Middlesex County Retirement System et al v. Semtech Corp. et al

MEMORANDUM in Opposition to MOTION to Dismiss Case of Plaintiff Mississippi Public Employees' Retirement System as to Defendant John Baumann 57 , MOTION to Dismiss Case Consolidated Amended Class Action Complaint 56 , MOTION to Dismiss Case 62

C.D. Cal.October 6, 2008

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFFS’ OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) KREINDLER & KREINDLER LLP Mark Labaton (#159555) 707 Wilshire Boulevard Los Angeles, California 90017 Telephone: (213) 622-6469 Facsimile: (213) 622-6019 Local and Liaison Counsel for Plaintiff and the Class CAULEY BOWMAN CARNEY & WILLIAMS, PLLC J. Allen Carney Randall K. Pulliam Bart Dalton (#187930) 11311 Arcade Dr., Suite 200 Little Rock, Arkansas 72212 Telephone: (501) 312-8500 Facsimile: (501) 312-8505 BARON & BUDD, P.C. Russell Budd Burton LeBlanc 3102 Oak Lawn Avenue, Suite 1100 Dallas, Texas 75219 Telephone: (214) 521-3605 Facsimile: (214) 520-1181 Lead Counsel for Lead Plaintiff LABATON SUCHAROW LLP Jonathan Gardner 140 Broadway New York, New York 10005 Telephone: (212) 907-0700 Facsimile: (212) 818-0477 Counsel for Lead Plaintiff UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA IN RE: SEMTECH CORPORATION SECURITIES LITIGATION ) ) ) ) ) ) ) Civil Action No.: 2:07-CV-07114- CAS (FMOX) Date: December 8, 2008 Time: 10:00 a.m. Ctrm: 5 Judge: Hon. Christina A. Snyder ------------------) LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 1 of 70 i 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) TABLE OF CONTENTS I. INTRODUCTION...........................................................................................1 II. STATEMENT OF FACTS..............................................................................2 A. Background...............................................................................................2 B. Semtech’s Stock Option Plans .................................................................3 C. Semtech’s Accounting For Stock Option Grants .....................................3 D. Individual Defendants Received Backdated Options...............................4 E. The False And Misleading Financial Statements.....................................5 F. Revelation of the Fraudulent Scheme ......................................................6 G. Semtech’s Restatement.............................................................................7 H. Confidential Witness’ Account ................................................................9 I. Professor Lie’s Statistical Analysis..........................................................9 J. The Individual Defendants Benefit From Stock Sales ...........................10 III. ARGUMENT ................................................................................................10 A. The Complaint States a Claim Under Section 10(b) of the Exchange Act Against Each of the Defendants .....................................10 1. Lead Plaintiffs Have Adequately Alleged Defendants’ Scienter......11 (a) Legal Standard ..........................................................................11 (b) Backdating Is An Intentional Act Which By Itself Strongly Infers the Backdater’s Scienter ..................................13 (c) Statistical Data Confirms Beyond Any Doubt That Semtech’s Option “Grant Dates” Were Selected Randomly..................................................................................15 (d) Semtech Admitted That its Employees Intentionally Backed Option Grants .........................................18 (e) Lead Plaintiffs Have Adequately Alleged the Scienter of Each Individual Defendant.....................................20 (i) Defendant Poe Acted With Scienter ..................................20 (ii) Defendant Franz Acted With Scienter...............................22 (iii) Defendant Baumann Acted With Scienter.........................25 Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 2 of 70 ii 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) (iv) Defendants Carlson and Maheswaran Acted With Scienter ..............................................................................27 (v) Defendant Semtech Acted With Scienter ..........................28 (vi) Defendant Poe, Franz and Baumann’s Class Period Stock Sales Further Support The Already Strong Inferences of Their Scienter...............................................28 (f) Lead Plaintiff Does Not Rely Solely On Semtech’s Restatement or GAAP Violations To Establish Scienter .....................................................................................30 (g) Lead Plaintiff’s Allegations of Scienter Are Not Based Solely On, But Are Supported By, Defendants’ Positions ...............................................................32 (i) The Fact Defendants Signed the Allegedly False and Misleading Statements Supports Scienter .........................35 2. The Complaint Adequately Alleges Loss Causation Against All Defendants...................................................................................36 (a) The Relevant Pleading Standard ..............................................36 (b) At Least “Some Indication” of Causation is Pled ....................36 3. The Complaint’s Loss Causation Allegations Satisfy Dura .............38 (a) Defendants’ Other Arguments are Meritless............................41 (b) The Reaction of Semtech’s Stock Price to Disclosures About the Restatement Confirms Loss Causation For the Earlier Drops ...............................................43 4. Lead Plaintiff Sufficiently Alleges Reliance.....................................44 (a) Lead Plaintiff Has Sufficiently Plead Market Efficiency..................................................................................44 B. Lead Plaintiff Has Standing to Pursue this Securities Class Action ......47 1. Lead Plaintiff’s Claims are Direct in Nature.....................................48 (a) The Class Suffered the Harm....................................................48 (b) The Class Will Receive the Benefit of Any Recovery ...................................................................................51 2. Direct and Derivative Actions are not Mutually Exclusive ..............52 C. Lead Plaintiff’s Claims Are Timely .......................................................53 1. The Claims Were Brought Within the Two-Year Period Provided by 28 U.S.C. § 1658(b)(1) ................................................53 Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 3 of 70 iii 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) 2. The Claims Were Brought Within the Five-Year Period Provided by 28 U.S.C. § 1658(b)(2) .................................................56 D. The Complaint States Control Person Liability Against Each Individual Defendant ..............................................................................58 IV. CONCLUSION .............................................................................................59 Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 4 of 70 iv 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) TABLE OF AUTHORITIES CASES In re 2TheMart.Com, Inc. Sec. Litig., 114 F. Supp. 2d 955 (C.D. Cal. 2000)..........................................................45, 46 In re Accredo Health, Inc. Sec. Litig. No. 03-2216 DP, 2006 WL 1716910 (W.D. Tenn. Apr. 19, 2006) ................... 46 In re Adaptive Broadband Sec. Litig., No. C 01-1092 SC, 2002 WL 989478 (N.D. Cal. Apr. 2, 2002) ...........22, 24, 25 In re Apple Computer, Inc. Sec. Litig. 243 F. Supp. 2d 1012, 1023 (N.D. Cal. 2002) ................................................... 28 Basic Inc. v. Levinson, 485 U.S. 224 (1988) .....................................................................................44, 45 Batwin v. Occam Networks, Inc., No. 07-2750, 2008 WL 2676364 (C.D. Cal. July 1, 2008)..............12, 31, 44, 58 Berson v. Applied Signal Tech., Inc., 527 F.3d 982 (9th Cir. 2008) ..................................................................11, 33, 34 Betz v. Trainer Wortham & Co., Inc., 519 F.3d 863 (9th Cir. 2008) ........................................................................54, 55 Binder v. Gillespie, 184 F.3d 1059 (9th Cir. 1999)............................................................................ 45 In re Bradley Pharms. Sec. Litig., 421 F. Supp. 2d, 822 (D.N.J. 2006).................................................................... 40 In re Bristol-Myers Squibb Sec. Litig., No. 00-1990, 2005 U.S. Dist. LEXIS 18448 (D.N.J. Aug. 17, 2005) ............... 44 In re Brooks Automation, Inc. Sec. Litig., No. 06-11068-RWZ, 2007 WL 4754051 (D. Mass. Nov. 6, 2007) .............50, 52 Cammer v. Bloom, 711 F. Supp. 1264 (D.N.J. 1989): (1).....................................................45, 46, 47 Chu v. Sabratek Corp., 100 F. Supp. 2d 815 (N.D. Ill. 2000).................................................................. 45 In re Comverse Tech., Inc. Sec. Litig., 543 F. Supp. 2d 134 (E.D.N.Y. 2008)................................................................ 57 In re Credit Suisse-AOL Sec. Litig., 465 F. Supp. 2d 34 (D. Mass. 2006)................................................................... 44 Cromer Fin. Ltd. v. Berger, No. 00-2284, 2003 WL 21436164 (S.D.N.Y. June 23, 2003) ........................... 42 Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 5 of 70 v 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) In re Daou Sys. Inc., 411 F.3d 1006 (9th Cir. 2005).....................................................................passim Dura Pharms. v. Broudo, 544 U.S. 336 (2005) ...............................................................................36, 38, 41 Durning v. Citibank, Int'l, 990 F.2d 1133 (9th Cir. 1993)......................................................................56, 57 Falkowski v. Imation Corp., 309 F.3d 1123 (9th Cir. 2002)............................................................................ 57 Feder v. Elec. Data Sys. Corp., 429 F.3d 125 (5th Cir. 2005) .............................................................................. 42 In re First Chicago Corp. Sec. Litig., 769 F. Supp. 1444 (N.D. Ill. 1991)..................................................................... 50 Garfinkel v. Memory Metals, Inc., 695 F. Supp. 1397 (D. Conn. 1988) ................................................................... 42 In re Gilead Scis. Sec. Litig., No. 06-16185, 2008 WL 3271039 (9th Cir. Aug. 11, 2008)..................37, 38, 41 In re Hansen Natural Corp. Sec. Litig., 527 F. Supp. 2d 1142 (C.D. Cal. 2007).............................................................. 16 Hayes v. Gross, 982 F.2d 104 (3d Cir. 1992) ...................................................................46, 49, 50 Howard v. Everex, 228 F.3d 1057 (9th Cir. 2000)..........................................................26, 35, 58, 59 Huynh v. Chase Manhattan Bank, 465 F.3d 992 (9th Cir. 2006) .............................................................................. 54 In re Int'l Rectifier Corp. Sec. Litig., No. 97-2544, 2008 U.S. Dist. LEXIS 44872 (C.D. Cal. May 23, 2008) ........... 28 Jablon v. Dean Witter & Co., 614 F.2d 677 (9th Cir. 1980) .............................................................................. 54 In re Juniper Networks, Inc. Sec. Litig., 542 F. Supp. 2d 1037 (N.D. Cal. 2008) ......................................................passim Kramer v. W. Pac. Indus., Inc., 546 A.2d 348 (Del. 1988)................................................................................... 51 Kronfeld v. Trans World Airlines, Inc., 104 F.R.D. 50 (S.D.N.Y. 1984).......................................................................... 42 In re LDK Solar Sec. Litig., No. 07-5182, 2008 U.S. Dist. LEXIS 42425 (N.D. Cal. May 29, 2008) .....33, 34 Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 6 of 70 vi 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Lapidus v. Hecht, 232 F.3d 679 (9th Cir. 2000) .............................................................................. 48 Levine v. SkyMall, Inc., No. 99-166, 2002 WL 31056919 (D. Ariz. May 24, 2002) ............................... 46 Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702 (7th Cir. 2008) ................................................................................ 9 In re Maxim Integrated Prods., Inc., No. 06-3344, 2008 WL 4061075 (N.D. Cal. Aug. 27, 2008) ............................ 57 In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248 (N.D. Cal. 2000) .....................................22, 23, 24, 25, 31 Middlesex Retirement Sys. v. Quest Software Inc., 527 F. Supp. 2d 1164 (C.D. Cal. 2007).......................................................passim Miller v. NTN Commc’ns, Inc., No. 97-CV-1116 TW JAH, 1999 WL 817217 (S.D. Cal. May 21, 1999) ......... 46 In re Monster Worldwide, Inc. Sec. Litig., 549 F. Supp. 2d 578 (S.D.N.Y. 2008) ................................................................ 14 In re Monster Worldwide, Inc. Sec. Litig,, No. 07 Civ. 2237 (JSR), 2008 WL 623339 (S.D.N.Y. Mar. 4, 2008) .........50, 52 No. 84 Employer-Teamster Joint Council Pension Trust Fund v. America West Holding Corp., 320 F.3d 920 (9th Cir. 2003) ..................................................................10, 33, 34 In re Nortel Networks Corp. Sec. Litig., No. 01 Civ. 1855, 2003 WL 22077464 (S.D.N.Y. Sept. 8, 2003) ..................... 42 In re Northpoint Commc'ns Group, Inc., Sec. Litig., 221 F. Supp. 2d 1090 (N.D. Cal. 2002) .......................................................33, 34 In re Openwave Sys. Sec. Litig., 528 F. Supp. 2d 236 (S.D.N.Y. 2007) ..............................................40, 50, 51, 52 In re Openwave Sys., Inc. S’holder Derivative Litig., No. C 06-03468 SI, 2008 WL 410259 (N.D. Cal. Feb. 12, 2008) ..................... 52 In re PMC-Sierra, Inc. Derivative Litig., No. 06-5530, 2007 WL 2427980 (N.D. Cal. Aug. 22, 2007) ............................ 14 In re PainCare Holdings Sec Litig., 541 F. Supp. 2d 1283 (M.D. Fla. 2008) ............................................................. 50 In re Parmalat Sec. Litig., 376 F. Supp. 2d 472 (S.D.N.Y. 2005) ................................................................ 45 In re Peerless Sys. Corp. Sec. Litig., 182 F. Supp. 2d 982 (S.D. Cal. 2002) ................................................................ 23 Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 7 of 70 vii 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Quintana v. Baca, 233 F.R.D. 562 (C.D. Cal. 2005) ......................................................................... 6 RMED Int'l, Inc. v. Sloan's Supermarkets, Inc., 185 F. Supp. 2d 389 (S.D.N.Y. 2002) ................................................................ 46 Rudolph v. UTStarcom, 560 F. Supp. 2d 880 (N.D. Cal. 2008)................................................................ 37 Rudolph v. UTStarcom, No. 07-04578, 2008 WL 4002855 (N.D. Cal. Aug. 21, 2008) ........10, 37, 38, 41 SEC v. Levin, 232 F.R.D. 619 (C.D. Cal. 2005) ......................................................................... 6 In re Salomon Analyst Metromedia Sec. Litig., 236 F.R.D. 208 (S.D.N.Y. 2006)........................................................................ 42 In re Scholastic Corp. Sec. Litig., 252 F.3d 63 (2d Cir. 2001) ................................................................................. 17 Schuster v. Gardner, 127 Cal. App. 4th 305 (2005)............................................................................. 53 In re Seitel Inc. Litig., 447 F. Supp. 2d 693 (S.D. Tex. 2006)................................................................ 43 South Ferry LP #2 v. Killinger, No. 06-35511, 2008 WL 4138237 (9th Cir. Sept. 9, 2008) ...................12. 30, 33 Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761 (2008) ...................................................................................26, 27 Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007) ................................................................................passim Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004)................................................................................. 48 In re USA Talks.com Sec. Litig., No. 99-CV-0162-L (JA), 2000 WL 1887516 (S.D. Cal. Sept 14, 2000) ........... 44 United States v. Reyes, No. 06-556, 2007 WL 2462147 (N.D. Cal. Aug. 29, 2007) .............................. 14 In re UnitedHealth Group PSLRA Litig., No. 06-CV-1691, 2007 WL 1621456 (D. Minn. June 4, 2007)........13, 40, 50 52 In re Unumprovident Corp. Sec. Litig., 396 F. Supp. 2d 858 (E.D. Tenn. 2005) ............................................................. 54 Weiss v. Amkor Technology, Inc., 527 F. Supp. 2d 938 (D. Ariz. 2007).................................................................. 19 Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 8 of 70 viii 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Wiestschner v. Monterey Pasta Co., 294 F. Supp. 2d 1102 (N.D. Cal. 2003) ............................................................. 23 Wool v. Tandem Computers Inc., 818 F.2d 1433 (9th Cir. 1987)............................................................................ 58 Zelman v. JDS Uniphase Corp., 376 F. Supp. 2d 956 (N.D. Cal. 2005)................................................................ 17 In re Zoran Corp. Derivative Litig., 511 F. Supp. 2d 986 (N.D. Cal. 2007).........................................................passim UNREPORTED CASES In re Brocade Sec. Litig., No. 05-2042 (N.D. Cal. Aug. 27, 2007).......................................................50, 52 DOCKETED CASES In re Am. Tower Corp. Sec. Litig, No. 06-CV-10933 (MLW) (D. Mass. filed May 26, 2006)..........................50, 52 In re American Tower Corp. Derivative Litig., No. 06-11029 (D. Mass. filed June 13, 2006) .................................................... 52 Bacas v. Way, No. 07-456 (S.D. Tex. filed Feb 1, 2007) .......................................................... 52 In re Brocade Commc’ns Sys., Inc. Derivative Litig., No. C-05-2233-CRB (N.D. Cal. filed June 1, 2005).......................................... 52 In re Brooks Automation, Inc. Derivative Litig., No. 06-10943 (D. Mass. filed May 30, 2006) .................................................... 52 Grasso v. Vitesse Semiconductor Corp., No. 2:06-cv-02639-R-CT (C.D. Cal. filed May 1, 2006) .................................. 50 Grecian v. Meade Instruments Corp., No. 06-908 (C.D. Cal. filed Sept. 27, 2006) ................................................50, 52 In re HCC Ins. Holdings, Inc. Sec. Litig., No. 4:07-cv-00801 (S.D. Tex. filed Mar. 8, 2007) ......................................50, 52 In re Juniper Derivative Actions, No. 5:06- 03396 JW (N.D. Cal. filed May 24, 2006) ........................................ 52 In re KLA-Tencor Corp. Sec. Litig., No. 06-4065 (N.D. Cal. filed June 29, 2006) ...............................................50, 52 In re KLA-Tencor Corp. S'holder Derivative Litig., No. C06-03445 JW (HRL) (N.D. Cal. filed May 26, 2006) .............................. 52 In re Meade Instruments Corp. Derivative Litig., No. 06-CC-205 (Cal. Super Ct. County of Orange filed Oct.6, 2006) .............. 