-4412 Telephone: (949) 451-3800 5 Facsimile: (949) 451-4220 [email protected] 6 SNELL & WILMER L.L.P. OSBORN MALEDON, P.A. 7 JOEL P. HOXIE (#005448) DAVID B. ROSENBAUM (#009819) JOSEPH G. ADAMS (#018210) MAUREEN BEYERS (#017134) 8 One Arizona Center 2929 North Central Avenue, Suite 2100 Phoenix, AZ 85004-2202 Phoenix, AZ 85012-2793 9 Telephone: (602) 382-6353 Telephone: (602) 640-9000 Facsimile: (602) 382-6070 Facsimile: (602) 640-9050 10 [email protected] [email protected] 11 Attorneys for Defendants APOLLO GROUP, INC.; TODD S. NELSON; 12 and KENDA B. GONZALES 13 IN THE UNITED STATES DISTRICT COURT
14 FOR THE DISTRICT OF ARIZONA 15
16 In re Apollo Group Inc. Securities Litigation, Master File No. CV-04-2147-PHX-JAT 17 CLASS ACTION 18 DEFENDANTS ' MOTION INLIMINE 19 NO.9: TO EXCLUDE THE RESTATEMENT OF SEC FILINGS 20 This Document Relates To: All Actions 21 22
23
24 25
26
27 28
Case 2:06-cv-02674- RCB Document 71-7 Filed 11 /23/2007 Page 2 of 10 1 Defendants move in limine for an order barring Plaintiff from presenting evidence or 2 argument concerning Apollo Group, Inc.'s ("Apollo") restatement of its filings
3 ("Restatements") with the Securities and Exchange Commission ("SEC"). Defendants also
4 seek to preclude Plaintiff from presenting evidence or argument relating to the reasons that 5 Apollo restated its SEC filings, primarily stock options backdating. Evidence or argument
6 relating to stock options backdating includes not only stock option backdating at Apollo, but 7 also Apollo's internal investigation into the options backdating, and the SEC's inquiry into
8 the options backdating. The Restatements include the restatement of the consolidated balance 9 sheet as of August 31, 2005, and the restated consolidated statements of income,
10 comprehensive income, shareholders' equity and cash flows for each of the fiscal years ended 11 August 31, 2005 and 2004, and the effects of the restatement on fiscal years ended August 31, 12 2002 through 2005. [Ex. 67 (Apollo 10-K filed May 22, 2007) at 31.] The Restatements also 13 include Apollo's restatement of its "consolidated statements of income, comprehensive
14 income, and cash flows for the three and six months ended February 28, 2006." [Ex. 68 15 (Apollo 10-Q/A, filed May 25, 2007) at 3.]
16 This Motion is brought on the grounds that the Restatements and the reasons for the
17 Restatements are irrelevant to this litigation and the claims brought therein, and that even if 18 such evidence were relevant, its probative value is substantially outweighed by the danger of 19 unfair prejudice and confusion of the issues. This Motion is made pursuant to Federal Rule 20 of Civil Procedure 7(b), Federal Rules of Evidence ("FRE") 401, 402, 403, 404(b) and 21 relevant case law.
22 1. INTRODUCTION 23 Defendants believe that Plaintiff may use evidence of Apollo's Restatements of its 24 SEC filings at trial. Plaintiff has made no claim as to false revenue projections in Apollo's 25
26 1 Defendants do not seek in this motion in limine to exclude reference to the restated numbers 27 found in the Restatements . In the event the Court grants this motion in limine, Defendants agree that all parties should be allowed to use the restated numbers reported by Apollo, as 28 long as the parties do not make any reference to Apollo ' s restatement of its SEC filings.
Case 2:06-cv-02674-RCB Document 71 -f Filed 11 /23/2007 Page 3 of 10 1 SEC filings, nor has it alleged that any of the figures in those filings were improper or
2 incorrect. As such, these Restatements are irrelevant, and are therefore, inadmissible. FRE 3 402. Plaintiff may also argue that the Restatements constituted evidence of scienter, but a 4 restatement alone is insufficient for an inference of scienter. Weiss v. Amkor Tech., Inc., 5 2007 U.S. Dist. LEXIS 7168.8, at *25-26 (D. Ariz. Sept. 25, 2007). Moreover, even though a
6 restatement could support a claim of scienter in a case directly concerning the original
7 statements that were restated, it would say nothing about other prior statements. Here, what 8 matters is Defendants' knowledge and intent with respect to the statements and alleged 9 omissions concerning the Wittman Report. The Restatements had nothing to do with the 10 Wittman Report. Thus, the nonexistent probative value of this evidence is substantially
11 outweighed by the prejudicial effects of the evidence. The reasons that Apollo restated its 12 SEC filings, primarily stock options backdating, are also irrelevant, and inadmissible.
13 Plaintiff will likely attempt to argue that the options backdating constituted evidence of 14 scienter, but options backdating itself offers little support for an allegation of scienter, and 15 like the Restatements, has nothing to do with the Wittman Report. See Weiss, 2007 U.S. Dist. 16 LEXIS 71688, at *26-27. As a result, this Court should grant this motion in limine and
17 exclude any argument, evidence, examination, comment or reference at trial regarding the 18 Restatements and the reasons that Apollo restated its SEC filings pursuant to FRE 401, 402, 19 403 and 404(b).
20 II. EVIDENCE OF THE RESTATEMENTS AND THE REASONS FOR THE RESTATEMENTS IS IRRELEVANT AND INADMISSIBLE 21 The Restatements are irrelevant and therefore inadmissible. FRE 401 and 402. The 22 Restatements are completely unrelated to Plaintiff's claims in this matter. Plaintiff has made 23 no allegations in this matter that any of the figures in Apollo's SEC filings, including the 24 restated filings, were improper or wrong. In fact, Plaintiff has specifically admitted with 25 respect to first quarter 2005 that "No claim has been asserted against Defendants for 26 makingfalse revenue projections. ..." and Plaintiff has asserted no claims against 27 Defendants for making false revenue projections for any time period. Plaintiffs Response 28
Case 2:06-cv-02674- RCB Document 71-72 Filed 11 /23/2007 Page 4 of 10 1 and Separate Counterstatement of Facts In Support of Opposition To Defendants' Motion for 2 Summary Judgment at 194 (emphasis added).
