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]
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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