52 Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 9 of 70 ix 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) In re Monster Worldwide, Inc. Stock Option Derivative Litig., Master Docket 1:06:cv 04622 (S.D.N.Y. filed June 15, 2006).......................... 52 In re Newpark Res., Inc. Sec. Litig., No. 2:06-cv-02150-ML-KWR (E.D. La. filed Apr. 21, 2006).....................51, 52 In re Newpark Resources, Inc. Derivative Litig., No. 06-07340 (E.D. La. filed Oct. 5, 2006) ....................................................... 53 Peregrine Litig. Trust v. Moores, No. 788659 (San Diego Super. Ct.).................................................................... 53 In re Peregrine Sys., Inc. Corp. Derivative Litig., No. 02-00950 (S.D. Cal. filed May 14, 2002).................................................... 53 In re Peregrine Sys., Inc. Sec. Litig., No. 02 CV 870-J (RBB) (S.D. Cal. Nov. 21, 2003)........................................... 53 In re UnitedHealth Group Inc. S'holder Derivative Litig, No. 06-01216 (D. Minn. filed Mar. 29, 2006) ................................................... 52 In re Wireless Facilities, Inc. Sec. Litig. II, No. 3:07-cv-00482-NLS (S.D. Cal. filed Mar. 15, 2007) .................................. 50 STATUTES AND RULES 15 U.S.C. §78j(b)...............................................................................1, 10, 47, 49, 53 15 U.S.C. §78t(a) ...............................................................................1, 10, 11, 58, 59 28 U.S.C. § 1658...................................................................................................... 53 28 U.S.C. § 1658(b)(1) ............................................................................................ 53 28 U.S.C. § 1658(b)(2) ......................................................................................56, 57 17 C.F.R. § 240.10b-5 ............................................................................................... 1 Fed. R. Civ. P. 8(a)(2)........................................................................................36, 58 Fed. R. Civ. P. 9(b) .................................................................................................. 13 Fed. R. Civ. P. 12(b)(6) .....................................................................................10, 54 Fed. R. Civ. P. 12(f)................................................................................................... 6 Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 10 of 70 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFFS’ OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Lead Plaintiff Mississippi Public Employees Retirement System (“MPERS”) (“Lead Plaintiff”)1 submits this Memorandum of Law in Opposition to Defendants’2 Motions to Dismiss. This is a securities fraud action, brought on behalf of a class of investors,3 for violations of: (1) Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §78j(b), and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission (“SEC”), 17 C.F.R. § 240.10b-5; and (2) Section 20(a) of the Exchange Act, 15 U.S.C. §78t(a). I. INTRODUCTION Semtech has admitted that for more than seven years, it backdated stock options to dates on which the price of Semtech stock conveniently settled at its lowest point in weeks, if not months.¶ 4.4 The Defendants did this intentionally to artificially inflate the Company’s reported net income and earnings per share (“EPS”) and to generate undisclosed profits for its officers, directors and employees. Indeed, an analysis completed by the leading expert on options backdating (Professor Erik Lie) established that the mathematical probability (or 1 All references to “¶ __” are to paragraph numbers in the Consolidated Amended Class Action Complaint (the “Complaint”) (Docket No. 53). 2 The defendants (“Defendants”) collectively consist of Semtech Corporation (“Semtech” or the “Company”); John D. Poe (“Poe”), the Company’s CEO from October 1985 to October 2003, the interim CEO from September 2005 to April 2006 and the Chairman of the Board from 1998 to October 2006 (¶ 17); Jason L. Carlson (“Carlson”), the CEO and director of Semtech from October 2003 to October 2005 (¶ 18); Mohan R. Maheswaran (“Maheswaran”), the President, CEO and a director of Semtech since 2006 (¶ 19); David G. Franz, Jr. (“Franz”), Semtech’s Vice President of Finance and CFO from 1993 until November 2006 (¶ 20); and John M. Baumann (“Baumann”), Semtech’s Treasurer from1994 until November 2006 (¶ 21). The five individual defendants are collectively the “Individual Defendants.” All citations to any Defendant’s Motion to Dismiss are referred to herein as (“__ Br. at __”). 3 The “Class Period” is the period between August 27, 2002 and July 19, 2006. 4 See also Semtech Corporation Form 10-K/A filed with the SEC on March 29, 2007 for the period ending January 29, 2006 (the “Restatement”), relevant portions of which are attached to Lead Plaintiff’s Request for Judicial Notice (“RJN”) as Ex. 1. Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 11 of 70 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) improbability) that Semtech’s option grants between 1994 and 2002 were timed without manipulation is 1 in 35,184, 372, 088, 332 - a probability of 0.0000%.5 The Defendants were not accidental beneficiaries of this backdating; instead, they controlled all accounting for options - actively deceiving Semtech investors and auditors while enjoying the fruits of their illegal profits. Defendants’ misconduct caused Semtech to materially understate compensation expense and overstate earnings throughout the Class Period. Indeed, once uncovered, the options manipulations perpetrated by the Defendants resulted in $91 million in pre-tax options related adjustments. When this fraudulent scheme was revealed, Semtech stock plummeted resulting in a large financial loss to Lead Plaintiff and the Class. Instead of addressing these detailed allegations directly, the Defendants quip that Plaintiff “arrived dressed in a disguise to a non costume affair.” Semtech Br. at 1. But it is the Defendants themselves who have disguised the Company’s true EPS and net income by hiding millions of dollars of compensation expense. Deliberately concealed by the Defendants, it took years, an investigation by outsiders into the Company’s options practices, and a terrible loss by Semtech shareholders for Defendants’ true conduct to come to light. II. STATEMENT OF FACTS A. Background Stock options are agreements that allow individuals to purchase at a later date shares of a publicly traded company at a predetermined, fixed price. ¶ 32. Recipients profit only when the market price of the company’s common stock exceeds the price at which the options were granted, known as the “strike price” or “exercise price.” ¶ 32. Unless otherwise stated, stock options are granted with an exercise price equal to the market value of the common stock on the date which the 5 See discussion on Professor Lie’s statistical analysis infra. Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 12 of 70 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) options are granted. ¶ 43. Accordingly, when such options are granted they have no intrinsic value and during the Class Period companies holding such options were not required to recognize any expense associated with such grants. A major purpose of such options is to incentive employees because if the stock and company grow, so does the value of the employee’s stock option. ¶ 36. B. Semtech’s Stock Option Plans When a company grants stock options to employees, it must do so under a written stock option plan filed with the SEC and disclosed to the public so that investors have an accurate understanding of: (1) the compensation paid, and (2) the company’s financial position. In granting stock options a company must adhere to its plan. ¶ 34. Semtech did not adhere to its option plans. By 1998, Semtech had several stock option plans for its employees, officers, directors and consultants (the “Stock Option Plans”)6. Each of the plans provided that the exercise price of the stock options could not be less than the fair market value of the Company’s common stock on the day of the grant. These plans also included a written agreement (the “Award Agreement”) between the option recipient and the Company (¶¶ 35-40) that provided: “each Award Agreement governing an Option shall state the Exercise Price. The Exercise Price of any Incentive Option shall not be less than the Fair Market Value of the Common Stock on the date of the grant…” (emphasis added) 1994 Plan. “The applicable date shall be the date on which the award is granted.” 1998 Plan. ¶ 37. C. Semtech’s Accounting For Stock Option Grants Semtech’s public filings state that it followed Accounting Principles Board Opinion (“APB”) No. 25 in accounting for stock options. (¶¶ 64-66, 83-85, 102- 6 The Stock Option Plans consist of the 1994 Long Term Stock Inventive Plan (the “1994 Plan”); the 1994 Non-Employee Directors Stock Option Plan (the “1994 Director’s Plan”); and the 1998 Long Term Stock Inventive Plan (the “1998 Plan”) (¶¶ 35-39). Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 13 of 70 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) 104, 122-124). APB 25 provided that public companies that grant “in-the-money” stock options must take a compensation expense for the difference between the fair value of the stock on the grant date and the exercise price of the option (i.e., “intrinsic value”). ¶ 42. The Company need not record a compensation expense if an option is issued at an exercise price equal to the market price of Semtech stock on the date of the grant (i.e., “at-the-money”). ¶ 42. The date of the grant, or “measurement date,” for stock option accounting purposes is the date upon which the compensation cost is to be measured. ABP 25 defines the measurement date as “the first date on which are known both (1) the number of shares that an individual employee is entitled to receive, and (2) the option or purchase price, if any.” ¶ 46. Thus, the actual “measurement date” can not occur until the terms (namely the identity of the recipient of the options, the number of shares and the strike price) of the option are actually determined. ¶ 47. When a company grants an “in-the-money” option, where the market price of the stock is more than the option’s exercise price on the “measurement date,” the compensation expense is calculated by multiplying the total number of options granted by the difference between the exercise price of the option and the market price of the stock on the measurement date. The resulting compensation cost must be recognized as an expense amortized over the option’s vesting period. ¶ 43. Throughout the Class Period, Defendants blatantly and repeatedly violated APB 25. D. Individual Defendants Received Backdated Options Semtech issued stock options to incentivize Company officers and key employees. ¶ 36. But many of these options were illegally backdated. For example, Individual Defendants Poe, Franz and Baumann received hundreds of Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 14 of 70 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) thousands of stock options, at least half a million7 of which were backdated, “in- the-money” options. Significantly, these Individual Defendants’ entered into written agreements with the Company detailing the award and the grant. As per Semtech’s Stock Option Plans, the Award Agreement was required to have (1) the grant date, and (2) the designated strike price. Thus, these Individual Defendants could plainly see on the face of the Agreement that the grant date and designated strike price for their options differed from the actual date the options were granted; each of these defendants, therefore, knew they had received backdated options.8 E. The False And Misleading Financial Statements Throughout the Class Period, Semtech falsely accounted for millions of dollars in stock options to its officers, employees, and directors, in contravention of APB 25 and Semtech’s own stated accounting policies. The Complaint details the specific false and misleading statements contained in Semtech’s public statements, including its press releases and public filings with the SEC. The Complaint also alleges, in detail, which Individual Defendant signed and swore to each false and misleading financial statement regarding the financial condition of the Company. As alleged throughout the Complaint, these statements were false and misleading because unknown to the market, Defendants were engaged in a long- term scheme to backdate stock option grants to days on which Semtech stock had reached its lowest point in order to hide compensation expenses and inflate income. Consequently, each financial statement that Semtech filed during the 7 According to Professor Lie’s analysis, infra, and a review of Proxy Statements from 1995-2003, Defendant Poe received approximately 375,685 backdated grants, Defendant Franz received approximately 164,466 backdated grants and Defendant Baumann received approximately 18,722 backdated grants (for a total of 558,853 backdated grants to these Individual Defendants). See RJN Exs. 2-8. 8 A stock option plan is publicly filed with the SEC. The Company’s management and directors (here, the Individual Defendants), especially those who sign the SEC filings attaching the plan, are (or would be reckless in not being) knowledgeable about how the plan is designed to operate. ¶ 34. Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 15 of 70 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Class Period overstated the Company’s net income and EPS and understated its compensation costs.9 F. Revelation of the Fraudulent Scheme The surreptitious backdating scheme at Semtech went undiscovered until 2006.10 In the spring of that year, many corporations began disclosing that they were under investigation by the SEC for backdating stock options. ¶ 48. On May 16, 2006 the Center for Financial Research (“CFRA”) published a report listing Semtech as a company at risk for options backdating. ¶ 127. Over the next several months, Semtech made a number of partial disclosures concerning its backdating practices (including that Semtech, the SEC and the U.S. Attorney’s Office were investigating the Company’s practices) which negatively impacted Semtech’s share price. Semtech’s final corrective disclosure occurred on July 20, 2006. On that day Semtech announced that it expected to record material amounts of additional compensation expense and restate its financial results for FY 2002 through FY 2006 to correct errors in accounting for stock options granted in fiscal years 1998- 2003. That day Semtech’s stock price closed at $12.37, down from the prior day’s close of $13.19, and again closed down at $11.60 on July 21, 2006. In all, 9 ¶¶ 58, 63, 67, 72, 76, 81, 86, 91, 95, 100, 105, 110, 115, 120, 125. 10 In a footnote, Semtech asks the Court to strike paragraphs 32-34, 45 and 48- 55 of the Complaint under Rule 12(f), alleging that those paragraphs are “immaterial and impertinent.” Semtech Br. at 11 n.8. Such motions are disfavored and require a showing that the challenged material has “no possible bearing on the controversy.” SEC v. Levin, 232 F.R.D. 619, 624 (C.D. Cal. 2005). The pleadings are read in the light most favorable to the non-movant, and the motion may be denied “if there is any doubt as to whether under any contingency the matter may raise an issue . . . .” Quintana v. Baca, 233 F.R.D. 562, 564 (C.D. Cal. 2005) (citations omitted). The challenged paragraphs describe the proper method of accounting for stock options and the recognition over several years of deceptive practices related to stock options. At a minimum, these allegations are relevant to whether the Defendants truthfully accounted for stock options, the materiality of these misrepresentations and each Defendant’s state of mind. Semtech’s challenge does not satisfy the requirements of Rule 12(f). Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 16 of 70 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Semtech’s stock lost 27.73% from its value between May 21, 2006 and July 21, 2006. ¶¶ 7-10, 134-136. G. Semtech’s Restatement On March 29, 2007 Semtech was forced to issue a massive financial restatement as a result of the backdating fraud (the “Restatement”). ¶ 141. According to the Restatement, the Company’s investigation uncovered over 2,000 stock option manipulations that resulted in $91 million in inflated income. ¶ 141. The Restatement highlighted the impropriety of thousands of option grants made by Defendant Poe-the former CEO of the Company. As explained, in April 1997 the Compensation Committee delegated authority to Poe to make option grants as agent of the Committee.11 Using and abusing this authority, Poe granted options to existing executive and non-executive employees through May 2002.12 With regard to Poe’s grants, the Company determined that “the elements of APB 25 were not satisfied as of the stated grant dates for 15 of 17 grant dates selected [and] there is evidence of intentional manipulation on 9 of these dates, representing approximately 42% of the shares and 76% of expenses in this category” (emphasis added).13 These grants also lacked adequate contemporaneous documentation to corroborate the establishment of the grant date.14 Regarding new employee grants, the Company found strong evidence that management intentionally selected favorable grant dates for new hires. The majority of grants were not made as of the recipients start date, which is required 11 ¶ 148. See also RJN Ex. 1 at 4. 12 Id. 13 ¶ 148. See also RJN Ex. 1 at 4-5. 14 ¶ 148. See also RJN Ex. 1 at 5. Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 17 of 70 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) by the Compensation Committee, and these improperly granted options resulted in a 90%-95% more favorable price for newly hired employees.15 Semtech also admitted, and its external auditors confirmed, that it did not maintain an effective control environment relating to its stock option grants, which “permitted certain former members of senior management to override controls and retroactively price stock option grants, and ultimately resulted in the Company’s failure to properly account for such option grants.” ¶ 179. Had these backdated options been properly accounted for, the Company would have recognized additional expenses of $36.4 million, $13.4 million, $9.2 million, $5.6 million, and $1.5 million for FY2002 through FY2006, respectively. Particularly damaging to the Company and the Individual Defendants was the revelation in the Restatement that the options manipulation was intentional. The Special Committee concluded that “the evidence supports a finding of intentional manipulation of stock option grants” directed by Defendant Poe (former CEO), that “a former Human Resources executive . . . participated in this conduct”, and that Defendant Franz (former CFO) and Defendant Baumann (former Treasurer) “knew or should have known of the manipulation and initiated or participated in some manipulative acts”.16 In addition, the Restatement stated that Individual Defendants Poe, Franz and Baumann had been effectively fired, and had not left the Company voluntarily as previously implied by the Company’s Form 8-K. ¶¶ 137-140, 143. Another executive who left the Company in 2007, “evidenced a willingness to acquiesce in the manipulative conduct.”17 Finally, the Special Committee “found some personal benefit to these five individuals in the form of options that were “in-the-money,” but unvested at the 15 Id. 16 Id. at 7. 