3 Plaintiff may attempt to argue that the Restatements are evidence of scienter, but a 4 restatement alone is insufficient for an inference of scienter. Weiss, 2007 U.S. Dist. LEXIS 5 71688, at *25-26 ("A plaintiff cannot allege scienter simply because Amkor restated its
6 financial statements."). Furthermore, as Plaintiff has made no allegations that any of the
7 figures in the filings that Apollo has since restated were incorrect, there are no allegations in
8 this case that any of the Restatements were the result of any alleged fraud. In re U.S. 9 Aggregates, Inc. Sec. Litig., 235 F. Supp. 2d 1063, 1073 (N.D. Cal. 2002) ("Plaintiff does not 10 allege that the restatement of shipping and handling charges was the result of fraud.").
11 The reasons that Apollo restated its SEC filings are also irrelevant and inadmissible.
12I FRE 401 and 402. Apollo restated its SEC filings with regards, primarily, to backdating of
13 stock option grants. [Ex. 69 (Apollo Group May 21, 2007 News Release).] Plaintiff has 14 made no allegations in this case regarding those grants or the accounting for the grants and 15 they are completely unrelated to Plaintiff's claims in this matter.
16 Furthermore, the options backdating is irrelevant as there was no wrongdoing on
17 Apollo's part. On July 3, 2007, the SEC announced that it was ending its investigation into
18 Apollo's stock option award practices and not recommending any enforcement action.
19 [Ex. 70 (July 3, 2007 AP Article Re SEC Ends Apollo Group Options Inquiry); Ex. 71 (July 20 3, 2007 Apollo Press Release).] With the assistance of outside counsel, Apollo also 21 conducted its own internal investigation into the stock options backdating. On December 14, 22 2006, Apollo discussed in a press release the results of that seven-month investigation.
23 [Ex. 72 (December 14, 2006 Apollo Press Release).] The company's own internal
24 investigation also failed to find any wrongdoing. [Id.] This lack of wrongdoing on Apollo's 25 part further supports the irrelevance of the options backdating.
26 Plaintiff might attempt to argue that the stock option grants and the backdating related 27 to those grants are evidence of scienter. The grants themselves are not sufficient evidence of
28 scienter. In re PETsMART, Inc. Secs. Litig., 61 F. Supp. 2d 982, 998-99 (D. Ariz. 1999)
Case 2:06-cv-02674- RCB Document 71 -^ Filed 11 /23/2007 Page 5 of 10 1 (finding the argument that the inflated stock price would increase "defendants' opportunities
2 for bonuses and long-term benefits linked to the company's financial performance," is clearly
3 insufficient to establish motive, and therefore, scienter); see also Acito v. IMCERA Group, 47 4 F.3d 47, 54 (2d Cir. 1995) ("Plaintiffs' allegation that defendants were motivated to defraud
5 the public because an inflated stock price would increase their compensation is without merit. 6 If scienter could be pleaded on that basis alone, virtually every company in the United States 7 that experiences a downturn in stock price could be forced to defend securities fraud
8 actions."). Furthermore, stock options backdating itself offers little support for an allegation
9 of scienter, and none here where there are no allegations relating to the options backdating. 10 See Weiss, 2007 U.S. Dist. LEXIS 71688, at *26-27 ("[T]he misapplication of accounting
11 rules to a particular company's stock option grants cannot be construed as a glaring example 12 of scienter because the measurement date criteria embodied in APB No. 25 are far from 13 obvious.").
14 In addition to the stock option grants, the Restatements were also made for a few other 15 reasons, including an increase in Apollo's allowance for doubtful accounts and Apollo's
16 conclusion that "various accounts such as cash, revenue, property and equipment, lease 17 accounting and other investments were not properly recorded in accordance with generally
18 accepted accounting principles." [Ex. 67 (Apollo 10-K filed May 22, 2007) at 3-4; see also 19 Ex. 68 (Apollo 10-Q/A, filed May 25, 2007) at 3-4.] Just as with the stock option grants, 20 Plaintiff has made no allegations regarding any of these issues, and therefore the 21 Restatements and the reasons for the Restatements are irrelevant and inadmissible.
22 To make the leap required by Plaintiff here - that requiring restatements in unrelated
23 areas shows an intent to defraud in another area - is not only illogical, but would violate the
24 central underpinnings of FRE 404. See FRE 404 (barring evidence of character or trait of 25 character). That some Apollo filings needed to be corrected says nothing about what Todd
26 Nelson and Kenda Gonzales thought concerning statements surrounding the program review. 27 28
Case 2:06-cv-02674- RCB Document 71 -i Filed 11 /23/2007 Page 6 of 10 1 III. EVEN IF THE RESTATEMENTS AND THE REASONS FOR THEM WERE RELEVANT, ANY SUCH EVIDENCE. SHOULD BE EXCLUDED 2 BECAUSE IT IS LIKELY TO RESULT IN UNFAIR PREJUDICE AND CONFUSION OF THE ISSUES 3 The danger of unfair prejudice and confusion of the issues substantially outweighs the 4 probative value of the Restatements and the reasons that Apollo restated its SEC filings. FRE 5 403. There is a danger of unfair prejudice here where Plaintiff may attempt to use the 6 evidence of the Restatements or the reasons for them to create an inference that Defendants 7 acted improperly with regards to those matters, and therefore, also acted improperly with 8 regards to the disclosure of the Wittman Report. Here, evidence of the Restatements or the 9 reasons for them is not admissible to show that because Apollo restated its SEC filings, that 10 perhaps some error was made with regards to the disclosure of the Wittman Report. To allow 11 Plaintiff to use evidence of the Restatements or the reasons for them for this purpose would 12 subject Defendants to unfair prejudice and would be directly contrary to the prohibition in 13 FRE 404. Plaintiff's use of evidence of stock options backdating would also violate FRE 403 14 because the SEC ended its investigation into the options backdating without recommending 15 an enforcement action, so any inference of wrongdoing would be prejudicial to Defendants. 16 [Ex. 70 (July 3, 2007 AP Article Re SEC Ends Apollo Group Options Inquiry); Ex. 71 (July 17 3, 2007 Apollo Press Release).] 18 There is also a danger of confusion of the issues here where the subject matter of and 19 reasons for the Restatements are not at issue in this matter. FRE 403. Plaintiff has not even 20 alleged any of the figures in the SEC filings, which were the subject of the Restatements, 21 were incorrect or improper and has asserted no claim against Defendants for false revenue 22 projections. None of the reasons for the Restatements are at issue. For example, there is 23 absolutely no connection between the disclosure of the Wittman Report and the stock options 24 backdating. Finally, if Plaintiff presents evidence of the Restatements or the reasons that 25 Apollo restated the SEC filings at trial, it will lead to undue delay and waste of time. FRE 26 403. 27
28
Case 2:06-cv-02674-RCB Document 71-^ Filed 11 /23/2007 Page 7 of 10 1 IV. CONCLUSION 2 In light of the foregoing, Defendants respectfully request that this Court grant this 3 motion in limine and preclude Plaintiff's presentation at trial of evidence or argument
4 regarding Apollo' s Restatements of its SEC filings and the reasons that Apollo restated its 5 SEC filings.