17 Id. Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 18 of 70 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) date of the grant” of approximately 4.8 million.18 Ultimately, the Special Committee cancelled and rescinded all the outstanding options held by Poe, cancelled one of Franz’s grants and re-priced the remaining option grants.19 H. Confidential Witness’ Account A Confidential Witness (“CW 1”) corroborated the findings of the Special Committee. CW 1, a court reporter and legal secretary responsible for preparing the paperwork for Semtech’s stock option grants, stated that Defendant Poe and Semtech’s human resources personnel ordered CW 1 to use the “hire date” as the strike price date even if the Board of Directors had not approved the option grant until months later. ¶¶ 185, 186.20 I. Professor Lie’s Statistical Analysis Statistical analysis confirms that it was virtually impossible for the backdating to be the result of chance or error. Indeed, expert analysis conducted by Professor Lie demonstrates that the probability that Semtech’s option grants between 1994 and 2002 were selected at random (i.e., without manipulation) would be 1 in 35,184,372,088,332 (i.e., statistically impossible). ¶¶ 4, 154-161. 18 Id. 19 The Special Committee found that Defendant Baumann also had one outstanding grant that expired or lapsed during the restatement process. Id. at 8. 20 Defendants Carlson and Maheswaran contend that Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007) precludes the use of confidential witnesses. See Carlson/Maheswaran Br. at 13-14. This is not true. Tellabs did not even preclude the use of confidential witnesses in that case, much less in other securities cases. And, on remand, the Seventh Circuit held that the plaintiffs could rely on statements from confidential witnesses and that “the absence of proper names does not invalidate the drawing of a strong inference from informants’ assertions.” Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702, 712 (7th Cir. 2008) (citing, inter alia, In re Daou Sys. Inc., 411 F.3d 1006, 1015-16 (9th Cir. 2005)). In Daou, this Circuit explained that “[n]aming sources is unnecessary so long as the sources are described ‘with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged’ and the complaint contains ‘adequate corroborating details.’” Id. Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 19 of 70 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) J. The Individual Defendants Benefit From Stock Sales During the Class Period, Defendants Poe, Franz and Baumann each benefited from their scheme through the following stock sales: Insider Total Shares Sold During the Class Period Total Proceeds John D. Poe 812,122 $17,466,467.80 David G. Franz, Jr. 132,000 $2,895,655.50 John M. Baumann 35,000 $728,162.57 Totals 979,122 $21,090,285.87 III. ARGUMENT Under Fed. R. Civ. P. 12(b)(6) (“Rule 12(b)(6)”), the reviewing court must accept as true all well-pled allegations in the complaint. Tellabs, 127 S. Ct. at 2509.21 As set forth below, the Complaint plainly states valid claims against each of the Defendants for violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. A. The Complaint States a Claim Under Section 10(b) of the Exchange Act Against Each of the Defendants To plead a claim under Section 10(b), a plaintiff must allege: (i) a misrepresentation or omission; (ii) of material fact; (iii) made with scienter; (iv) in connection with the purchase or sale of a security; (v) upon which plaintiff relied; 21 “A complaint should not be dismissed unless it appears beyond a doubt that the plaintiff cannot prove any set of facts in support of the claim that would entitle him or her to relief.” No. 84 Employer-Teamster Joint Council Pension Trust Fund v. America West Holding Corp., 320 F.3d 920, 931 (9th Cir. 2003). In addition, the reviewing court must “draw all reasonable inferences in favor of the nonmoving party…. [and a]ny existing ambiguities must be resolved in favor of the pleading.” In re Juniper Networks, Inc. Sec. Litig., 542 F. Supp. 2d 1037, 1045 (N.D. Cal. 2008) (quoting Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). As recently stated by Judge Illston in Rudolph v. UTStarcom, No. 07- 4578, 2008 WL 4002855, at *1 (N.D. Cal. Aug. 21, 2008), “[t]he question presented by a motion to dismiss is not whether the plaintiff will prevail in the action, but whether the plaintiff is entitled to offer evidence in support of the claim.” Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 20 of 70 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) and (vi) that the alleged misrepresentation or omission was the proximate cause of plaintiff’s injury. Daou, 411 F.3d at 1014. Significantly, the Defendants do not dispute that the Company disseminated a series of materially false and misleading statements during the Class Period, or that the admitted improper accounting of backdated options caused the Company to overstate its reported net income by more than $91 million during the period between 1996 and 2006, and ultimately prompted the Restatement. Instead, they argue the Complaint fails to adequately plead scienter, loss causation and reliance, and that Lead Plaintiff and the Class somehow lack standing to bring this case as a securities fraud action. In addition, Defendants Maheswaran, Carlson and Baumann contend that the Complaint fails to attribute any actionable misrepresentations to them, while Defendants Poe and Baumann allege that the Complaint is untimely. Finally, each Individual Defendant argues that the Complaint fails to allege control person liability under Section 20(a). All of these arguments lack merit. 1. Lead Plaintiffs Have Adequately Alleged Defendants’ Scienter (a) Legal Standard One can allege scienter through facts “giving rise to a strong inference that defendants acted with the intent to deceive or with deliberate recklessness as to the possibility of misleading investors.” Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 987 (9th Cir. 2008). “In the Ninth Circuit, recklessness (as a form of intentional conduct) has long sufficed to establish scienter for §10(b) purposes.” Juniper, 542 F. Supp. 2d at 1046. The Supreme Court recently clarified that in evaluating scienter, courts must consider whether an inference of scienter is “cogent” and “at least as likely as”- but not more likely than-“any plausible opposing inference.” Tellabs, 127 S. Ct. at 2503, 2510 (emphasis in original). Moreover, the “inquiry . . . is whether all of Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 21 of 70 12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard.” Id. at 2509 (emphasis in original). Thus, “[i]n determining whether a plaintiff has sufficiently pled scienter, a court must consider whether the total of plaintiffs’ allegations, even though individually lacking, are sufficient to create a strong inference that defendants acted with deliberate or conscious recklessness.” Batwin v. Occam Networks, Inc., No. 07-2750, 2008 WL 2676364, at *8 (C.D. Cal. July 1, 2008). As the Ninth Circuit recently opined, Tellabs “suggests that perhaps Silicon Graphics, Vantive, and Read -Rite are too demanding and focused too narrowly in dismissing vague, ambiguous, or general allegations outright.” South Ferry LP #2 v. Killinger, No. 06-35511, 2008 WL 4138237, at *5 (9th Cir. Sept. 9, 2008). The Court explained: Tellabs suggests that while a high level of detail is required under the PSLRA, a court should look to the complaint as a whole, not to each individual scienter allegation as Silicon Graphics suggests. Thus, Tellabs counsels us to consider the totality of circumstances . . . Id. The Supreme Court also cautioned “[t]he inference that the defendant acted with scienter need not be irrefutable, i.e., of the ‘smoking-gun’ genre, or even ‘the most plausible of competing inferences,’” Tellabs, 127 S. Ct. at 2510, and “emphasize[d], as well, that . . . a plaintiff is not forced to plead more than she would be required to prove at trial.” Id. at 2513. Here, Lead Plaintiff has shown through the Company’s own admissions, corroborated by powerful statistical data, that the Defendants intentionally manipulated the grant dates of hundreds of thousands of options through backdating. Lead Plaintiff has also demonstrated that those responsible for the backdating were the same individuals that reviewed, approved, signed and certified Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 22 of 70 13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) the false and misleading statements alleged in the Complaint. As discussed below, the totality of the allegations of scienter satisfy Rule 9(b), the PSLRA and Tellabs. Accordingly, Defendants’ motion should be denied. (b) Backdating Is An Intentional Act Which By Itself Strongly Infers the Backdater’s Scienter Backdating, by nature, is intentional conduct that requires the backdater to review the historical trading prices of the company’s securities, and then intentionally select an opportune date-when the stock traded low-as the “grant date” for the options to be issued. Like betting on a horserace that has already been run, the backdater assures the options granted bear the lowest possible exercise prices.22 In this way, the backdater intentionally maximizes the value of those options to their recipient, while at the same time allowing the company to avoid recording compensation expenses for those backdated options (even though in-the-money options require such an expense) because the options appear to have been granted at-the-money on the purported “grant date.” Options are thus backdated with the specific intent to hide compensation expenses that would otherwise be clearly required by GAAP. Accordingly, the intent to backdate options is co-extensive with the intent to commit securities fraud. To distract the Court from this obvious conclusion, Defendants argue that Lead Plaintiff has not demonstrated Defendants understood the proper accounting treatment for options (or backdated options).23 This argument ignores the relevant facts and misstates the law. 22 See In re UnitedHealth Group PSLRA Litig., No. 06-CV-1691, 2007 WL 1621456, at *1-2 (D. Minn. June 4, 2007) (stating, “this case is incredibly simple. Plaintiffs claim defendants were playing a game with a stacked deck. When awarded options, with deliberately selected grant dates which were already in-the- money, defendants were playing a game…. the patsy was either the hapless corporation, which in varying ways defendants controlled, or the corporation’s shareholders, whose equity provided the game’s antes and bloated pot.”). 23 Poe Br. at 10-12, Baumann Br. at 16, Carlson/Maheswaran Br. at 12, Semtech Br. at 13. Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 23 of 70 14 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) The primary reason to backdate options has always been to manipulate the cost accounting for such options with the intent to conceal expenses and inflate income.24 Put another way, one does not backdate an option without intending to hide expenses and thereby inflate income. There is no other reason to backdate an option. For instance, if the goal was to afford the employee greater compensation, the grantor would openly grant that employee an in-the-money option or give her some other form of compensation. The sole reason to hide the fact that the option was granted in-the-money is to hide the corresponding compensation expense. Thus, by intentionally backdating an option, the defendant reveals his knowledge of the option accounting rules and his intent to subvert them. Accordingly, where the plaintiff sufficiently pleads the defendant intentionally backdated options, it has adequately alleged the defendant’s intent to commit securities fraud.25 24 See, e.g., In re Zoran Corp. Derivative Litig., 511 F. Supp. 2d 986, 996 (N.D. Cal. 2007) (“The motive for backdating is to avoid a ‘hit to the earnings,’ i.e., a compensation expense, while still awarding in-the-money options”); United States v. Reyes, No. 06-556, 2007 WL 2462147, at *1 (N.D. Cal. Aug. 29, 2007) (“The chief purpose” of backdating “is to make the grants look as though they were granted at fair market value, and thereby to avoid a compensation charge”); In re PMC-Sierra, Inc. Derivative Litig., No. 06-5530, 2007 WL 2427980, at *1 (N.D. Cal. Aug. 22, 2007) (Backdating allows a company to “improperly avoid the impact of that expense on its bottom line as well as the tax liabilities that otherwise would result from granting ‘in the money’ stock options”); In re Monster Worldwide, Inc. Sec. Litig., 549 F. Supp. 2d 578, 581-82 (S.D.N.Y. 2008); Testimony Concerning Options Backdating by Christopher Cox, Chairman, U.S. Securities and Exchange Commission before the U.S. Senate Committee on Banking, Housing and Urban Affairs, Sept. 6, 2006 (“purpose of disguising an in- the-money option through backdating is to allow the person who gets the option grant to realize larger potential gains-- without the company having to show it as compensation on the financial statements”) (See RJN Ex. 9). 25 Defendants also argue that APB 25 is inherently complex and difficult to apply. Poe Br. at 10-12, Baumann Br. at 16-17, Carlson/Maheswaran Br. at 12. This is not true, but more important it, too, is a red herring argument because the act of backdating indicates that the party doing the backdating is familiar with the relevant accounting rules. Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 24 of 70 15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) (c) Statistical Data Confirms Beyond Any Doubt That Semtech’s Option “Grant Dates” Were Selected Randomly Option backdating is evidenced by a pattern of “granting” options on unusually fortuitous dates. See, e.g., Zoran and Quest. The statistical improbability that a company and its executives would by chance select such fortunate “grant dates” is compelling evidence that such grant dates were intentionally manipulated. The remoter the odds, the stronger the inference of scienter. In Zoran, 7 of the 32 grants at issue were priced on the lowest trading day of the relevant month, the odds of which occurring by chance was 1 in 1,151. 511 F. Supp. 2d at 1004. Based on these facts, the court stated, “[h]itting the most favorable date seven times out of 32 is a striking pattern” and “agree[d] that this pattern seems hugely suspicious.” Id. The Court also recognized that a total of nine in 32 grants were made on one of the two lowest trading days in a month, and two more were made on at least the sixth lowest trading day. Based on these facts, the Court held, “[c]oupled with the statistical pattern of favorable grant dates and the fact that the grant date could be chosen at the will of the compensation committee, plaintiff has plainly succeeded in pleading that these grants were backdated.” Id. at 1005. Likewise, in Middlesex Retirement Sys. v. Quest Software Inc., the company admitted that “most” of the options it granted between 1998 and 2002 were not properly dated. 527 F. Supp. 2d 1164, 1181 (C.D. Cal. 2007). The court found the “extremely fortunate [grant] dates give rise to a strong inference that backdating has occurred and that it was done intentionally.” Id. at 1182. For additional support, the court considered the graphical representation of the allegedly backdated grants and found it equally remarkable. Id. The Court stated: The graphical representation lends substantial support to the notion that no amount of “highly technical” accounting treatments can Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 25 of 70 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) obscure the obvious: that someone at Quest was engaging in substantial, prolonged, and intentional backdating of stock options. In the parlance of the Tellabs holding, the Court can definitively state that the inference that intentional backdating occurred at Quest is more “cogent and compelling” than any opposing inference offered by Defendant. Id. (emphasis in original). Here, the odds of Defendants having dated the options at issue by chance is an astronomical 1 in 35 trillion. ¶¶ 154-160. In other words, there is virtually no chance (0.00000%) whatsoever that the Defendants randomly selected the purported grant dates. ¶ 154. These extreme odds leave little doubt that Semtech executives intentionally selected the most opportune grant dates repeatedly for roughly eight years. To support this analysis, Lead Plaintiff has set forth, in great detail, the statistical methodology behind these results and the data upon which they are founded. ¶¶ 155-160. As pleaded, Lead Plaintiff’s expert combed all relevant SEC filings between 1994 and 2007 to identify 76 separate grants.26 ¶ 155. He 26 In re Hansen Natural Corp. Sec. Litig., 527 F. Supp. 2d 1142 (C.D. Cal. 2007), is not analogous. There, the plaintiffs offered nothing but their own analysis comparing defendants’ purported option grant dates and the company’s trading price ten days after the grant to conclude Hansen had backdated. Id. at 1155-56. There was no statistical analysis performed as to the likelihood that such grants were chosen by chance, nor was there any description of what plaintiffs analytical methods were, what those methods were based on, or whether the same methods had been used by anyone else or had been peer reviewed. Based on such “cursory allegations,” the court declined to draw an inference that the grants at issue were backdated. Id. Here, by contrast, Lead Plaintiff’s expert, Erik Lie, is the leading statistician on the issue of backdating and has pioneered the analytical techniques for ferreting out backdating at public companies. His work has been discussed extensively since his seminal report, “On the Timing of CEO Stock Option Awards,” was published in May 2005. See RJN Ex. 10. Professor Lie, using proven methods of statistical analysis of potentially backdated grants, has concluded the chance of the grant dates at issue being selected at random were astronomical. This evidence is far more compelling than that pleaded in Hansen, and is much more akin to the evidence of backdating pleaded in Quest and Zoran. Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 26 of 70 17 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) then ranked the trading days in a relevant month, with a rank of 1 indicating the lowest daily closing price and a rank of 20 indicating the highest daily closing price in the month. ¶156. Afterward, the expert calculated that the chance these 76 options grants were dated at random was a staggering 1 in 10,537,447,360. ¶¶ 158-59. The expert then removed the post-SOX option grants and pre-scheduled option grants from the equation27 and calculated that the chance of randomly granting discretionary options on the lowest trading day in a month 18 out of 37 times was an even more incredible 1 in 35,184,372,088,832. ¶160. Both calculations leave no doubt that the options could not have been backdated randomly by chance, but rather were “granted” on dates that were intentionally picked by the Defendants.28 Lead Plaintiff included charts of 16 of the allegedly backdated option grants. ¶ 161. The charts prove just how successful Defendants were at backdating these option grants to take advantage of both drops and increases in Semtech’s stock price. These charts show that it was not possible that these options dates were selected by chance or by mistake. Thus, there is no doubt that Semtech’s executives intentionally backdated hundreds of thousands of options; indeed, there is no other plausible inference. 