6 Dated : October 9, 2007 Respectfully submitted 7 By: /s/ Kristopher P. Diulio 8 Kristopher P. Diulio, appearing pro hac vice
9 GIBSON, DUNN & CRUTCHER LLP 10 3161 Michelson Drive Irvine , CA 92612-4412 11 Telephone : (949) 451-3800 12 OSBORN MALEDON, P.A. 13 2929 North Central Avenue, Suite 2100 Phoenix, AZ 85012-3311 14 Telephone: (602) 640-9000 15 SNELL & WILMER L.L.P. 16 One Arizona Center Phoenix, AZ 85004-2102 17 Telephone: (602)382-6070 18 Attorneys for Defendants 19 20 21
22
23 24 25
26
27
28
Case 2:06-cv-02674- RCB Document 71-Z Filed 11 /23/2007 Page 8 of 10 1 CERTIFICATE OF SERVICE
2 I hereby certify that on October 9, 2007, the attached document was electronically transmitted to the Clerk of the Court using the CM/ECF System which will send notification of such filing and 3 transmittal of a Notice of Electronic Filing to the following CM/ECF registrants: 4 5 Ramzi Abadou ramzia(a,lerachlaw.com 6 Joseph G Adams iadams([email protected] 7 Francis Joseph Balint, Jr. fbalint(2i bffb.com 8 William J. Ban wban(barrack.com 9 Jeffrey A. Barrack [email protected] 10 11 Stephen R. Basser [email protected] 12 Maureen Beyers [email protected]
13 James R. Condo [email protected]
14 Joel Philip Hoxie [email protected]
15 William S. Lerach general [email protected]
16 William J. Maledon [email protected] 17 Robert D. Mitchell robertmitchellgmitchelllaw.com 18 Mark R. Rosen [email protected] 19 David B. Rosenbaum [email protected] 20 Stephen G. Schulman sschulman(,milbergweiss.com 21 Rosemary J. Shockman RShock cr,aol.com 22 Geoffrey M. Trachtenberg [email protected] 23 Marc M. Umeda [email protected] 24 Samuel M. Ward 25 swardgbarrack.com
26 27 28
Case 2:06-cv-02674- RCB Document 71-7 Filed 11 /23/2007 Page 9 of 10 1 I further certify that copies of the foregoing were sent on October 9, 2007, via U.S. Mail to 2 the following parties:
3 Leonard Barrack 4 Barrack Rodos & Bacine 2 Commerce Sq 5 2001 Market St., Ste 3300 Philadelphia, PA 19103 6 7 Patrick Joseph Coughlin Lerach 'Coughlin Stoia Geller Rudman & Robbins LLP 8 100 Pine St 9 Ste 2600 San Francisco, CA 94111 10
11 12
13 /s/ Dena F. Kennedy 14
15
16 17 18 19
20
21 22 23
24 25
26
27 28
Case 2:06-cv-02674- RCB Document 71-7 Filed 11 /23/2007 Page 10 of 1.0 EXHIBIT F
Case 2:06-cv-02674- RCB Document 71-8 Filed 11 /23/2007 Page 1 of 11 11
2
3
4
5
6
7 IN THE UNITED STATES DISTRICT COURT 8
9 FOR THE NORTHERN DISTRICT OF CALIFORNIA
10
11 UNITED STATES OF AMERICA, No. C 06-00556-1 CRB 0. o c 12 Plaintiff, ORDER DENYING DEFENDANT'S UU 4-4 MOTION FOR A JUDGMENT OF o 13 V. ACQUITTAL 14 AA GREGORY L. REYES, 15 Defendant. c 16 z 17 On August 7, 2007, a jury convicted Defendant Gregory Reyes of all ten counts 0 charged against him in connection with stock options backdating scheme. pending W-1 18 a Now 19 before the Court is Reyes' motion for a judgment of acquittal, pursuant to Rule 29. For the
20 reasons set forth below, the motion is hereby DENIED.
21 Reyes stands convicted of engaging in a fraudulent scheme to understate the expenses
22 of Brocade Communications Systems, the public company where he formerly held the
23 position of Chief Executive Officer. Under the relevant accounting rules in effect at the time
24 of his tenure, Brocade was required to report a "compensation charge whenever it granted
25 stock options with a strike price below fair market value. The theory of this prosecution is
26 that, in order to avoid this compensation charge, Reyes and his co-conspirators "backdated
27 stock options. In other words, Brocade made it appear as though stock options had been
28 granted on an earlier day when the fair market value was much lower. Through the systematic backdating of stock options, Reyes made the options look as though they had been
2:06-cv-02674- RCB Document 71-8 Filed 11 /23/2007 Page 2 of 11 1 granted at fair market value, thereby allowing Brocade to avoid a compensation charge, when
2 in fact they were being given at a price much lower than the fair market value on the date
3 when the grants were approved.
4 That a backdating scheme existed is beyond dispute. That the scheme allowed the
5 company to understate its compensation expenses is also undisputed. As Reyes himself
6 acknowledges, "Brocade, as a company.... periodically used the benefit of hindsight to
7 price stock options to its rank-and-file employees and ... its accounting for those options had
8 to be corrected in a financial restatement. Mot. for a New Trial at 1.
9 The criminal trial thus centered around two issues, both unrelated to the question of
10 whether backdating occurred. The first issue was materiality. Do investors care about
11 backdating? Is the understatement of non-cash compensation expenses important to 0. o c 12 shareholders? Or more precisely, did the government prove, beyond a reasonable doubt that UU 4-4o 13 there is a substantial likelihood that the undisclosed compensation expenses would have been
14 important to a reasonable investor when buying or selling shares of Brocade stock? The AA 15 second issue was intent. Did Reyes possess a criminal state of mind when he approved the c 16 backdated grants? That is, did Reyes intend to hide compensation expenses and deceive z 17 shareholders by participating in the scheme? Finally, in a similar vein, there is a corollary of 0 W-1 18 the issue of intent, namely whether the relevant accounting rules were sufficiently clear in 19 their commands. Did Reyes appreciate the significance of the accounting rules? Or instead
20 are those rules so vague that it would be fundamentally unfair to hold Reyes criminally liable
21 for their transgression? As to these issues--materiality, intent, and the clarity of accounting
22 rules--Reyes claims that the case against him is insufficient to support the jury's verdict.