27 The post-SOX and pre-scheduled grant dates were removed because there is little opportunity to manipulate these grants. For pre-scheduled grants the option “grant dates” are chosen ahead-of-time, so backdating these grants is essentially impossible. Following SOX executives were required to file documents with the SEC reflecting their grants within 2 days of the actual grant. Thus, for executives that followed the post-SOX reporting regulations, the window to backdate options was reduced to 2 days, essentially prohibiting backdating. 28 Defendants suggest that acts of backdating that pre-date the class period are irrelevant. See Poe Br. at 13-14. That suggestion misstates the law. See Zelman v. JDS Uniphase Corp., 376 F. Supp. 2d 956, 970 (N.D. Cal. 2005) (“The proposed class period dates function only to define the plaintiff class, not to restrict the universe of relevant or actionable facts in this case.”); see also In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 72 (2d Cir. 2001) (“Any information that sheds light on whether class period statements were false or materially misleading is relevant”). Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 27 of 70 18 The ostensible “competing” inference offered by Defendants is that they were “merely negligent” in not properly documenting the grant dates and that what appears to be backdating is really just a coincidence.29 Not only is this excuse implausible; it also does not constitute a viable defense. Sloppy paper work and lax controls surrounding the granting of options cannot explain how 18 of Semtech’s 37 option grants between 1994 and 2002 were purportedly made on the absolute lowest trading day in the relevant month, nor does it explain why these wrong grant dates so consistently and substantially benefited the Defendants. (d) Semtech Admitted That its Employees Intentionally Backed Option Grants Perhaps even more compelling, the Company itself concluded that Defendant Poe intentionally backdated options with the help and/or acquiescence of Defendants Franz, Baumann, and a former Vice President in the Human Resources Department. ¶¶ 142, 150. After almost a year of intense investigation, the Company completed its review, directed by a Special Committee, into backdating and concluded that Poe and another former executive intentionally backdated options. ¶¶ 142, 146. The Special Committee, informed by numerous experts retained by the Company, found that nearly half of all grants issued by Defendant Poe were manipulated (i.e. backdated). ¶ 148. This committee also found that Defendants Franz and Baumann “knew, or should have known, of the manipulation and initiated or participated in some manipulative acts.” ¶¶ 142, 150.30 29 Poe Br. at 12, Franz Br. 20. 30 The Committee also provided telling details regarding the circumstances upon which Poe, Franz and Baumann left the Company. ¶¶ 143, 150. The Committee explained that Poe resigned his post as Chairman of the Board in August 2006, but then refused to cooperate with the Committee’s investigation. ¶ 150. Following the Committee’s report, the Board accepted the Committee’s recommendation to ask Poe to resign, and, if he refused, to preclude him from seeking re-election. Id. Poe was then asked to immediately resign. Id. The Committee also recommended that, based on their findings, Franz and Baumann be (continued . . . ) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 28 of 70 19 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) The Defendants’ argument that these findings were made in hindsight is not persuasive.31 Every investigation looks at evidence in hindsight. That is the job of investigators; they don’t predict events that will happen in the future, they investigate events that already occurred. What the Defendants ignore is that the Special Committee’s findings were based on compelling contemporaneous evidence of Defendants’ fraud, including emails, correspondence, personnel records, accounting ledgers and other option-related documents. Based on this evidence and a thorough investigation that took a year to complete, Semtech announced that some current and former Semtech executives committed fraud. Such an admission, supported by strong evidence, carries enormous weight. Poe relies on Weiss v. Amkor Technology, Inc., and erroneously suggests this case somehow undermines Semtech’s powerful conclusion of his guilt. Poe Br. at 9-10. It does not. In Amkor, the special committee’s findings could not be linked to any of the Individual Defendants. See 527 F. Supp. 2d 938, 949 (D. Ariz. 2007). Here, in contrast, they can. In a section entitled “Findings as to Individual Conduct,”32 Semtech and its Special Committee specifically identified Poe, Franz and Baumann by name or title and described their culpability based on contemporaneous evidence, thus raising a strong inference that these Defendants acted with the requisite scienter. Based upon the strong statistical data, the visual representations of intentional backdating, and the Company’s admission that many of its option grants were intentionally backdated by one or more of the Individual Defendants, the only two remaining relevant legal inquiries are: Who at Semtech participated in ( . . . continued) asked to resign, and they did. Id. The Committee further directed the Board to cancel and rescind all of Poe’s outstanding options, and to cancel some of Franz’s options and re-price others. Id. 31 Poe Br. at 9-10, Baumann Br. at 17-18. 32 See RJN Ex. 1. _ Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 29 of 70 20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) or was aware of the backdating? Were these participants the same persons who helped prepare and/or signed and certified the false and misleading financial reports? (e) Lead Plaintiffs Have Adequately Alleged the Scienter of Each Individual Defendant (i) Defendant Poe Acted With Scienter It is beyond dispute that Defendant Poe acted with scienter. Indeed, following its thorough investigation, Semtech concluded Poe intentionally manipulated the grant dates on thousands of options. ¶¶ 142, 150. As mentioned, one backdates option grants to assure the option has intrinsic value when issued, and to hide that expense from investors. By backdating grants, Poe clearly intended to commit securities fraud. Semtech’s conclusion that Poe acted intentionally is supported by the statistical evidence demonstrating the extreme improbability that Poe selected the grant dates randomly. ¶ 154-160. Fully aware of his fraud, Poe signed and certified at least six financial statements during the Class Period which, as intended, falsely hid compensation expenses and inflated income as a result of the backdating scheme. ¶¶ 58, 62, 65, 68, 71, 75, 77, 119. The evidence of Poe’s fraudulent intent is further corroborated by Lead Plaintiff’s confidential witness, an employee in Semtech’s Human Resources department, who had direct interaction with Poe (¶¶ 185-86), and recounted a specific instance in which Poe reprimanded her for properly dating a series of option grants and then ordered her to backdate them. Id. Not surprisingly, Poe was the beneficiary of at least 375,685 backdated options. RJN Exs. 2-7. And, seven of the ten grants he received between 1995 and the end of 2002 were backdated. Id. It defies logic and common sense to suggest Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 30 of 70 21 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Poe did not know statements accounting for those options were false and misleading.33 Poe also made knowingly false statements when he certified Class Period financial statements pursuant to SOX. ¶¶ 68, 77 and RJN Exs. 11-13. In those certifications he stated the reports did not contain any materially false statements or omissions, and that the reports fairly presented in all material respects the financial condition, results of operations and cash flows of Semtech. Id. This was not true, and Poe knew these statements were false because he intentionally backdated options in violation of Semtech’s Stock Option Plans, then falsely stated in the Company’s financial reports that all options were properly accounted for in accordance with APB 25. He then certified financial statements he knew did not properly account for those backdated options. Id.34 Additionally, the certifications Poe signed falsely affirmed that he and Franz had designed adequate disclosure controls to ensure that all material information regarding Semtech was properly reported, that he and Franz had tested those controls and deemed them adequate, and that all deficiencies in those controls, as well as any known frauds (whether material or not), were reported to Semtech’s audit committee and its auditors. ¶¶ 71, 75, 119. Yet, despite these certifications, Poe knew that Semtech’s controls regarding option grants had glaring weaknesses because he was well aware of his own 33 See Quest, 527 F. Supp. 2d at 1183-84 (“the Court finds that the substantial number and value of the option grants given to Defendants that consistently had measurement dates on either the lowest prices of the year or immediately preceding rapid rises in the Company’s stock, combined with Defendant’s key positions relating both to the granting of and/or accounting for stock options gives rise to a compelling inference of either Defendants’ actual knowledge or deliberate recklessness”). 34 “When a corporate officer signs a document on behalf of the corporation, that signature will be rendered meaningless unless the officer believes that the statements in the document are true.” Zoran, 511 F. Supp. 2d at 1013 (citing Howard v. Everex, 228 F.3d 1057, 1061 (9th Cir. 2000)). Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 31 of 70 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) intentional backdating. Thus, he knew that his and Franz’s statements characterizing and accounting for those backdated option grants were false and misleading, that the Company had no controls in place to protect against backdating, and that the frauds attendant thereto had not been reported to the Company’s auditors. As Semtech admitted in its Restatement, the principle weakness in its internal controls was that “the Company was under the leadership of the Former CEO [Defendant Poe], who was found by the Special Committee to have manipulated option grants in prior fiscal years….” ¶ 182. Also indicative of Poe’s scienter are the fact that he refused to be interviewed by the Committee investigating the backdating (RJN Ex. 1, p. 7) and that he was forced to resign as a result of the Special Committee’s findings. ¶¶ 143, 150.35 These allegations leave no doubt that Poe intentionally committed securities fraud, and they create a strong inference of his scienter, one that is cogent and compelling and far more plausible than any inference offered by Defendants. (ii) Defendant Franz Acted With Scienter Franz tries to escape the Special Committee’s findings by trying to paint his conduct as merely negligent rather than intentional or deliberately reckless. Franz Br. at 15. In so doing, he mischaracterizes the Special Committee’s finding that he and Defendant Baumann “knew, or should have known, of the manipulation” by completely ignoring the rest of that finding- that both Defendants “initiated or participated in some manipulative acts.” ¶¶ 142, 150. This case is squarely on-point with McKesson, which rejected the same “mere negligence” argument under similar, though less compelling, circumstances. 35 See In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248, 1274 (N.D. Cal. 2000). See also In re Adaptive Broadband Sec. Litig., No. C 01-1092 SC, 2002 WL 989478, at *14 (N.D. Cal. Apr. 2, 2002) (inference of scienter raised because “[a]s Adaptive’s financial difficulties were coming to light” by a restatement and an internal investigation “three of the named individual defendants either left the company or were moved to new positions”). Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 32 of 70 23 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Not surprisingly, Franz completely ignores this case. In McKesson, the complaint relied heavily on the reported conclusions of the company’s own investigators to establish the former management’s scienter. 126 F. Supp. 2d at 1273-74. The court found that scienter was strongly evidenced by the investigators’ statements that management “knew or should have known” about accounting improprieties - the very language that Franz argues supports a finding only of “mere negligence.” That court found such investigative findings (coupled with terminations of the senior management involved) to be “much more direct evidence of scienter” even than allegations of an “improper [accounting practice] . . . so widespread . . . that senior management must have known of” it. Id. at 1273. As the court explained: The company’s statements about the fired employees and their participation in [the company’s] improper accounting practices . . are, however, strong circumstantial evidence of fraud. Companies do not routinely announce massive restatements of revenue accompanied by press releases announcing that various employees have been fired “for cause.” It certainly is not routine to state that the terminated employees “knew or should have known” about accounting improprieties. One can only assume that [the company] had a factual basis for such statements. Id. at 1274 (emphasis added).36 36 Franz cites only Wiestschner v. Monterey Pasta Co., 294 F. Supp. 2d 1102, 1115 (N.D. Cal. 2003) and In re Peerless Sys. Corp. Sec. Litig., 182 F. Supp. 2d 982, 995 (S.D. Cal. 2002) for the proposition that blanket allegations that a defendant “knew or should have known” are insufficient to allege scienter. In those cases, however, statements at issue were merely plaintiffs’ allegations that the defendants “knew or should have known” certain information. Here, the Defendant Company, after expending great effort and assets to review its historical stock option practices concluded that Franz “knew or should have known” of the backdating and that he participated in or initiated manipulative acts. As explained in McKesson, it is quite a different thing when the company admits to this level of culpability. When combined with the additional finding of the Committee that Franz performed manipulative acts relating to the fraud, the cases cited by Franz are clearly inapposite. Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 33 of 70 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Here, not only did the Special Committee find Franz “knew or should have known” of the backdating fraud, it also concluded that he “initiated or participated in manipulative acts” relating to the fraud. ¶¶ 142, 150. The Committee also recommended his termination and the Company asked him to resign, which he did. ¶¶ 143, 150. These findings, establishing that Franz acted with scienter, are stronger than those determined to be sufficient in McKesson.37 In addition, Franz received at least 164,466 backdated options. RJN Exs. 2- 7. Six of the nine option grants Franz received between 1995 and the end of 2002 were backdated. Id. Franz was also Semtech’s CFO during the relevant period. ¶ 20. As the recipient of thousands of options that were patently in-the-money when issued to him, it is not plausible that Franz did not know his options were backdated or that the statements accounting for his options were false and misleading. See Quest, 527 F. Supp. 2d at 1183-84. Despite his knowledge of the backdating scheme and its impact on the Company’s financial reports, Franz certified each of the 15 Class Period quarterly and annual reports, all of which the Company admitted overstated reported income and hid compensation expenses. His certifications included false assurances that the Company maintained adequate internal controls so that its publicly released financial reports were true and accurate in all material respects. ¶¶ 58, 62, 65, 68, 71, 75, 77, 80, 82, 84, 87, 90, 92, 94, 96, 99, 101, 103, 106, 109, 111, 114, 116, 119, 121, 123, 126. As Semtech later admitted, those controls contained glaring material weaknesses. ¶¶ 179-83. “The Ninth Circuit has held that scienter is properly alleged when the complaint alleges both false statements and the defendant’s close involvement in the preparation of those statements.” Zoran, 511 37 See also Adaptive Broadband, 2002 WL 989478, at *14 (inference of scienter raised because “[a]s Adaptive’s financial difficulties were coming to light” by a restatement and an internal investigation “three of the named individual defendants either left the company or were moved to new positions”). Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 34 of 70 25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) F. Supp. 2d at 1013 (citing Daou, 411 F.3d at 1022-24). Here, Lead Plaintiff has alleged both. Accordingly, based on the totality of the allegations against Franz, including the Company’s admission that he “knew or should have known” of the backdating and “initiated or participated in deceptive acts,” his forced resignation, his receipt of thousands of backdated options and his accounting and financial expertise, Plaintiffs have raised at least a strong inference of his scienter. (iii) Defendant Baumann Acted With Scienter Baumann also tries to escape from the Special Committee’s findings by suggesting they “undermine” his scienter because the committee concluded only that he “knew or should have known” of the backdating. Baumann Br. at 17-18. Yet, as McKesson held, even a statement that the defendant “knew or should have known” is highly indicative of scienter. See McKesson, 126 F. Supp. 2d at 1273- 74. Baumann also ignores the Committee’s finding that he “initiated or participated in manipulative acts,” which is evidence that he was at a minimum deliberately reckless. ¶¶ 142, 150. Baumann also received close to 19,000 backdated options. In fact, more than half the options granted to Baumann prior to 2003 were backdated. RJN Ex. 8. His receipt of these backdated options, particularly in light of his role as Semtech’s Treasurer, strongly suggests his knowledge of the backdating fraud and its intended impact. See Quest, 527 F. Supp. 2d at 1183-84. His forced resignation as Company Treasurer following disclosure of the fraud constitutes further evidence of his involvement in the fraud and adds significantly to a strong inference of his scienter. ¶¶ 143, 150.38 38 See McKesson, 126 F. Supp. 2d at 1274. See also Adaptive Broadband, 2002 WL 989478. Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 35 of 70 26 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) In the face of considerable evidence of his scienter, Baumann attempts to avoid liability for the fraud by claiming not to have “made” any of the false and misleading statements at issue, and by arguing that “[a] defendant must actually make a false or misleading statement in order to be held liable under Section 10(b).” Baumann Br. at 8-9. Stoneridge Investment Partners, LLC v. Scientific- Atlanta, Inc., 128 S. Ct. 761 (2008) (“Stoneridge”), however, rejects the argument that there must be a “specific oral or written statement before there [can] be liability under Section 10(b) or Rule 10b-5” as “erroneous.” Id. at 769. In Stoneridge, the Supreme Court expressly acknowledged that “[c]onduct itself can be deceptive.” Id. (emphasis added); see also id. at 773-74. As Baumann admits, “an individual may become a primary violator through substantial participation or intricate involvement in the preparation of fraudulent statements.” Baumman’s Br. at 8-9. Moreover, “an actor is reckless if he had reasonable grounds to believe material facts existed that were misstated or omitted, but nonetheless failed to obtain and disclose such facts although he could have done so without extraordinary effort.” See Howard, 228 F.3d at 1064. As admitted in the Special Committee Report, Baumann participated in the backdating scheme, having at the very least “initiated or participated in deceptive acts.” ¶¶ 142, 150. Moreover, as the Treasurer of Semtech, he was responsible for maintaining adequate and accurate accounts of the Company’s common stock. ¶ 21, RJN Ex. 14 at 25-26. He or the Secretary were also required to sign each stock certificate issued by the Company. Id. at 27 Thus, Baumann was a gate keeper of Semtech’s common stock and could have prevented or disclosed the fraud at any time. Id. At the very least, given his responsibilities over monitoring and issuing shares of Semtech’s common stock, investors had a right to expect he would protect against improprieties in the granting and exercise of options that would divest the Company of that stock at an inadequate or fraudulently induced price. Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 36 of 70 27 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Significantly, Baumann is also named as the press contact on each of the 11 false and misleading quarterly earnings releases during the Class Period. ¶¶ 56, 60, 69, 73, 78, 88, 93, 97, 107, 112, 117. 39 As the press contact and purportedly a member of Semtech’s Investor Relations department, not only did he help prepare Semtech’s press releases, but he was responsible for answering inquiries relating to the announcements. His role and position placed him at the forefront of Semtech’s backdating unlike the far more remote role played by third parties in Stoneridge. In view of his public role at Semtech and role as a corporate fiduciary, it was foreseeable to Baumann that disclosure of the backdating scheme would give rise to liability. Thus, Baumann knew and/or actively participated in the backdating fraud and made false statements to conceal the fraud. Accordingly, Plaintiffs have raised a strong inference of his scienter. (iv) Defendants Carlson and Maheswaran Acted With Scienter On April 14, 2006, Defendant Maheswaran, as Semtech’s CEO, signed and certified the Company’s Annual Report for 2005. ¶ 123. As later admitted by the Company, that report included millions of dollars in hidden expenses and inflated income. The report also came nearly a year after Professor Erik Lie published his statistical analysis on CEO stock option grants which uncorked backdating scandals across the country. RJN Ex. 10. Considering the degree to which Semtech engaged in backdating fraud, the many backdated grants, the statistical improbability that those grant dates were selected at random (1 in 35 trillion), and the Restatement resulting from the admission of backdating by Semtech executives ($91 million), one can strongly infer that Defendant Maheswaran knew of the backdating fraud when he issued the 2005 annual report. 39 See also RJN Exs. 15-25. Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 37 of 70 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Similarly, Defendant Carlson signed and certified eight annual and quarterly reports during his tenure as Semtech’s CEO, each including millions of dollars in inflated income and hidden expenses. ¶¶ 80, 84, 90, 94, 99, 103, 109 and 114. At least two of these reports were issued after Professor’ Lie’s article. It is unreasonable to suggest Carlson was not aware of the backdating fraud when he issued the aforementioned reports. See Zoran, 511 F. Supp. 2d at 1013. (v) Defendant Semtech Acted With Scienter A plaintiff adequately alleges the scienter of the corporate defendant by sufficiently alleging the scienter of any employee or agent of the corporation. See In re Int'l Rectifier Corp. Sec. Litig., No. 97-2544, 2008 U.S. Dist. LEXIS 44872, at *66 (C.D. Cal. May 23, 2008) and In re Apple Computer, Inc. Sec. Litig., 243 F. Supp. 2d 1012, 1023 (N.D. Cal. 2002). Thus, if the Court finds Lead Plaintiff has sufficiently alleged even one of the Individual Defendants acted with scienter, then it must find that Semtech also possessed the requisite scienter. Here, because Lead Plaintiff has sufficiently alleged the scienter of at least one Individual Defendant, it has also adequately alleged Semtech’s scienter. (vi) Defendant Poe, Franz and Baumann’s Class Period Stock Sales Further Support The Already Strong Inferences of Their Scienter Defendants argue that the stock sales do not give rise to a strong inference of scienter because Lead Plaintiff has not alleged these sales were “unusual” or “suspicious” in number or timing, or relative to their past trading behavior.40 The prototypical guidelines regarding the relevance of a defendant’s stock sales to scienter, however, are not applicable to backdating cases. See Quest, 527 F. Supp. 2d at 1184-87. 40 Poe Br. at 17-18, Franz Br. at 22-24, Baumann Br. at 18-19. Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 38 of 70 29 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) First, the percentage of shares sold is irrelevant in the backdating context because the long duration of the fraud alleviates any need to sell large numbers of shares quickly. Id. at 1185. Where a defendant believes the fraud will continue undetected for years or decades, there is no compulsion to sell shares quickly. Id. Moreover, large sales may have actually raised suspicion, causing early detection of defendant’s scheme. Id. “Thus, the requirement that percentages be pled is only relevant when the insider is aware of the time that the inside information will be disclosed and there will be a resulting effect on the stock price.” Id. at 1185. Here, Lead Plaintiff has alleged how many shares Defendants Poe, Franz and Baumann sold during the Class Period and the proceeds generated by the sales. In all, Defendants sold more than $21 million worth of Semtech stock during the Class Period. ¶ 191. It is not relevant whether these sales amounted to a large percentage of the Defendants’ Semtech holdings, the only consideration is whether these sales are large enough to raise suspicion. Quest, 527 F. Supp. 2d at 1185. “Because Plaintiff has pled the amount of stock sales with the appropriate degree of specificity, and the amount is substantial enough to justify an inference of motive, this sub-factor leans in favor of finding the stock sales ‘suspicious.’” Id. at 1186. The issue of timing is also irrelevant in the backdating context because “the nature of Defendants’ … scheme was such that there was no preordained date on which the allegations of improper backdating would be revealed with the resulting drop in stock price.” Id. Additionally, once the backdating became public, any large stock sales by the Defendants would have caused a strong appearance of impropriety. Id. “Thus, the fact that Plaintiff has not pled facts relating to the timing of Defendants sales[ ] is of little significance and this factor neither weighs for nor against a finding of suspicious stock sales.” Id. Likewise, whether the Defendants’ sales were consistent with their prior trading history is also moot because Defendants have allegedly been backdating Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 39 of 70 30 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) options since Semtech went public. Id. Thus, Defendants’ entire trading history has been influenced by the backdating fraud, rendering any comparison to their pre-class period trading histories irrelevant. Id. at 1187. Therefore, this factor does not weigh against a finding of suspicious stock sales either. Id. Accordingly “[g]iven that the first factor, ‘amount of shares sold’ weighs in favor of a finding that the stock sales provided a motive for Defendants’ backdating, and that the second and third factors neither weigh for nor against a finding of suspicious stock sales…the stock sales are ‘suspicious,’ and thus provide a possible motive for Defendants’ actions.” Id. At the very least, under Tellabs and South Ferry, these allegations add to the totality of the scienter averments against Poe, Franz and Baumann. (f) Lead Plaintiff Does Not Rely Solely On Semtech’s Restatement or GAAP Violations To Establish Scienter Defendants argue that Semtech’s Restatement alone does not create a strong inference of scienter.41 Aside from departing completely from the admonition of Tellabs and South Ferry to consider all of Lead Plaintiff’s allegations “holistically,” Defendants’ arguments regarding the Restatement are misplaced. Defendants argue simply that the mere allegation that a company restated its financial statements alone does not give rise to an inference of scienter. But Lead Plaintiff has not alleged that the mere presence of Semtech’s Restatement demonstrates scienter. Rather, Lead Plaintiff has alleged that within the Restatement, Defendants have admitted elements of the claims. ¶¶ 4, 7, 142, 150. Specifically, Semtech admitted that Poe backdated options for nearly a decade with the assistance of Franz, Baumann and another former executive. ¶¶ 142, 150. Moreover, Defendants’ GAAP violations were regularly repeated for nearly a 41 Franz Br. at 18-20, Baumann Br. at 16-17, Carlson/Maheswaran Br. at 12- 13. Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 40 of 70 31 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) decade and resulted in a considerable restatement which erased $91 million in previously reported income. ¶ 141. “Although, as the [Semtech] defendants note, the mere publication of inaccurate accounting figures, or a failure to follow GAAP, without more, does not establish scienter, this does not mean that the misapplication of accounting principles is irrelevant to the question of scietner. This is particularly so where there are specific allegations of significant GAAP violations.” Batwin, 2008 WL 2676364, at *13 (citing McKesson, 126 F. Supp. 2d at 1273) (stating, “When significant GAAP violations are described with particularity in the complaint, they may provide powerful indirect evidence of scienter. After all, books do not cook themselves”). Defendants’ GAAP violations are well detailed in the Complaint. ¶¶ 162- 78. As explained above, the accounting standards violated were straight forward and simple to apply. See supra, at 3-4. These violations, as intended, increased reported income and hid compensation expenses.42 The fraudulent accounting occurred consistently throughout the Class Period and resulted in a significant Restatement (¶ 162), larger than the one this Court found significant in Batwin. 43 At the very least, these violations augment the totality of Plaintiffs’ scienter allegations. 42 Franz erroneously avers that Plaintiffs failed to explain which line items of Semtech’s financial statements were false and misleading. Franz, Br. at 19. Plaintiffs, however, alleged numerous times that Defendants’ backdating fraud inflated net income by hiding compensation expense. ¶¶ 6, 56, 59, 60, 63, 64, 67, 69, 72, 73, 76, 78, 81, 83, 86, 88, 91, 93, 95, 97, 100, 102, 105, 107, 110, 112, 115, 117, 120, 122, 125, 147-49, 152-53, 162, 171. 43 See Batwin, 2008 WL 2676364, at *13 (stating,“[a]lthough, as the [Semtech] defendants note, the mere publication of inaccurate accounting figures, or a failure to follow GAAP, without more, does not establish scienter, this does not mean that the misapplication of accounting principles is irrelevant to the question of scietner. This is particularly so where there are specific allegations of significant GAAP violations.”) (citing McKesson, 126 F. Supp. 2d at 1273) (stating, “When significant GAAP violations are described with particularity in the complaint, they may provide powerful indirect evidence of scienter. After all, books do not cook themselves”). Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 41 of 70 32 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) (g) Lead Plaintiff’s Allegations of Scienter Are Not Based Solely On, But Are Supported By, Defendants’ Positions Defendants pretend their corporate positions were completely irrelevant to the issue of scienter.44 These positions, however, are germane. They put the Defendants at the scene of the crime so to speak, and demonstrate their control over the granting of options at Semtech. As Defendants suggest, allegations of scienter based solely on the defendant’s position are insufficient to create a strong inference of scienter. “On the other hand, allegations that the defendant signed false financial documents, approved options grants, oversaw the option granting process, or was intimately involved in deciding when and to whom options would be granted may support a strong inference of scienter.” Juniper Networks, 542 F. Supp. 2d at 1047. Here, Lead Plaintiff does not rely solely on the Defendants’ positions to establish their knowledge of backdating, but also probes the specific terms of the Stock Option Plans at issue and Defendants’ own statements of who was responsible for the allegedly backdated option grants and which Defendants were otherwise aware of them. ¶¶ 142, 148, 150. In other words, Lead Plaintiff has pleaded direct evidence of Defendants’ knowledge based on their admissions, not based solely upon their positions at Semtech. Nevertheless, the law does not state that allegations of a defendant’s position are irrelevant to scienter, nor does it preclude a finding of scienter based in part on the defendant’s position. Indeed, the Ninth Circuit has consistently found that where the information at issue was critical to the company’s core business, those in positions of responsibility and authority may be presumed to have knowledge of it. 44 Poe Br. at 14, Franz Br. 20-22, Baumann Br. at 14-15, Carlson/Maheswaran Br. at 10. Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 42 of 70 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) See, e.g., Applied Signal, 527 F.3d at 987-88; America West, 320 F.3d 920. See also South Ferry, 2008 WL 4138237, at *6. In Applied Signal, the plaintiffs did not allege that the CEO and CFO actually knew about four undisclosed stop-work orders that would later significantly impair the company’s revenue stream. But “plaintiffs infer[ed] that these high-level managers must have known about the orders because of their devastating effect on the corporation’s revenue.” 527 F.3d at 987. The Ninth Circuit found that the significance of the stop-work orders in conjunction with the defendant’s leadership positions was sufficient to raise a strong inference of scienter. Id. at 987-88. The Ninth Circuit has even extended this line of reasoning to reach a company’s outside directors. America West, 320 F.3d 920. In America West, the plaintiffs did not allege particular facts that the company’s outside directors were aware of maintenance problems that had plagued the airline. Instead, they relied on an inference that the maintenance issues were significantly important to that company such that even the outside directors must have been aware of them. The Court agreed, finding it “was absurd to suggest the Board of Directors would not discuss” such issues. Id. at 943 n.21.45 Here, the Company’s option grants were essential to its future viability and so central to the duties of each of the Individual Defendants, that their knowledge of those grants can be inferred by their positions of control and authority. For 45 See also In re LDK Solar Sec. Litig., No. 07-5182, 2008 U.S. Dist. LEXIS 42425, at *44 (N.D. Cal. May 29, 2008) (stating “[i]t could be reasonably and strongly inferred that LDK’s responsible officers were aware of major discrepancies in how much inventory was being reported to the public and how much was actually present. In sum, there was sufficient evidence to generate a ‘strong inference’ of scienter for the moving defendants”); and In re Northpoint Commc’ns Group, Inc., Sec. Litig., 221 F. Supp. 2d 1090, 1104 (N.D. Cal. 2002) (finding, “upon the laying of a proper factual foundation that information was known within a corporation, it may be inferred that facts critical to a business’s core operations or an important transaction are known to a company’s responsible officers”). Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 43 of 70 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) instance, the Stock Option Plans describe the purpose of granting options as “to promote the longer-term financial success of Semtech Corporation by providing a means to attract, retain and award individuals who can and do contribute to such success.” ¶ 36. As the Special Committee found, the vast majority of backdated options were those issued to newly hired employees. ¶147. Because attracting talented employees was critical to the future success of Semtech, stock option grants were the means by which the Defendants ensured Semtech’s success. Backdating the options made them even more potent. Considering the importance placed upon options to the future success of Semtech, and the fact that the terms of the Stock Option Plans and Defendants’ own admissions put administration of the plans and the granting of options squarely within their control, “it is absurd to suggest” these Defendants were not aware of the backdating alleged. See America West, 320 F.3d at 943 n.21 See also Applied Signal; LDK; and Northpoint. As in Juniper, the Complaint “alleges more than that [the CEO and the CFO] held high executive positions. Rather, it alleges (1) that [the CEO and the CFO] signed false financial documents, (2) that they knew or were reckless in not knowing that these documents were false, and (3) that they placed themselves in a position of oversight over [the Company’s] options granting practices such that they knew or were reckless in not knowing that options were being granted inconsistent with the representations in the financial documents.” 542 F. Supp. 2d at 1048. Accordingly, as in that case, the Defendants’ motions to dismiss here should be denied. Id. Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 44 of 70 35 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) (i) The Fact Defendants Signed the Allegedly False and Misleading Statements Supports Scienter Defendants argue that signing public filings alone does not give rise to a strong inference of scienter.46 Again, they attack a single piece of scienter evidence as if it stands alone. They also denigrate the signature requirements of the SEC reporting rules and SOX, wrongly ignoring that these requirements impose duties upon the signer to review and approve the documents signed. See Howard, 228 F.3d at 1061. As explained in Quest: For these certifications to have any substance, signatories to the certifications must be held accountable for the statements. It would be wholly inappropriate to permit a signatory to evade liability because he/she did not prepare the financial report, as Defendants argue, on the ground that the signatory was unaware of the misstatements made therein. To hold otherwise would effectively eviscerate the entire substance of 18 U.S.C. § 1350, the purpose of which is to ensure that regardless of who prepared the statements, the signatories are attesting to their accuracy and reliability. Additionally, several Defendants also signed proxy forms and other publicly reported financial disclosures. The financial disclosures, proxy statements, and SOX Certifications are clearly “statements” for the purposes of establishing contemporaneous knowledge. Given that the Company is currently in the process of restating numerous financial reports, contemporaneous knowledge of the financial reports signed by the Individual Defendants can be inferred. Quest, 527 F. Supp. 2d at 1189-90 (citations omitted). 