23 "In ruling on a Rule 29 motion, `the relevant question is whether, after viewing the
24 evidence in the light most favorable to the prosecution, any rational trier of fact could have
25 found the essential elements of the crime beyond a reasonable doubt.' United States v.
26 Alarcon-Simi, 300 F.3d 1172, 1176 (9th Cir. 2002) (quoting United States v.
27 Bahena-Cardenas, 70 F.3d 1071, 1072-73 (9th Cir. 1995)). "The test applied is the same as
28 the test for challenging the sufficiency of the evidence. United States v. Clayton, 108 F.3d
2 2:06-cv-02674-RCB Document 71-8 Filed 11 /23/2007 Page 3 of 11 1 1114, 1116 (9th Cir. 1997) (citation omitted). "In ruling on a [motion for acquittal] , a district
2 court must bear in mind that `it is the exclusive function of the jury to determine the
3 credibility of witnesses , resolve evidentiary conflicts, and draw reasonable inferences from
4 proven facts.' United States v. Rojas, 554 F.2d 938, 943 (9th Cir. 1977) (quoting United
5 States v. Nelson, 419 F.2d 1237, 1241 (9th Cir. 1969)).
6 1. Materiality
7 The Court has already addressed the issue of materiality in two written orders. The
8 first was issued in connection with the civil case and held that, at least on the evidence
9 presented in that context, Reyes had presented insufficient evidence to compel the conclusion
10 that backdating is immaterial as matter of law. See SEC v. Reyes, No. C-06-4435-CRB
11 (May 17, 2007) (order denying defendant's motion for partial summary judgment). The 0. o c 12 second was issued in the context of this case, in response to Reyes' motion for a judgment of UU 4-4o 13 acquittal, and held that the government had presented sufficient evidence in its case-in-chief
14 to send the issue of materiality to the jury. See United States v. Reyes, No. CR-06-0556- AA 15 CRB, at 4-7 (N.D. Cal. Aug. 3, 2007). c 16 In this motion, Reyes renews his argument that evidence as to the materiality of z 17 Brocade's backdating scheme was insufficient, especially in light of the evidence presented 0 W-1 18 in his defense. The Court considers the defense case not nearly so persuasive as to compel 19 reasonable doubt regarding the materiality of backdating. It is true, as Reyes has repeatedly
20 argued, and as several witnesses testified, that investors frequently disregard non-cash
21 compensation expenses, such as stock options, when trying to discern the value of a
22 company. See e.g. , RT 1847-48 (testimony of Steven Catricks); RT 3143 (testimony of
23 Jason Gold). It is also true, as many analysts noted, that Brocade's restatement of
24 compensation expenses was irrelevant to the company's fundamentals, such as its revenues
25 or sales growth. See e.g., Exs. 6006, 6007, 6010, 6014, 6015 (analyst reports). It is also true
26 that many investors continued to hold stock in companies that had disclosed "irregularities
27 in their stock option programs. See e.g. , RT 1905-08, 1911-15 (testimony of Steven
28 Catricks); RT 3153-54 (testimony of Jason Gold). All of this evidence underscores a very
3 2:06-cv-02674-RCB Document 71-8 Filed 11 /23/2007 Page 4 of 11 1 important point: stock option expenses do not say very much about the potential for a
2 company to make money, which is what investors care about most.
3 It does not follow from this evidence, however, that investors necessarily consider
4 stock option expenses immaterial. A wildly profitable company might give away no stock
5 options. It might give away stock options at fair market value (as Brocade told investors it
6 did). It might backdate stock options at less than fair market value by backdating them (as
7 Brocade actually did). It might even give away all of the company's treasury stock to its
8 employees for free. Regardless of whether or how a company granted options, it is likely
9 that many investors still would be interested in buying shares of that company for the simple
10 reason that it is wildly profitable. This does not mean that investors necessarily consider the
11 stock options program immaterial. In other words, although investors consider some 0. o c 12 information more important than non-cash compensation expenses, it does not follow that UU 4-4o 13 they consider stock options expenses unimportant.
14 None of the witnesses for the defense testified that non-cash compensation expenses AA 15 are irrelevant to investors. To the contrary, Shirley Stacy, the director of "investor relations c Z 16 at Brocade, testified that she fielded questions from investors who specifically asked about 17 the company's stock options program. RT 3534-49. For example, she stated that investors 0 W-1 18 raised questions about Brocade's decision to regrant (as opposed to reprice) "underwater 19 stock options. RT 3545-3548. She further indicated that she handled calls from investors
20 who were concerned about the incentives created by Brocade's stock options program. RT
21 3546. From this testimony, it is easy to infer that investors would have cared that Brocade
22 was concealing in-the-money grants, which were perceived by investment professionals as a
23 "a giveaway of shares that failed to align the interests of shareholders and employees. RT
24 1681 (testimony of Robert McCormick).
25 Dr. David Gulley, an expert witness for the defense, recognized that there was a
26 "statistically significant drop in Brocade's share price attributable to the company's
27 announcement that it was conducting an ongoing investigation into stock options and would
28 restate compensation expenses. RT 3386-89. This testimony also permits an inference that
4 2:06-cv-02674- RCB Document 71-8 Filed 11 /23/2007 Page 5 of 11 1 investors bought and sold shares of Brocade based on the company's non-cash compensation
2 expenses. (Dr. Gulley's "scientific opinion that this "statistically significant drop was
3 attributable to "concern about an "internal review, as opposed to concern about the
4 compensation expenses that were being internally reviewed, is not, in this Court's view,
5 sufficient to compel reasonable doubt in the minds ofjurors. RT 3382-85.)