46 Poe Br. at 15, Franz Br. at 17-18, Carlson/Maheswaran Br. at 10-11. Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 45 of 70 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Here, Semtech admitted that Poe, Franz and Baumann knew of the backdating fraud. ¶¶ 142, 150. This is corroborated by Semtech’s later firings and by these Defendants’ receipt of backdated options which were memorialized in a written option agreement that clearly displayed the fraudulently induced “grant date” and strike price. ¶¶ 39, 143; RJN Exs. 2-8. The fact that these Defendants then signed and certified publicly issued financial reports, or in the case of Baumann, were the investor relations contact on press releases announcing those financial results further supports the scienter allegations. For the foregoing reasons, Lead Plaintiff has adequately alleged each Defendants’ scienter. 2. The Complaint Adequately Alleges Loss Causation Against All Defendants (a) The Relevant Pleading Standard The Complaint more than adequately alleges ‘loss causation’-i.e., that Defendants’ stock option backdating and accounting fraud inflated the value of Semtech shares during the Class Period, and that the revelation of their fraud removed that inflation. (b) At Least “Some Indication” of Causation is Pled According to the Supreme Court, plaintiffs are required to plead only a “short and plain statement,” pursuant to Rule 8(a)(2), that provides defendants with “some indication of the loss and the causal connection that the plaintiff has in mind.” Dura Pharms. v. Broudo, 544 U.S. 336, 337 (2005) (emphasis added). In Dura the Supreme Court specifically acknowledged that pleading loss causation “[is] not meant to impose a great burden upon a plaintiff.” Dura, 544 U.S. at 347; see Daou, 411 F.3d at 1026 (applying Dura). In Daou, the Ninth Circuit’s leading case applying Dura, the Ninth Circuit held that so long as the “allegations, if assumed true, are sufficient to provide [defendants] with some indication that the drop in [] stock price was causally Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 46 of 70 37 related to [defendants’] financial misstatement” that are a result of the fraudulent conduct, the motion to dismiss is to be denied. 411 F.3d at 1026. Most recently, the Ninth Circuit reaffirmed its holding in Daou, concluding that the plaintiff must only allege “facts that, if taken as true, plausibly establish loss causation” and that “so long as the plaintiff alleges facts to support a theory that is not facially implausible” the motion to dismiss must be denied. In re Gilead Scis. Sec. Litig., No. 06-16185, 2008 WL 3271039, at *8 (9th Cir. Aug. 11, 2008) (emphasis added). Ultimately, loss causation is an issue of fact not properly resolved on a motion to dismiss. As the Ninth Circuit recently clarified, “[s]o long as the plaintiff alleges facts to support a theory that is not facially implausible, the court’s skepticism is best reserved for later stages of the proceedings when the plaintiff’s case can be rejected on evidentiary grounds.” Id.47 “[If] the complaint alleges facts that, if taken as true, plausibly establish loss causation, a Rule 12(b)(6) dismissal is inappropriate.” Id.,48 citing with approval Emergent Capital Inv. Mgmt. LLC, v. Stonepath Group, 343 F.3d 189, 197 (2d Cir. 2003) (loss causation “is a matter of proof at trial and not to be decided on a Rule 12(b)(6) motion to dismiss’”); see also Rudolph v. UTStarcom, No. 07-04578, 2008 WL 4002855, at *4 (N.D. Cal. Aug. 21, 2008) (citing Gilead as supporting that “loss causation is a fact-intensive inquiry better suited for determination at trial than at the pleading stage”).49 47 Tellingly, despite being reported seven days before Defendants filed their motions, no mention of Gilead is made in Defendants’ briefs. 48 Importantly, unlike the comparative analysis for scienter under Tellabs, discussed in detail above, for loss causation, there is “not ‘a probability requirement … it simply calls for enough fact[s] to raise a reasonable expectation that discovery will reveal evidence of’ loss causation.” Gilead, 2008 WL 3271039, at *8 (quoting Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955, 1965 (2007). 49 Defendants rely on Rudolph v. UTStarcom, 560 F. Supp. 2d 880 (N.D. Cal. 2008) (“Rudolph I”), rendered prior to the Ninth Circuit’s decision in Gilead, as supportive of its loss causation analysis. However, just days after Defendants’ (continued . . . ) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 47 of 70 38 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) As detailed below, the allegations of loss causation far exceed the Dura- Daou pleading standard, as they allege a direct connection between the stock drop and the disclosure of Defendants’ fraudulent conduct. Defendants’ attempts to test the statistical significance of the stock drops or to parse the disclosures at issue and reassign causation to their non-culpable aspects is unavailing, premature and must be reserved for the ultimate trier of fact after the conclusion of expert discovery. 3. The Complaint’s Loss Causation Allegations Satisfy Dura The Complaint’s well-pled allegations provide the Defendants with ample indication of Lead Plaintiff’s loss causation theory. Here, in addition to alleging that the Defendants’ backdating scheme artificially inflated the Company’s stock price during the Class Period, Lead Plaintiff: (i) details how the Company’s failure to properly account for its issuance of backdated options caused the Company to misstate its audited financial statements by understating expenses and overstating its reported net income and EPS; (ii) identifies several corrective disclosures concerning the Defendants’ backdating fraud and the Company’s improper accounting of its backdated option grants; (iii) connects these disclosures to the ( . . . continued) filing here the court revisited the issue in Rudolph v. UTStarcom, No. 07-04578, 2008 WL 4002855 (N.D. Cal. Aug. 21, 2008) (“Rudolph II”), analyzing the same disclosure (now in the planitiffs’ amended complaint) and reached the opposite conclusion in light of Gilead. The issue in both decisions was whether a press release announcing an internal investigation into the Company’s stock option practices (but that did not reveal that UTStarcom’s prior financial statements would actually need to be restated) was sufficient to plead loss causation. Rejecting the exact argument advanced by Defendants here, in Rudolph II, Judge Illston concluded that it did stating: Pursuant to the Ninth Circuit’s recent clarification regarding allegations of loss causation, the Court now finds that the November 7, 2006 press release could plausibly establish loss causation. While it is true that the press release did not definitively state that backdating had occurred or that UTStarcom would adjust its financial statements as they related to equity grants, the press release did, for the first time, put the market on notice that such disclosures might be forthcoming.” 2008 WL 4002855, at *4. Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 48 of 70 39 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) alleged misstatements or deceptive conduct; and (iv) identifies the resulting stock drops following successive corrective disclosures and as the artificial inflation dissipated from the Company’s stock price. ¶¶ 127-36. The Complaint specifies a number of partial disclosures regarding Defendants’ backdating fraud which resulted in partial adjustments to Semtech’s stock price as the artificial inflation in the share price was gradually removed: • On May 22, 2006 the Company issued a press release announcing: (i) the SEC had requested “information regarding stock options granted since January 1, 1997” and (ii) Semtech was named in a May 16, 2006 report (the CFRA Report) as a company that was at risk for the timing of its historic stock option grants. (¶¶ 127-128) (RJN Ex. 26); • On June 9, 2006 the Company announced in a SEC filing that it could not timely file its Form 10-Q for the quarter ended April 30, 2006, and that the Company was “also conducting [its] own internal review of these stock option grants” (¶ 129) (RJN Ex. 27); • On June 14, 2006 the Company announced further details of the fallout from its historic options backdating, including that (i) the Company’s Audit Committee had commenced its own independent investigation; (ii) the Company received a subpoena, dated June 8, 2006, from the United States Attorney’s Office for the Southern District of New York regarding its historic stock options practices; (iii) filing of the Company’s Form 10-Q for the quarter ended April 30, 2006 would be delayed past the deadline given by the SEC; (iv) the Company expected a delisting notification from NASDAQ; and (v) two derivative lawsuits were filed against the Company and certain of its present and former directors and executive officers relating to the Company’s past stock option practices (¶ 130) (RJN Ex. 28); Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 49 of 70 40 • On July 20, 2006 the Company filed a Form 8-K which revealed that the Company’s Board of Directors, on July 12, 2006, formed a Special Committee to continue the Audit Committee’s investigation, and that the investigation’s “initial phase” concluded that the measurement dates pursuant to the requirements of ABP 25 for certain stock option awards granted from 1998 through 2003 differ from the measurement dates previously recorded for such awards by the Company, and that as a result “the Company expects to record additional non-cash compensation expenses and expects such additional expenses to be material.” The Company also revealed for the first time that it “expects to restate its financial statements for fiscal years 2002-2006” - which will affect financial statements for earlier years and as a result its previously issued financial statements should not be relied upon. The Company further revealed that expenses arising from the option backdating investigation, related litigation and other activities were expected to be significant. Finally, the Company revealed that it was evaluating its internal financial reporting and disclosure controls and procedures (¶ 132) (RJN Ex. 29). Each of these disclosures provided additional information to the market regarding Semtech’s exposure as an option backdater and, as such, each is sufficient to plead loss causation.50 50 See, e.g., In re Bradley Pharms. Sec. Litig., 421 F. Supp. 2d, 822, 828-29 (D.N.J. 2006) (SEC’s informal inquiry “partially disclosed what the alleged misrepresentations had concealed from the market and began to reveal to the market place what the [subsequent disclosures] later confirmed”); Juniper, 542 F. Supp. 2d at 1049 (reports that identified Juniper as a high risk for options backdating and announcements that the company’s prior financial statements could not be relied upon, were sufficient to plead loss causation); In re Openwave Sys. Sec. Litig., 528 F. Supp. 2d 236, 253-54 (S.D.N.Y. 2007) (announcements that the SEC was investigating Openwave’s stock option grant practices and that the company had received subpoenas from two United States Attorneys concerning option grants were each sufficient to plead loss causation); In re Unitedhealth Group PSLRA Litig., No. 06-cv-1691, 2007 WL 1621456 (D. Minn. June 4, 2007) (Wall Street Journal article reporting the United Health executives had received (continued . . . ) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 50 of 70 41 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) The Complaint goes on to detail the effect these partial disclosures had on Semtech’s stock price (¶¶ 134-136) as follows: (i) Semtech’s stock price dropped on May 22 and 23, 2006 (losing $0.78 from its closing on May 19) following the Company’s May 22 press release and issuance of the CFRA report; (ii) Semtech’s stock price dropped on June 13-16 (losing $0.76 from its closing on June 12) as a result of the Company’s June 9 and June 14, 2006 disclosures; and (iii) Semtech’s stock price dropped on July 20 and 21 (losing $1.59 from its closing on July 19, 2006) following the Company’s press releases on July 20, 2006.51 These allegations plainly demonstrate that each partial disclosure of Defendants’ fraud caused a decrease in Semtech’s stock price. Accordingly, Lead Plaintiffs’ allegations more than suffice under Dura and Daou to plead loss causation. (a) Defendants’ Other Arguments are Meritless Defendants argue that Lead Plaintiffs’ continued stock purchases on June 19 and 27, 2006 -- after the Company’s partial disclosures -- somehow undercut loss causation. This argument, however, is premised on the erroneous presumption that a shareholder would never buy a company’s stock after that company has disclosed ( . . . continued) backdated options sufficient to plead loss causation); Rudolph II, 2008 WL 4002855, at *4 (press release announcing investigation into past options practice sufficient to allege loss causation). 51 With respect to a disclosure-by-disclosure analysis of loss causation, and the temporal connection between disclosures and stock price movement advocated by Defendants, the Ninth Circuit expressly rejected “a bright-line rule requiring an immediate market reaction” because “[t]he market is subject to distortions that prevent the ideal of a free and open public market from occurring.” Gilead, 2008 WL 3271039, at *9. Indeed, a “limited temporal gap . . . and the subsequent decline in stock value does not render a plaintiff’s theory of loss causation per se implausible.” Id. In Gilead, the “temporal gap” amounted to three months. Here, as discussed, the reaction of Semtech’s share price occurred within a day or two of the disclosures in most cases, and the persistent loss initiated on May 16 came to a close by July 20, when the Company announced that it would restate years of financial statements to correct for underreporting compensation expense. Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 51 of 70 42 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) a fraud. (Poe Br. at 21, n.13; Carlson/Maheswaran Br. at 19-20).52 The truth is that many investors purchase stock after the artificial inflation caused by a fraud has been removed from the stock when the remaining fundamentals of the company’s future profitability appear promising. Defendants’ argument also places far too much emphasis on the subjective investment strategy of one shareholder where loss causation is an objective standard not properly assessed through the myopic lens Defendants argument provides. Cromer Fin. Ltd. v. Berger, No. 00-2284, 2003 WL 21436164, at *7 (S.D.N.Y. June 23, 2003) (“the issue of loss causation is an objective one”). Defendants also attempt to neutralize the July 20, 2006 press release and concomitant stock price drop on the specious grounds that the Class Period ends on July 19, 2006 - the day before this press release. (Carlson/Maheswaran Br. at 20; Poe Br. at 21-22). As the July 20, 2006 press release is the final corrective disclosure, Lead Plaintiff appropriately ended the Class Period on the day before - the last day that the Company’s stock price contained any artificial inflation due to 52 Defendants alternatively argue that Lead Plaintiff’s continued stock purchases undercut its reliance argument. (Id.) Defendants posit this argument as follows: Lead Plaintiff could not have relied upon the misrepresentations if it continued to purchase after the truth was revealed. However, “[a]s numerous courts have held, the fact that a putative class representative purchased additional shares in reliance on the integrity of the market after the disclosure of corrective information has no bearing on whether or not the representative relied on the integrity of the market during the class period, that is before the information at issue was corrected or changed.” In re Salomon Analyst Metromedia Sec. Litig., 236 F.R.D. 208, 216 (S.D.N.Y. 2006) (citing In re Frontier Ins. Group, Inc. Sec. Litig., 172 F.R.D. 31, 42 (E.D.N.Y. 1997)); see also In re Nortel Networks Corp. Sec. Litig., No. 01 Civ. 1855, 2003 WL 22077464, at *3 n.4 (S.D.N.Y. Sept. 8, 2003) (finding typicality requirement for class certification satisfied despite plaintiff’s purchases the defendant’s stock “well after the alleged fraud was exposed”); Kronfeld v. Trans World Airlines, Inc., 104 F.R.D. 50, 53 n.4 (S.D.N.Y. 1984); Garfinkel v. Memory Metals, Inc., 695 F. Supp. 1397, 1404 (D. Conn. 1988); Feder v. Elec. Data Sys. Corp., 429 F.3d 125, 138 (5th Cir. 2005). Any purchases by Lead Plaintiff after partial disclosure of the truth is only a reflection of Lead Plaintiff’s reliance upon the integrity of the market and a determination that the Company’s lower share price was an appropriate risk. Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 52 of 70 43 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Defendants’ fraud. The June 20, 2006 press release caused the last of the artificial inflation to be removed from the share price. Ending the Class Period on the day of the final disclosure is consistent with the cases cited by Defendants, as Defendants are only being charged with misrepresentations made during the Class Period. (b) The Reaction of Semtech’s Stock Price to Disclosures About the Restatement Confirms Loss Causation For the Earlier Drops After ignoring the corrective impact of the earlier disclosures, the Defendants contend that the Complaint fails to establish loss causation because the stock price only decreased one penny after Semtech finally quantified the amount of its Restatement. Carlson/Maheswaran Br. at 20. In addition to again improperly raising questions of fact as to whether any inflation remained in the Company’s stock price as of the date of this announcement, this argument is irrelevant to loss causation because Lead Plaintiff has not alleged any loss was caused by this statement. The market’s reaction to Semtech’s post-Class Period announcements about the Restatement confirms that the Company’s earlier disclosures fully corrected Defendants’ prior statements concerning the accuracy and completeness of Semtech’s financial statements. Moreover, the partial disclosures preceding the Restatement created the expectation that Semtech, like many others, would be forced to restate and recognize a material reduction of its previously reported income. See, e.g., In re Seitel Inc. Litig., 447 F. Supp. 2d 693, 711-13 (S.D. Tex. 2006) (denying motion to dismiss where stock did not drop on announcement of restatement, but did drop due to other disclosures). Indeed, these earlier corrective disclosures in May - July 2006 resulted in precisely the persistent loss expected of an efficient market. The disclosures in May - July 2006 revealed to investors that options backdating had occurred at Semtech and that Semtech would have to restate past Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 53 of 70 44 earnings materially to account properly for the fraudulently dated options. Naturally the market expected a restatement of Semtech’s audited financial statements, along with tax implications and criminal and civil actions, to follow. Indeed, “[t]he fact that the stock price fell without more complete and detailed disclosure, if anything, only goes to show that the tip of the iceberg was enough [to] cause the loss.” In re Bristol-Myers Squibb Sec. Litig., No. 00-1990, 2005 U.S. Dist. LEXIS 18448, at *58 (D.N.J. Aug. 17, 2005). Simply put, by the time Semtech got around to announcing the exact dollar impact of the backdating scheme, they were merely confirming the material risks that investors had anticipated from the earlier disclosures. For these reasons, the reaction of Semtech’s stock price to the Company’s announcement on March 29, 2007 does not have any bearing on the sufficiency of the Complaint’s loss causation allegations. 