6 "The determination [of materiality] requires delicate assessments of the inferences a
7 `reasonable shareholder' would draw from a given set of facts and the significance of those
8 inferences to him, and in the civil and criminal contexts alike, "these assessments are
9 peculiarly ones for the trier of fact. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 450
10 (1976). The Court finds nothing in the evidence presented by the defense to justify
11 withholding the issue of materiality from the jury in this case. 0. o c 12 II. Intent UU 4-4o 13 In its previous order, the Court explained why the prosecution's case-in-chief
14 contained sufficient evidence for a jury to conclude, beyond a reasonable doubt, that Reyes AA 15 acted with criminal intent. Relevant evidence included: (1) Reyes' approval of backdated c 16 grants, which included his review of paperwork showing the selection of a favorable z 17 historical price; (2) Reyes' statement that, at some point during his tenure as CEO, he 0 W-1 18 became aware that the granting of stock options carried "accounting implications, RT 2201- 19 03; (3) Reyes' receipt of an e-mail attachment containing summaries of the relevant
20 accounting rules related to stock options, Ex. 187; (4) indications that Reyes was "very, very
21 interested in possible changes to the stock options program, RT 548; (5) Reyes'
22 acknowledgment via e-mail, albeit in a distinguishable context, that it was "illegal to
23 backdate stock options, Ex. 648; RT 2080-84; (6) Reyes' statement, recounted by a human
24 resources employee whose only interaction with Reyes concerned stock option grants, that
25 "[i]t's not illegal if you don't get caught, RT 567; and (7) Reyes' acknowledgment in
26 Brocade's financial statements and representation letters that the company had recorded a
27 compensation charge for "the difference between the exercise price and the fair market value
28 at the date of grant, see e. g. , Ex. 27 at 54.
5 2:06-cv-02674- RCB Document 71-8 Filed 11 /23/2007 Page 6 of 11 1 The Court finds the evidence presented by the defense insufficient to establish
2 reasonable doubt as a matter of law. It is true that the defense presented significant evidence
3 that Reyes relied on Brocade's accounting and finance departments to handle the company's
4 books. It also demonstrated that Reyes, as CEO, was primarily occupied with concepts other
5 than accounting and spent little time scouring financial statements. RT 2631-32 (testimony
6 of Yin Cantor). But the defense case also provided additional fodder for the jury's
7 conclusion that Reyes understood the relevant accounting rules, and therefore that he acted
8 with an intent to deceive when he approved backdated options. For example, Shirley Stacy
9 testified that she participated in meetings with top Brocade executives about proposed
10 changes to the accounting rules for stock options. Stacy testified that Reyes was in
11 attendance at the meeting, where company officers received a briefing on the impact of the 0. o c 12 new accounting rules, which would have required Brocade to record a compensation charge UU 4-4o 13 based on the "fair value, as opposed to merely the "intrinsic value, of the stock options it
14 granted. RT 3588-3599, 3614-3618, 3637. AA 15 In addition, in cross-examination of an expert witness for the defense, the prosecution c 16 introduced evidence that Reyes himself was very concerned about the proposed changes. In z 17 one e-mail, for example, Reyes asks: 0 W-1 18 In your opinion. how real is the threat that this McCain/Levin bill which calls for companies to report the cost of stock options as an expense will be passed? 19 Is there anything that Brocade can be doing from a lobbying standpoint to help 20 stop this over reaction to [Enron]?
21 Ex. 1035. In subsequent communications to colleagues at Brocade, Reyes asks for assistance
22 in drafting "letters ... to our Senator and Congressman to go out under my signature in
23 order to "help to stop Congress from harming or eliminating [the] company's stock options
24 program. Ex. 1052. These communications suggest quite a bit about Reyes' state of mind.
25 They indicate his understanding that the accounting rules then applicable permitted Brocade
26 to grant options at fair market value without a compensation charge. They indicate that he
27 was opposed to a proposal that would have required compensation charges for all grants.
28 They indicate his perception of the proposal as a "threat. Ex. 1035. And they imply his
6 2:06-cv-02674-RCB Document 71-8 Filed 11 /23/2007 Page 7 of 11 1 belief that additional compensation charges would have "harm[ed] or eliminat[ed]
2 Brocade's stock options program. Ex. 1052.
3 In his motion, Reyes cites numerous cases for the proposition that acquittal is
4 warranted where "the evidence viewed in the light most favorable to the prosecution gives
5 `equal or nearly equal circumstantial support to a theory of guilt and a theory of innocence.'
6 United States v. Glenn, 312 F.3d 58, 70 (2d Cir. 2002) (quoting United States v. Lopez, 74
7 F.3d 575, 577 (5th Cir. 1996)); see also United States v. Bishop, 959 F.2d 821, 831 (9th Cir.
8 1992). His recitation of the law is correct. But the law does not require the prosecution
9 "exclude every reasonable hypothesis consistent with innocence. Bishop, 959 F.2d at 831
10 (quoting United States v. Miller, 688 F.2d 652, 663 (9th Cir. 1982)). Though it may be
11 possible to "conjure hypothetically plausible explanations of [a defendant's] behavior that are 0. o c 12 consistent with innocence, United States v. Mares, 940 F.2d 455, 460 (9th Cir.1991), a UU 4-4o 13 hypothetical explanation "does not justify disturbing a jury verdict to the contrary, Bishop,
14 959 F.2d at 832. Here, in the Court's view, the evidence at trial was sufficient to support the AA 15 jury's finding of criminal intent. c 16 III. "Ambiguity" of APB 25 z 17 Reyes has argued throughout these proceedings that APB 25--the Accounting Board 0 W-1 18 Principles opinion requiring companies to record a compensation charge for the "intrinsic 19 value of the stock options it grants--is vague and ambiguous. He observes that there was a
20 "diversity of practice among accounting experts about how to apply the rule. RT 2872-73;
21 Ex. 4012. He notes that certain accounting authorities, including the SEC itself, issued
22 additional guidance to clarify some types of confusion about what he perceives as an unclear
23 and obscure accounting provision. RT 2867-69, 2879-82; Exs. 3805, 3185. And he notes
24 that numerous public companies have recently restated their stock option expenses due to
25 "misapplication of the rule. RT 2882-87. Reyes attributes these restatements to the
26 complexity and lack of clarity of APB 25. He argues that criminal liability cannot be based
27 upon the violation of so vague a rule, noting that the law must "give[] a person of ordinary
28
7 2:06-cv-02674- RCB Document 71-8 Filed 11 /23/2007 Page 8 of 11 1 intelligence fair notice that his contemplated conduct is forbidden by the statute. Mot. for J.
2 of Acquittal at 19 (quoting United States v. Harriss, 347 U.S. 612, 617 (1954)).
3 The Court previously addressed this contention in the context of a motion to dismiss.
4 In a written order, the Court disagreed with Reyes' description of APB 25 as vague and
5 ambiguous. It stated: "The goal of APB 25 is straightforward: it requires companies to
6 record the "intrinsic value of an option at the time it is granted. In other words, if an
7 in-the-money option is granted, then APB 25 requires a company to record as compensation
8 the amount by which the market price exceeds the strike price. United States v. Reyes, No.
9 CR-06-0556-CRB, at 5 (N.D. Cal. May 30, 3007) (unpublished order denying motion to
10 dismiss indictment). The Court noted that certain aspects of the opinion might have been
11 unclear at the time of Reyes' tenure at Brocade--for instance, "whether the value of [a] stock 0. o c 12 option should be calculated based on the date of the interview, or the offer, or the acceptance, UU 4-4o 13 or another event. Id. But the Court rejected the notion that APB 25 could be reasonably
14 construed so as to permit the deliberate selection of an historical date in order to make stock AA 15 options appear to have been given at a lower fair market value. c Z 16 The Court reserved making any judgment, however, about how the alleged backdating 17 scheme at Brocade had run afoul of APB 25, whether due to the rule's ambiguity or for some 0 W-1 18 other, less innocent reason. The Court concluded that such a determination was not possible 19 "without a trial of the general issue. Id. at 7. The Court noted, however, that Reyes would
20 be free to "renew his attack upon the government's case ... if the evidence presented at trial
21 would not allow a jury to find beyond a reasonable doubt ... that [he] received adequate
22 guidance from APB 25. Id. Defendant here renews his attack. The Court now rejects it.
23 None of the evidence introduced in the defense case suggests that APB 25 is so fuzzy
24 as to permit the retrospective selection of a favorable historical stock price. The "diversity of
25 practice that may have existed, and still may exist, in the application of APB 25 relates to
26 different complexities, such as whether a grant recipient is or when he becomes an eligible
27 "employee, whether a stock option plan qualifies as "noncompensatory, how to account for
28 "modifications to previous grants, and how to account for awards in the context of "business
8 2:06-cv-02674-RCB Document 71-8 Filed 11 /23/2007 Page 9 of 11 1 combinations, such as subsidiaries. See Ex. 3082. Similarly, the supplemental guidance
2 issued by the Financial Accounting Standards Board had nothing to do with clarifying
3 whether backdating was permissible. See Ex. 3802. Likewise, the revised rules set forth in
4 FAS 123 had little to do with "confusion about the application of APB 25, and more to do
5 with the criticism that a stock option's "intrinsic value does not "faithfully represent the
6 economic transactions affecting the issuer. Ex. 3805. Finally, the recent letter expressing
7 "only the views of the Office of the Chief Accountant give no indication that APB 25 was
8 unclear on the question of backdating. The letter dedicates only one paragraph on the
9 question of backdating and indicates that the practice is impermissible. By contrast, it
10 dedicates ten pages to other issues, including lags in options paperwork and how to account
11 for previous accounting errors. Ex. 3185. 0. o c 12 As the Court previously stated: "Whatever ambiguity may exist in APB 25, it is not UU 4-4o 13 possible to construe the rule's language as permitting the deliberate retroactive selection of a
14 particular grant date and the intentional concealment of the date on which that retroactive AA 15 selection was made. If APB 25 precludes anything, it prohibits companies from deliberately c 16 choosing a strike price based on a favorable historical date and then, even under z 17 circumstances where the intrinsic value of the grant is clear, pretending that the option was 0 W-1 18 granted earlier than it actually was. Id. at 6. That is precisely the scheme proven by the 19 government at trial. The nature of the scheme at Brocade was clear from evidence such as
20 the so-called "beer truck memo, in which human resources personnel explained the process
21 by which the most favorable historical prices were selected, and the option paperwork then
22 prepared to reflect that earlier date. See Ex. 196. Indeed, it is nearly beyond dispute that
23 Brocade's human resources department systematically looked back at the performance of the
24 company's stock and chose a grant date, then approved by Reyes, solely for the reason that it
25 provided the recipient with a favorable strike price. The only reasonable construction of
26 APB 25 is that it prohibits such a practice. To read the rule otherwise would render it utterly
27 meaningless; there would be no purpose to requiring a compensation charge for in-the-money
28
9 2:06-cv-02674- RCB Document 71-8 Filed 11 /23/2007 Page 10 of 11 1 options if companies could avoid the charge, and thereby confer in-the-money options,
2 simply by backdating a document.
3 CONCLUSION
4 As to Reyes' conviction on all of the ten counts charged, the Court concludes that,
5 "viewing the evidence in the light most favorable to the prosecution, the jury "`could have
6 found the essential elements of the crime[s] beyond a reasonable doubt.' Alarcon-Simi , 300
7 F.3d at 1176 (quoting Bahena-Cardenas, 70 F.3d at 1072-73). Accordingly, Reyes' motion
8 for a judgment of acquittal pursuant to Rule 29 is DENIED.
9 IT IS SO ORDERED.
10
11 0. eAf'^^^ o c 12 Dated: August 27, 2007 CHARLES R. BREYER UU UNITED STATES DISTRICT JUDGE 4-4o 13
14 AA 15 c 16 zo 17
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G:\CRBALL\2006\0556cr\order re motion for acquittal 2.wpd 10 ,ase 2:06-cv-02674-RCB Document 71-8 Filed 11/23/2007 Page 11 of 11 EXHIBIT G
Case 2:06-cv-02674-RCB Document 71-9 Filed 11/23/2007 Page 1 of 7 Appolo Group, Inc. Insider Sales: 11/28/01 - 10/18/06
Last Name First Name Date Shares Price Proceeds BACHUS DANIEL 4/3/2002 8,888 $29.58 $262,974 3/28/2003 3,000 $43.88 $131,636 4/9/2003 3,666 $44.37 $162,673 7/31/2003 5,000 $65.49 $327,450 1/4/2005 5,200 $83.10 $432,104 1/12/2005 4,800 $83.00 $398,400 30,554 $1 ,715,237
BLAIR JOHN 4/1/2002 3,555 $30.44 $108,213 4/1/2002 1,518 $35.09 $53,272 7/29/2002 4,000 $38.70 $154,800 10/14/2002 3,000 $31.90 $95,700 1/2/2003 3,000 $36.65 $109,947 3/31/2003 5,000 $49.29 $246,458 3/31/2003 2,000 $41.97 $83,933 4/23/2003 4,000 $55.92 $223,695 7/2/2003 5,000 $63.50 $317,500 10/13/2003 2,000 $66.55 $133,101 10/13/2003 2,000 $72.12 $144,231 1/5/2004 4,000 $69.98 $279,915 1/13/2004 1,334 $77.60 $103,518 10/25/2004 2,375 $71.30 $169,338 10/25/2004 2,153 $71.30 $153,509 1/3/2005 4,000 $80.82 $323,290 4/5/2005 5,000 $75.94 $379,720 7/1/2005 6,250 $78.48 $490,480 60,185 $3 ,570,619
DECONCINI DINO 7/8/2002 35,000 $38.42 $1,344,574 7/9/2002 30,375 $38.51 $1,169,811 7/9/2002 9,280 $38.51 $357,394 7/9/2002 956 $38.51 $36,818 7/2/2003 15,000 $64.66 $969,900 12/29/2003 3,000 $70.00 $210,000 1/6/2004 3,000 $75.47 $226,395 1/9/2004 2,000 $76.00 $152,000 1/15/2004 2,000 $78.00 $156,000 10/26/2004 1,450 $67.08 $97,266 4/29/2005 10,000 $72.15 $721,500 12/30/2005 2,954 $60.47 $178,614 12/30/2005 596 $60.46 $36,034 115,611 $5,656,306
GONZALES KENDA 4/10/2002 44,445 $30.38 $1,350,360 4/11/2002 4,444 $29.96 $133,153 4/12/2002 4,444 $29.69 $131,953 4/15/2002 28,889 $30.21 $872,747
Case 2:06-cv-02674-RCB Document 71-9 Filed 11/23/2007 Page 2 of 7 4/17/2002 6,667 $30.96 $206,445 3/28/2003 4,130 $43.60 $180,058 3/31/2003 870 $42.81 $37,248 4/3/2003 2,500 $43.45 $108,637 7/14/2003 6,500 $56.41 $366,676 7/15/2003 12,800 $56.24 $719,935 7/17/2003 4,800 $55.66 $267,186 7/18/2003 8,900 $55.42 $493,250 7/23/2003 7,000 $55.74 $390,209 136,389 $5 ,257,858
GOVENAR HEDY 4/18/2002 68,343 $38.21 $2,611,612 1/7/2005 5,000 $81.15 $405,750 1/10/2005 2,500 $82.10 $205,251 1/11/2005 2,500 $82.13 $205,320 78,343 $3,427,933
NELSON TODD 12/21/2001 26,667 $26.92 $718,000 12/26/2001 13,333 $25.05 $334,000 12/27/2001 6,667 $25.44 $169,625 12/28/2001 20,000 $25.52 $510,375 1/4/2002 6,667 $25.31 $168,750 1/7/2002 13,333 $24.76 $330,150 1/8/2002 6,667 $25.61 $170,750 1/9/2002 40,000 $26.14 $1,045,650 4/1/2002 8,889 $30.44 $270,614 4/2/2002 17,777 $30.03 $533,987 4/3/2002 56,247 $34.20 $1,923,647 4/3/2002 8,889 $29.58 $263,013 4/8/2002 35,556 $30.03 $1,068,013 4/9/2002 4,444 $29.52 $131,187 4/15/2002 13,333 $30.21 $402,800 4/23/2002 8,889 $30.93 $275,014 4/24/2002 44,033 $31.65 $1,393,655 4/25/2002 35,965 $32.35 $1,163,658 6/28/2002 11,000 $29.43 $323,676 7/1/2002 10,000 $29.15 $291,502 7/2/2002 3,500 $28.71 $100,500 7/5/2002 2,500 $27.95 $69,883 7/8/2002 21,300 $28.37 $604,221 7/9/2002 3,700 $28.28 $104,623 7/10/2002 15,000 $28.13 $421,947 7/11/2002 5,000 $28.00 $140,000 7/29/2002 28,000 $25.84 $723,649 10/11/2002 100,000 $31.62 $3,162,300 10/11/2002 84,999 $43.04 $3,658,586 10/11/2002 75,001 $43.04 $3,228,246 10/14/2002 90,000 $44.05 $3,964,752 10/14/2002 35,000 $31.87 $1,115,335 10/15/2002 50,000 $45.52 $2,275,975 10/15/2002 30,000 $33.46 $1,003,713
Case 2:06-cv-02674-RCB Document 71-9 Filed 11/23/2007 Page 3 of 7 10/16/2002 18,500 $32.49 $601,156 11/29/2002 112,500 $44.79 $5,038,560 11/29/2002 12,500 $44.79 $559,840 12/23/2002 75,000 $35.57 $2,667,398 12/24/2002 100,000 $44.68 $4,467,810 12/24/2002 77,500 $35.60 $2,759,194 12/26/2002 22,500 $35.90 $807,732 3/28/2003 4,130 $43.60 $180,058 3/31/2003 15,870 $42.61 $676,164 4/1/2003 22,797 $43.32 $987,671 4/2/2003 18,000 $44.52 $801,446 10/10/2003 74,000 $65.76 $4,866,521 10/10/2003 40,000 $70.69 $2,827,744 10/13/2003 38,500 $66.40 $2,556,435 10/13/2003 38,286 $66.40 $2,542,225 10/13/2003 35,586 $66.40 $2,362,942 10/13/2003 20,500 $71.92 $1,474,393 10/14/2003 45,936 $65.64 $3,015,074 10/14/2003 15,400 $70.38 $1,083,777 10/22/2003 18,478 $64.11 $1,184,676 10/22/2003 150 $64.11 $9,617 10/22/2003 1 $64.11 $64 10/27/2003 25,000 $68.90 $1,722,620 10/28/2003 7,433 $68.60 $509,876 10/28/2003 6,334 $68.60 $434,489 10/29/2003 25,000 $70.10 $1,752,505 10/30/2003 25,000 $70.01 $1,750,165 11/3/2003 35,333 $70.52 $2,491,591 11/4/2003 8,333 $71.50 $595,775 1,870,925 $82,789,312
NOONE LAURA 1/28/2003 6,000 $33.98 $203,879 7/2/2003 5,595 $64.96 $363,462 4/6/2005 10,000 $75.65 $756,500 7/13/2005 5,000 $74.15 $370,757 7/14/2005 2,500 $74.01 $185,025 7/15/2005 2,500 $74.28 $185,710 12/22/2005 144,259 $61.96 $8,937,913 12/22/2005 25,000 $62.10 $1,552,500 12/22/2005 22,500 $62.05 $1,396,150 12/22/2005 22,500 $62.01 $1,395,126 245,854 $15,347,022
NORTON JOHN 7/10/2002 6,700 $38.99 $261,233 7/10/2002 3,300 $38.98 $128,634 7/11/2002 10,000 $39.00 $390,039 7/29/2002 20,000 $38.98 $779,600 7/30/2002 45,562 $39.08 $1,780,563 7/30/2002 5,562 $39.08 $217,363 7/31/2002 15,562 $39.28 $611,275 10/14/2002 10,000 $44.58 $445,800
Case 2:06-cv-02674-RCB Document 71-9 Filed 11/23/2007 Page 4 of 7 10/15/2002 20,000 $45.57 $911,300 10/17/2002 10,000 $45.84 $458,400 10/21/2002 2,000 $45.83 $91,660 1/6/2003 10,000 $45.96 $459,550 4/2/2003 10,000 $51.97 $519,700 4/14/2003 13,562 $52.49 $711,899 1/6/2004 2,250 $70.98 $159,705 184,498 $7,926,722
SPERLING JOHN 12/21/2001 198,750 $30.33 $6,028,750 12/24/2001 63,750 $30.33 $1,933,750 12/26/2001 112,500 $30.22 $3,400,500 12/26/2001 37,500 $30.00 $1,125,000 12/27/2001 37,500 $30.56 $1,146,250 12/28/2001 51,750 $30.15 $1,560,501 12/31/2001 30,000 $29.96 $898,850 4/1/2002 168,750 $35.09 $5,921,994 4/2/2002 112,500 $35.12 $3,951,000 4/3/2002 281,250 $34.20 $9,618,750 6/28/2002 65,000 $39.44 $2,563,867 7/1/2002 93,750 $39.31 $3,685,266 7/2/2002 61,000 $39.11 $2,385,466 7/3/2002 15,250 $38.40 $585,614 7/3/2002 15,000 $38.88 $583,175 10/11/2002 160,000 $43.04 $6,886,832 10/14/2002 70,000 $43.64 $3,054,653 10/15/2002 45,000 $45.36 $2,041,155 10/16/2002 225,000 $45.03 $10,130,940 11/4/2002 213,150 $38.11 $8,123,147 11/5/2002 217,563 $40.82 $8,880,922 12/23/2002 70,000 $44.59 $3,121,216 12/23/2002 50,000 $44.59 $2,229,440 12/24/2002 200,000 $44.65 $8,930,940 3/28/2003 175,000 $50.01 $8,751,750 6/26/2003 160,000 $62.43 $9,988,640 6/27/2003 90,000 $62.17 $5,595,264 10/14/2003 25,000 $65.28 $1,632,073 10/23/2003 75,000 $64.19 $4,814,205 10/23/2003 18,983 $64.29 $1,220,484 10/28/2003 25,000 $63.61 $1,590,263 10/29/2003 25,000 $64.48 $1,612,120 10/30/2003 81,017 $64.22 $5,203,041 1/7/2004 175,000 $71.69 $12,545,418 1/8/2004 75,000 $71.46 $5,359,380 3,519,962 $157, 100,612
SPERLING PETER 1/24/2002 22,500 $29.40 $661,500 1/25/2002 180,000 $29.30 $5,273,556 1/25/2002 7,500 $29.36 $220,200 1/28/2002 105,000 $29.45 $3,092,803 1/29/2002 15,000 $30.13 $452,000 1/30/2002 45,000 $29.47 $1,326,201
Case 2:06-cv-02674-RCB Document 71-9 Filed 11/23/2007 Page 5 of 7 4/1/2002 457,875 $35.09 $16,068,345 4/2/2002 371,250 $35.12 $13,038,300 4/3/2002 295,875 $34.20 $10,118,925 4/4/2002 450,000 $34.72 $15,627,015 4/5/2002 112,500 $34.10 $3,837,004 4/8/2002 562,500 $36.32 $20,430,000 6/28/2002 65,000 $39.44 $2,563,867 7/1/2002 93,750 $39.31 $3,685,266 7/2/2002 61,000 $39.11 $2,385,466 7/3/2002 15,000 $39.00 $585,050 7/5/2002 90,250 $39.07 $3,526,167 7/8/2002 75,000 $39.02 $2,926,598 7/9/2002 62,000 $38.84 $2,408,229 7/10/2002 187,000 $38.84 $7,263,454 7/11/2002 50,000 $38.83 $1,941,615 7/18/2002 700,600 $34.55 $24,205,730 7/26/2002 7,500 $36.71 $275,361 7/29/2002 293,500 $38.36 $11,259,658 10/11/2002 160,000 $43.04 $6,886,832 10/14/2002 270,000 $43.64 $11,782,233 10/15/2002 120,000 $45.36 $5,443,080 10/16/2002 200,000 $45.03 $9,005,280 10/17/2002 250,000 $44.79 $11,198,125 12/23/2002 253,000 $44.59 $11,280,966 12/24/2002 247,000 $44.61 $11,017,484 12/26/2002 300,000 $44.95 $13,484,790 12/27/2002 16,900 $44.68 $755,092 12/30/2002 8,100 $44.77 $362,637 1/2/2003 100,000 $45.19 $4,519,360 1/3/2003 75,000 $45.49 $3,411,975 3/28/2003 500,000 $51.00 $25,498,250 4/3/2003 125,000 $50.69 $6,335,738 6/26/2003 325,000 $62.43 $20,289,425 6/27/2003 321,428 $62.17 $19,983,050 6/30/2003 203,572 $62.28 $12,678,953 7/1/2003 150,000 $62.01 $9,300,975 10/10/2003 78,726 $65.73 $5,174,668 10/13/2003 69,714 $66.42 $4,630,599 10/14/2003 53,442 $65.68 $3,509,884 10/28/2003 148,118 $63.42 $9,393,644 10/29/2003 33,045 $64.48 $2,130,900 10/30/2003 116,955 $64.22 $7,511,037 12/23/2003 250,000 $68.33 $17,083,225 12/24/2003 175,000 $68.76 $12,033,595 12/26/2003 75,000 $68.43 $5,132,213 12/29/2003 275,000 $68.44 $18,819,790 12/30/2003 225,000 $67.71 $15,233,783 1/5/2004 194,300 $70.44 $13,686,822 1/6/2004 55,700 $70.82 $3,944,674 12/29/2004 42,000 $81.32 $3,415,625 7/1/2005 50,578 $78.51 $3,970,874 7/6/2005 6,908 $77.23 $533,506
Case 2:06-cv-02674- RCB Document 71-9 Filed 11/23/2007 Page 6 of 7 7/27/2005 72,122 $73.65 $5,311,641 7/28/2005 60,000 $75.67 $4,540,470 9,932,207 $472,463,500
Case 2:06-cv-02674-RCB Document 71-9 Filed 11/23/2007 Page 7 of 7