4. Lead Plaintiff Sufficiently Alleges Reliance To take advantage of the presumption of reliance applicable in securities class actions, a plaintiff must allege that a “defendant made material representations or omissions concerning a security that is actively traded in an ‘efficient market,’ thereby establishing a ‘fraud on the market.’” Batwin, 2008 WL 2676364, at *15 n.10 (quoting Binder v. Gillespie, 184 F.3d 1059, 1064 (9th Cir. 1999)). Lead Plaintiff has satisfied this minimal burden. (a) Lead Plaintiff Has Sufficiently Plead Market Efficiency At the motion to dismiss stage, the plaintiff’s burden to plead market efficiency is satisfied by merely alleging that an efficient market exists - as any further inquiry would require an evidentiary search that is better suited for a later stage in the litigation.53 Indeed, the Supreme Court recognized in Basic Inc. v. 53 See In re Credit Suisse-AOL Sec. Litig., 465 F. Supp. 2d 34, 51 n.18 (D. Mass. 2006) (“Market efficiency is not, however, an appropriate inquiry for a (continued . . . ) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 54 of 70 45 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Levinson, 485 U.S. 224 (1988) that proof of market efficiency “is a matter for trial.” Id. at 249 n.29. Asking the Court to decide this question of fact now, Defendants Carlson and Maheswaran argue that Lead Plaintiff cannot rely on the “fraud on the market” theory endorsed by the Supreme Court in Basic for an alleged failure to “demonstrate” the existence of an efficient market. Carlson/Maheswaran Br. at 22. Even if this Court were to entertain Defendants’ invitation, which it should not, Lead Plaintiff has satisfied this burden. The Ninth Circuit has indicated that certain factors may be helpful in inferring an efficient market, as announced in Cammer v. Bloom, 711 F. Supp. 1264 (D.N.J. 1989): (1) whether the stock trades at a high weekly volume; (2) whether securities analysts follow and report on the stock; (3) whether the stock has market makers and arbitrageurs; (4) whether the company is eligible to file SEC registration Form S-3, as opposed to Form S-1 or S-2; and (5) whether there are empirical facts showing a cause and effect relationship between unexpected corporate events or financial releases and an immediate response in the stock price. Binder, 184 F.3d at 1065. See Cammer, 711 F. Supp. at 1286-87; see also In re 2TheMart.Com, Inc. Sec. Litig., 114 F. Supp. 2d 955, 964 (C.D. Cal. 2000) (J. Carter). Defendants argue that at most Lead Plaintiff has alleged two factors, which they contend is not sufficient evidence of an efficient market. Carlson/Maheswaran Br. at 23. But to adequately allege an efficient market, this ( . . . continued) motion to dismiss.”); see also In re USA Talks.com Sec. Litig., No. 99-CV-0162-L (JA), 2000 WL 1887516, at *6 (S.D. Cal. Sept 14, 2000) (holding that “[a] showing of whether the Cammer elements are met requires a factual exploration which is premature at the motion to dismiss stage.”); In re Parmalat Sec. Litig., 376 F. Supp. 2d 472, 508 (S.D.N.Y. 2005) (“Whether a market is efficient often is a question of fact”); Chu v. Sabratek Corp., 100 F. Supp. 2d 815, 826 (N.D. Ill. 2000) (“the question on a motion to dismiss is not whether [the] plaintiff has proved an efficient market, but whether he has pleaded one.”) Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 55 of 70 46 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Court has previously held that plaintiffs need not plead all five of these factors,54 and that alleging only two of the Cammer factors can be sufficient.55 In addition to the Cammer factors, allegations that a stock traded on the NASDAQ (or another national stock exchange) also strongly supports a finding of an efficient market.56 Here, Lead Plaintiff has more than adequately plead market efficiency. Among other allegations in the Complaint, Lead Plaintiff alleges: • Semtech stock traded on the NASDAQ (¶ 198(a)); • several securities analysts employed by major brokerage firms reported on the stock (¶ 198(d)); • Semtech’s stock price reacted swiftly in direct response to announcements by the Company in connection with the backdating scheme (pleading the crucial cause and effect factor) (¶¶ 8-10, 134-136); 54 See 21TheMart.Com, 114 F. Supp. 2d at 964 (J. Carter)(“each [Cammer] factor need not be alleged in order to give rise to the inference that the stock was traded in an efficient market”). 55 See Cammer, 711 F. Supp. at 1287; Miller v. NTN Commc’ns, Inc., No. 97- CV-1116 TW JAH, 1999 WL 817217, at *10 (S.D. Cal. May 21, 1999) (holding that plaintiffs pleaded an efficient market after analyzing only two points - decline in the company shares immediately after the warning was issued and the fact that the shares were trading on the AMEX). Additionally, the court in 2TheMart.com has held that while each factor need not be alleged, “the fifth factor may be the most significant factor in determining market efficiency as it is ‘the essence of an efficient market and the foundation for the fraud on the market theory.’” 114 F. Supp. 2d at 964. This “cause and effect” factor can be alleged through statements regarding the stock price moving in response to certain disclosures by the company. See, e.g., id. at 964-65; Miller, 1999 WL 817217, at *10. 56 See, e.g., Levine v. SkyMall, Inc., No. 99-166, 2002 WL 31056919, at *5 (D. Ariz. May 24, 2002) (“[T]here should be a presumption ... that certain markets are developed and efficient for virtually all the securities traded ... [on] the NASDAQ….”); Hayes v. Gross, 982 F.2d 104, 107 (3d Cir. 1992) (allegations of stock trading on the NASDAQ suggested an efficient market); RMED Int'l, Inc. v. Sloan's Supermarkets, Inc., 185 F. Supp. 2d 389, 404-05 (S.D.N.Y. 2002) (holding “numerous courts have held that stocks trading on the AMEX are almost always entitled to the presumption”) (citations omitted); Miller, 1999 WL 817217, at *10 (same); In re Accredo Health, Inc. Sec. Litig. No. 03-2216 DP, 2006 WL 1716910, at *8 (W.D. Tenn. April 19, 2006) (“based on this court's research, the overwhelming case authority holds that securities listed on the NASDAQ trade in an efficient market”). Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 56 of 70 47 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) • Semtech regularly communicated with public investors via established market communications mechanisms, including major newswire services (¶ 198(c)); • as a regulated issuer, Semtech filed periodic reports with the SEC and the NASDAQ (¶ 198(b)); • Semtech traded on an efficient market (¶ 198); and • the market for Semtech securities promptly digested current information from public sources and reflected such information in Semtech’s stock price (¶ 199). Furthermore, a review of publicly filed SEC documents demonstrate that Semtech was eligible to file Form S-3s from 1996 through the end of 2006, after which it lost its eligibility in the fallout from the disclosure of the options backdating scandal as disclosed in Defendants’ 2007 Form 10-K.57 See Cammer, 711 F. Supp. at 1264 (holding one factor for determining market efficiency is determining whether the company is eligible to file SEC registration form S-3, as opposed to form S-1 or S-2). Accordingly, Lead Plaintiff has satisfied its minimal burden at the motion to dismiss stage of pleading that Semtech stock traded on an efficient market. B. Lead Plaintiff Has Standing to Pursue this Securities Class Action Lead Plaintiff has properly brought this class action for violations of Section 10(b) and Rule 10b-5 of the Exchange Act, to seek remedy for the substantial losses that they and the Class, as Semtech shareholders, independently suffered as a result of the false and misleading statements Defendants made in connection with their options backdating scheme. 57 See Form S-3s for 1996-2000 (RJN Ex. 30) and Semtech’s 2007 Form 10-K (RJN Ex. 31). Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 57 of 70 48 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) 1. Lead Plaintiff’s Claims are Direct in Nature Whether an action is derivative or direct is an issue governed by the law of the state in which the corporation is incorporated. See Lapidus v. Hecht, 232 F.3d 679, 682 (9th Cir. 2000). Under Delaware law, Semtech’s state of incorporation (¶ 16), Lead Plaintiff’s claims are direct. Tooley v. Donaldson, Lufkin & Jenrette, Inc. provides the framework to determine whether an action is direct or derivative in nature. See 845 A.2d 1031, 1035-40 (Del. 2004). Under Tooley, courts must address two issues: (1) who suffered the alleged harm (the shareholder or the corporation); and (2) who would receive the benefit of any recovery or other remedy (the shareholder or the corporation). See 845 A.2d at 1033. The answers compel a finding that Lead Plaintiff’s claims are direct. (a) The Class Suffered the Harm The first prong of Tooley is satisfied by Lead Plaintiff’s allegations that the Class suffered financial harm caused by Defendants’ fraudulent conduct. As articulated by Arthur Levitt, former Chairman of the SEC, backdating “is stealing” and results in the “ripping off [of] shareholders in an unconscionable way.” ¶ 53. Defendants’ conduct here is no exception. As alleged, Lead Plaintiff “purchased Semtech securities at artificially inflated prices and suffered an economic loss when the artificial inflation was removed from Semtech’s stock price.” ¶¶ 195-197. This price inflation was the result of Defendants’ fraudulent activity which caused the Company to materially overstate its reported net income and materially understate its reported compensation expense, misrepresenting its compliance with its own stated Stock Option Plans, misleading investors as to the value of Defendants’ compensation, and misrepresenting its compliance with GAAP. ¶¶ 2, 6, 171, 178, 195-197. Upon the staged disclosure of the truth, this inflation was gradually removed and Lead Plaintiff and the Class suffered massive losses in response. ¶ 197. Although Lead Plaintiff and the Class suffered Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 58 of 70 49 significant financial losses, Defendants reaped benefits including over $21 million in Class Period stock sales, the receipt of hundreds of thousands of backdated options, and the ability to attract, retain and motivate its officers and key employees through an undisclosed measure of compensation. ¶¶ 6, 36, 191. Defendants try to misdirect the Court by arguing that the Company also suffered harm. Semtech Br. at 6-7. This is irrelevant. Companies often suffer harm when they commit fraud. What is important is that Lead Plaintiff seeks redress only for the harm clearly and directly suffered by Lead Plaintiff and the Class as a result of their purchase of inflated Semtech stock. ¶¶ 6, 15, 195-197, 209-210. Defendants’ also unsuccessfully attempt to paint the Complaint as one merely alleging mismanagement, a claim Defendants contend belongs only to the corporation. See Franz Br. at 7-8. Once again, the fallacy of Defendants’ argument is evident from a review of the Complaint. Specifically, although the Complaint alleges there were material weaknesses in the Company’s internal controls, this allegation does not stand alone. Instead, the Complaint seeks redress for financial losses sustained by the putative class as a result of Defendants’ affirmative misrepresentations of Semtech’s income and expenses through “intentional manipulation” (as found by Semtech’s Special Committee) in connection with their backdating scheme. ¶¶ 2, 6, 142, 171, 178, 196. Accordingly, far from “bootstrapping” allegations of fraud to a mismanagement claim, these allegations unequivocally demonstrate that this is a paradigm case of a violation of § 10(b) and Rule 10b-5 seeking redress for artificial inflation of Semtech’s stock price during the Class Period.58 See Hayes, 982 F.2d at 105-07 (holding plaintiffs’ 58 The cases cited by Defendant Franz in support of its argument that mismanagement claims are better brought as derivative actions are inapposite as they deal largely with allegations where the claims are purely that the corporation had insufficient internal controls and failed to report that these controls were deficient. See Franz Br. at 7-8. The principal case that Defendant Franz relies on (continued . . . ) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 59 of 70 50 suffered “direct injury” from artificial inflation of corporate stock price despite defendant’s arguments that mismanagement allegations made the action derivative).59 The foregoing allegations clearly allege a direct injury for harm suffered by Lead Plaintiff and the Class. Further demonstrating the fallacy of Defendants’ arguments, and that these facts more than support a direct claim for losses suffered by these shareholders, are the sheer number of similar options backdating suits which have been brought as direct claims and favorably resolved on similar allegations as those alleged here.60 ( . . . continued) actually supports Lead Plaintiff’s position by stressing the “distinction between claims that arise from acts of corporat[e] mismanagement” and claims (such as here) that “contain an element of manipulation and or deception.” In re First Chicago Corp. Sec. Litig., 769 F. Supp. 1444, 1449 (N.D. Ill. 1991) (holding that plaintiffs Rule 10b-5 allegations amounted to more than a mismanagement claim for purposes of passing 12(b)(6) muster). Similarly, the case here deals with “manipulation” and “deception” as noted by the Company’s own Special Committee, which concluded that “the evidence supports a finding of intentional manipulation” and implicated certain Defendants. ¶ 142. 59 Similar to the allegations here, the Hayes plaintiff alleged that defendants made misrepresentations that resulted in artificial inflation of the corporate stock price, and that under the federal securities laws that plaintiff and others similarly situated were injured as a result. See id. at 105. The Third Circuit held that the amended complaint alleged “direct injury to plaintiff” despite defendants arguments that it was a derivative action. 60 See, e.g., Juniper, 542 F. Supp. 2d 1037 (motion to dismiss direct claims brought by aggrieved shareholders under Section 10(b) denied in part); In re Brocade Sec. Litig., No. 05-2042 (N.D. Cal. Aug. 27, 2007) (motion to dismiss direct claims brought by aggrieved shareholders under Sections 10(b) and 20(a) denied); In re Monster Worldwide, Inc. Sec. Litig., No. 07-2237, 2008 WL 623339, at *1 (S.D.N.Y. Mar. 4, 2008) (individual defendant’s motion to dismiss direct claims brought by aggrieved shareholders under sections 10(b) and 20(a) denied); In re PainCare Holdings Sec Litig., 541 F. Supp. 2d 1283 (M.D. Fla. 2008) (motion to dismiss direct claims brought by aggrieved shareholders of sections 10(b) and 20(a) denied); In re Brooks Automation, Inc. Sec. Litig., No. 06- 11068-RWZ, 2007 WL 4754051 (D. Mass. Nov. 6, 2007) (same); Openwave, 528 F. Supp. 2d at 249 (same); In re UnitedHealth Group PSLRA Litig., No. 06-1691, 2007 WL 1621456 (D. Minn. June 4, 2007) (same); Grecian v. Meade Instruments Corp., No. 06-908 (C.D. Cal. filed Sept. 27, 2006) (direct claims brought by aggrieved shareholders of Section 10(b) resolved in settlement); In re KLA-Tencor Corp. Sec. Litig., No. 06-4065 (N.D. Cal. filed June 29, 2006) (same); Grasso v. Vitesse Semiconductor Corp., No. 2:06-cv-02639-R-CT (C.D. Cal. filed May 1, 2006) (same); In re Wireless Facilities, Inc. Sec. Litig. II, No. 3:07-cv-00482-NLS (S.D. Cal. filed Mar. 15, 2007) (same); In re Am. Tower Corp. Sec. Litig, No. 06- CV-10933 (MLW) (D. Mass. filed May 26, 2006) (same); In re HCC Ins. (continued . . . ) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 60 of 70 51 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) (b) The Class Will Receive the Benefit of Any Recovery Given that the harm complained of was suffered by Lead Plaintiff and the Class, the benefit of any recovery will go to them. This is an independent harm suffered by those shareholders who purchased Semtech stock during the Class Period - and these same shareholders will receive the benefit of recovery.61 See, e.g., Openwave, 528 F. Supp. 2d at 252 (loss causation found where post disclosure substantial price decline removed the artificial inflation from the stock price, causing real economic loss to investors who had purchased during the Class Period); Juniper, 542 F. Supp. 2d at 1049 (holding that shareholders adequately plead loss causation based on similar facts as alleged here). Ignoring these allegations, Defendants argue a recovery would go only to Semtech because it, and not its shareholders, allegedly suffered losses as a result of receiving less than it should have for the option grants when they were exercised at below market value prices. Semtech Br. at 8. Therefore, Defendants’ argue, any alleged damages in the underpayment of the exercise price for the backdated stock options belong to the Company. Id. Notably, Defendants fail to point to any allegations where Lead Plaintiff seeks to recover any alleged underpayment on backdated options that may have been exercised. Indeed, the Lead Plaintiff only seeks damages suffered by the Class as a direct and proximate cause of ( . . . continued) Holdings, Inc. Sec. Litig., No. 4:07-cv-00801 (S.D. Tex. filed Mar. 8, 2007) (same); In re Newpark Res., Inc. Sec. Litig., No. 2:06-cv-02150-ML-KWR (E.D. La. filed Apr. 21, 2006) (same). 61 In support of the argument that the “shareholders would not receive any damages from such a claim” Semtech incorrectly relies on Kramer v. W. Pac. Indus., Inc., 546 A.2d 348, 352-53 (Del. 1988). See Semtech Br. at 10. However, this case is wholly inapposite as it neither involves an options backdating matter nor a Section 10(b) and Rule 10b-5 claim. Instead, it involves a state court action where the courts considered the “consequences of a cash-out merger upon the standing of a shareholder to pursue a claim of wrongdoing against management.” Kramer, 546 A.2d at 349. Kramer’s claim for corporate waste bears no relevance on the instant Section 10(b) action where Lead Plaintiff seeks redress to harms they directly suffered from their purchase of shares inflated as a result of Defendants’ deception. Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 61 of 70 52 Defendants’ false and misleading statements and their purchase of Semtech’s artificially inflated stock. ¶¶ 6, 15, 171, 195-197, 209-210. Accordingly, where, as here, the Class has been directly harmed by their purchase of inflated corporate stock, they, not the Company, will receive the benefit of any recovery, thus satisfying Tooley’s second prong. 2. Direct and Derivative Actions are not Mutually Exclusive Defendants argue that “direct and derivative actions ‘are mutually exclusive’” and that the existence of parallel derivative and direct actions illustrates that this case should have been filed as a derivative case. See Semtech Br. at 6 (citing Schuster v. Gardner, 127 Cal. App. 4th 305 (2005)). The fallacy of this argument is best demonstrated by the enormous number of options backdating actions in which parallel derivative and direct claims are pursued to compensate all those aggrieved - including both the corporation and the shareholders.62 62 See, e.g., Juniper, 542 F. Supp. 2d 1037 (direct) and In re Juniper Derivative Actions, No. 5:06- 03396 JW (N.D. Cal. filed May 24, 2006) (derivative); In re Brocade Sec. Litig., No. 05-2042 (N.D. Cal. Aug. 27, 2007) (direct) and In re Brocade Commc’ns Sys., Inc. Derivative Litig., No. C-05-2233- CRB (N.D. Cal. filed June 1, 2005) (derivative); Monster, 2008 WL 623339 (direct) and In re Monster Worldwide, Inc. Stock Option Derivative Litig., Master Docket 1:06:cv 04622 (S.D.N.Y. filed June 15, 2006) (derivative); In re Brooks Automation, Inc. Sec. Litig., No. 06-11068-RWZ, 2007 WL 4754051 (D. Mass. Nov. 6, 2007) (direct) and In re Brooks Automation, Inc. Derivative Litig., No. 06- 10943 (D. Mass. filed May 30, 2006) (derivative); Openwave, 528 F. Supp. 2d at 249 (direct) and In re Openwave Sys, Inc. S’holder Derivative Litig., No. C 06- 03468 SI, 2008 WL 410259, at *1 (N.D. Cal. Feb. 12, 2008) (derivative); In re UnitedHealth Group PSLRA Litig., No. 06-1691, 2007 WL 1621456 (D. Minn. June 4, 2007) (direct) and In re UnitedHealth Group Inc. S'holder Derivative Litig, No. 06-01216 (D. Minn. filed Mar. 29, 2006) (derivative); Grecian v. Meade Instruments Corp., No. 06-908 (C.D. Cal. filed Sept. 27, 2006) (direct) and In re Meade Instruments Corp. Derivative Litig., No. 06-CC-205 (Cal. Super Ct. County of Orange filed Oct.6, 2006) (derivative); In re KLA-Tencor Corp. Sec. Litig., No. 06-4065 (N.D. Cal. filed June 29, 2006) (direct) and In re KLA-Tencor Corp. S'holder Derivative Litig., No. C06-03445 JW (HRL) (N.D. Cal. filed May 26, 2006) (derivative); In re American Tower Corp. Sec. Litig, No. 06-CV-10933 (MLW) (D. Mass. filed May 26, 2006) (direct) and In re American Tower Corp. Derivative Litig., No. 06-11029 (D. Mass. filed June 13, 2006) (derivative); In re HCC Ins. Holdings, Inc. Sec. Litig., No. 4:07-cv-00801 (S.D. Tex. filed Mar. 8, 2007) (direct) and Bacas v. Way, No. 07-456 (S.D. Tex. filed Feb 1, 2007) (derivative); In re Newpark Resources, Inc. Sec. Litig., No. 2:06-cv-02150-ML- KWR (E.D. La. filed Apr. 21, 2006) (direct) and In re Newpark Resources, Inc. (continued . . . ) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 62 of 70 53 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Semtech’s attempt to support this argument by citing Schuster v. Gardner is unavailing. See 127 Cal. App. 4th 305 (2005). In fact, Schuster supports well- settled authority that direct and derivative actions can be maintained in parallel to seek redress for injuries to different parties. Schuster involves a state court action against Peregrine System, Inc. for certain accounting improprieties. The Schuster action was filed along with a series of law suits, alleging violations of, among other things, Section 10(b), Section 11, Section 14, and breaches of fiduciary duty. These actions sought relief for injuries sustained by the shareholders (the direct actions) and injuries sustained by the corporation (the derivative actions). See In re Peregrine Sys., Inc. Sec. Litig., No. 02 CV 870-J (RBB) (S.D. Cal. Nov. 21, 2003)(direct action); Peregrine Litig. Trust v. Moores, No. 788659 (San Diego Super. Ct.) (civil action); In re Peregrine Sys., Inc. Corp. Derivative Litig., No. 02- 00950 (S.D. Cal. filed May 14, 2002) (derivative action). Accordingly, where Lead Plaintiff has satisfied the elements of a 10(b) claim (as alleged here) parallel derivative and shareholder lawsuits naturally co-exist. C. Lead Plaintiff’s Claims Are Timely 28 U.S.C. § 1658 provides two limitations periods, both of which are satisfied in this case. 1. The Claims Were Brought Within the Two-Year Period Provided by 28 U.S.C. § 1658(b)(1) 28 U.S.C. § 1658(b)(1) provides that an action involving “a claim of fraud, deceit, manipulation . . . of a regulatory requirement concerning the securities laws” must start within two years “after the discovery of the facts constituting the violation.” The period begins when the plaintiff (1) has actual knowledge of the ( . . . continued) Derivative Litig., No. 06-07340 (E.D. La. filed Oct. 5, 2006) (derivative) (The foregoing list of direct and derivative actions does not include reference to all derivative actions filed in connection with the corporation’s options backdating practices). Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 63 of 70 54 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) fraud or (2) should have, in the exercise of reasonable diligence, discovered the fraud. Betz v. Trainer Wortham & Co., Inc. 519 F.3d 863, 871 (9th Cir. 2008). The second test, known as “inquiry notice,” is a two part test. First, the facts “must be sufficiently probative of fraud-sufficiently advanced beyond the stage of a mere suspicion ... to incite the victim to investigate.” Id. at 871. If that is established, the question is “in the exercise of reasonable diligence,” when should the plaintiff have discovered the facts constituting the alleged fraud. Id. The statute does not begin to run until both prongs of the “inquiry notice” test are satisfied. Id. In the context of a Rule 12(b)(6) motion, the defendant bears the greater burden of showing “beyond doubt that the plaintiff can prove no set of facts that would establish the timeliness of the claim.”63 Baumann and Poe simply assert, without any evidence, that Lead Plaintiff was on “inquiry notice” of the Defendants’ misrepresentations concerning compensation expense and net income years before their backdating scheme came to light. See Baumann Br. at 21 n.3; Poe Br. at 24-25. These Defendants have not identified any facts that could be considered “sufficiently probative of fraud” under the rigorous standard set out in Betz. See 519 F.3d at 876. As the court explained in Zoran, 511 F. Supp. 2d at 1014, the existence of publicly available information on stock options is irrelevant to the question of inquiry notice unless such information gives some reason to suspect fraud. After all, outsiders do not have “superpowers to detect secret backdating inside the company,” and the law does not require a reasonable investor to “engage in complicated statistical analysis in 63 Huynh v. Chase Manhattan Bank, 465 F.3d 992, 997 (9th Cir. 2006); see also Jablon v. Dean Witter & Co., 614 F.2d 677, 682 (9th Cir. 1980) (a motion to dismiss based on the statute of limitations can be granted “only if the assertions of the complaint, read with the required liberality, would not permit the plaintiff to prove” a timely claim); In re Unumprovident Corp. Sec. Litig., 396 F. Supp. 2d 858, 884 (E.D. Tenn. 2005) (declining to reach “the somewhat extraordinary conclusion” that the plaintiff was on inquiry notice as a matter of law). Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 64 of 70 55 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) order to uncover alleged malfeasance.” Id. at 1014 (quoting Ryan v. Gifford, 918 A.2d 341, 359 (Del. Ch. 2007)). The first indication that Semtech was engaged in fraud in reporting its compensation expenses and net income came on May 16, 2006, when the Center for Financial Research and Analysis (“CFRA”) published a research report listing Semtech as a company “at risk” for such practices. ¶ 127. Two days later, the SEC requested information from Semtech on its stock options, and the Company announced an internal review on June 9, 2006. ¶¶ 128-129. Afterward the Company publicly claimed that “[w]e first learned of issues associated with our past stock option grants on May 17, 2006 when Nasdaq alerted us to a research report published on May 16, 2006 by the Center for Financial Research and Analysis.” Id. at ¶ 144 (quoting 2006 Form 10-K/A) (emphasis added). Assuming that the May 2006 report was sufficient to satisfy the first prong of the “inquiry notice” test, the second question is when should the plaintiff have reasonably discovered the fraud. Betz, 519 F.3d at 876. After the May 2006 report first raised suspicions of fraud, further investigation was required to discover the actual fraud. Lead Plaintiff used statistical analysis to determine whether the options were backdated. ¶¶ 154-161. Then Lead Plaintiff reviewed the Company’s financial statements to find out whether the compensation expense for such options was properly “amortized and recognized as an expense over the option’s vesting period,” in accordance with APB 25. ¶¶ 42-44. A reasonable investor could not have discovered these misrepresentations until, at the earliest, the second half of 2006. Even assuming Lead Plaintiff was on “inquiry notice” as early as May 26, 2006, this lawsuit, brought on August 10, 2007, was initiated well within the two-year limitations period. Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 65 of 70 56 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) 2. The Claims Were Brought Within the Five-Year Period Provided by 28 U.S.C. § 1658(b)(2) 28 U.S.C. § 1658(b)(2) provides that a private securities action must be brought no later than five years after the “violation.” This five-year limitations period does not begin to run until the defendant commits the “violation” for which the plaintiff seeks redress. See Zoran, 511 F. Supp. 2d at 1014 (explaining that “the statute of limitations accrues as of when the violation itself occurs”). Zoran involved a derivative suit in which plaintiffs sought damages based directly on the granting of backdated stock options. See id. at 1000. Based on the nature of the claims, the court concluded that the “violation” was the granting of the stock options, and disallowed claims based on grants more than five years before the suit was filed. Id. at 1014. Ignoring the nature of the claims, the Defendants argue that the logic of Zoran bars fraud claims if the misrepresentations involve transactions that occurred more than five years before the suit was filed. See Baumann Br. at 21; Poe Br. at 24. Nothing in the relevant case law supports such an odd and unreasonable application of section 1658(b)(2). The Complaint here does not seek damages or other relief based on the backdating itself. Rather, the fraud is the failure to account for the backdating and misrepresenting those financials to the market. The crux of the Complaint is Semtech’s misrepresentation of its compensation expenses, EPS and net income causing “Lead Plaintiff and other members of the Class to purchase Semtech securities at artificially inflated prices.” ¶ 202. These misrepresentations occurred less than five years before the lawsuit was filed. Defendant Poe cites Durning v. Citibank, Int’l, 990 F.2d 1133, 1136 (9th Cir. 1993) for the proposition that in securities cases “a cause of action accrues at the completion of the sale of the instrument.” Poe Br. at 24 n.15. This generic statement of the law, even if correct, does nothing to advance Poe’s argument because the “instruments” at issue in this case are shares of stock purchased or Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 66 of 70 57 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) otherwise acquired “between August 27, 2002 and July 19, 2006,” within the five- year period. ¶ 26. In Durning, the “instruments” at issue were bonds, and the court held that the cause of action accrued at the time the bonds were purchased. See Durning, 990 F.2d at 1136.64 With respect to securities fraud claims, the cause of action accrues “when the last alleged misrepresentation was made by the defendants.” Id. at 1136. For purposes of section 1658(b)(2), the “violation” is the false representation, and “[s]uch a violation is considered to have occurred on the date that the false representation was made, not the date of the conduct which gave rise the representation.” In re Maxim Integrated Prods., Inc., No. 06-3344, 2008 WL 4061075 (N.D. Cal. Aug. 27, 2008). In Maxim, also a backdating case, the court held “[e]ach false representation may constitute a separate violation of § 10(b); the five-year period begins to run with respect to each violation when it occurs.” Id.65 The Complaint alleges that the Defendants made false statements about Semtech’s net income, EPS and compensation expense on numerous occasions in 2002, 2003, 2004, 2005 and 2006. ¶¶ 56-126. Because each of those misleading statements occurred after August 2002 (within five years of the filing of the Complaint), the fraud claims are timely. 64 Poe also cites Falkowski v. Imation Corp., 309 F.3d 1123 (9th Cir. 2002), for the equally unremarkable proposition that the granting of a stock option is considered a “purchase or sale” under Securities Litigation Uniform Standards Act. Poe Br. at 24 n.15. Again, this proposition, even if correct is irrelevant to any argument in this case. The plaintiffs in Falkowski were employees who had received stock options, claiming fraudulent inducement in connection with those options and therefore subject to preemption under SLUSA. See Falkowski, 309 F.3d at 1131. Lead Plaintiff, by contrast, purchased Semtech common stock on the NASDAQ and is claiming that fraudulent representations made between 2002 and 2006 artificially inflated the price of that stock. 65 Citing Zoran, 511 F. Supp. 2d at 1014; see also In re Comverse Tech., Inc. Sec. Litig., 543 F. Supp. 2d 134, 155 (E.D.N.Y. 2008) (with respect to claims based on “misleading disclosures about options backdating or other accounting practices, the 5-year period specified in section 1658(b)(2) begins to run on the date of such disclosures, not on the date of grant of the backdated options.”). Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 67 of 70 58 D. The Complaint States Control Person Liability Against Each Individual Defendant Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), imposes liability on individuals who “control” any person that is liable under any provision of the Exchange Act. To state a Section 20(a) claim, a plaintiff must allege: (1) a primary violation of the federal securities laws (which as established above, Lead Plaintiff has done); and (2) that the defendant exercised actual power or control over the primary violator. Howard, 228 F.3d at 1065. It is not necessary to show “actual participation or the exercise of power” in order to make out a prima facia case. Id. Plaintiff need only allege an ability to control or influence a primary violator. See Wool v. Tandem Computers Inc., 818 F.2d 1433, 1440 (9th Cir. 1987)66. Individual Defendants Poe, Franz, Baumann, Maheswaran, and Carlson held powerful positions at Semtech. These Individual Defendants were each personally involved in the daily management of the Company, had access to and control over the financial information pertaining to the Company and, during the Class Period, engaged in the preparation, signing, and issuance of the false and misleading financial statements at the core of this matter. Not only were the Individual Defendants responsible for the issuance of false and misleading financial information to the public and Lead Plaintiff, but they also controlled the conduct complained of herein.67 ¶¶ 206-207. 66Plaintiffs are not required to plead “control person liability” with particularized facts, as plaintiffs need not prove the individual defendant's scienter or “culpable participation” in the alleged wrongdoing. Howard, 228 F.3d at 1065 (quoting Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1575 (9th Cir. 1990). Instead, Section 20(a) claims must be pleaded in accordance with Federal Rule of Civil Procedure 8(a)(2) requiring “a short and plain statement of the claim showing the pleader is entitled to relief.” Batwin, 2008 WL 2676364, at *24. 67 Defendant Maheswaran’s argues that the Section 20(a) claim should be dismissed as to him because he joined Semtech “long after” the options grants identified in the Complaint were made. This argument is not compelling given that the fraud here is not simply the backdating, but also the false and misleading statements that resulted from the illegal backdating, and for which Maheswaran was responsible. The financial statements Maheswaran signed and swore to were (continued . . . ) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 68 of 70 59 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) Given that the Individual Defendants each had the power to oversee and direct the management and policies of the Company -including the stock options practices and public filings, each Individual Defendant is presumptively a “control person” under Section 20(a). See Juniper, 542 F. Supp. 2d. at 1053 (an options backdating case where court denied defendants’ motions to dismiss Section 20(a) claim finding that defendants “participated in the operation and management of the company…[ as well as] in the conduct of its business affairs.”); Howard, 228 F.3d at 1066 (finding a prima facia case of “control person” liability where defendant had actual authority over the preparation and presentation to the public of financial statements). Further, the Company itself found that “the evidence supports a finding of intentional manipulation by [Defendant Poe]…and that [Defendant Franz] and [Defendant Baumann] … knew, or should have known, of the manipulation and initiated or participated in some manipulative acts.” ¶ 142; RJN Ex. 1 at 7. Thus, Defendants controlled the backdating scheme. With respect to Poe, this finding is supported by the account of CW 1 whose account demonstrates the former CEO’s control over her option dating duties. IV. CONCLUSION For the foregoing reasons Defendants’ motions should be denied in their entirety. Dated: October 6, 2008 ( . . . continued) false and misleading because they failed to account for the amortization in the backdated options’ subsequent vesting period. Quest, 527 F. Supp. 2d at 1194 (C.D. Cal. 2007) (sustaining control person liability on a motion to dismiss where defendant joined the company nearly a year and a half after the last backdated option was granted). Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 69 of 70 60 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEAD PLAINTIFF’S OMNIBUS OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT CIVIL ACTION NO.: 2:07-CV-07114-CAS (FMOX) By: /s/ Mark Labaton Mark Labaton (#159555) KREINDLER & KREINDLER LLP 707 Wilshire Boulevard Los Angeles, California 90017 Telephone: (213) 622-6469 Facsimile: (213) 622-6019 Local and Liaison Counsel for Plaintiff and the Class CAULEY BOWMAN CARNEY & WILLIAMS, PLLC J. Allen Carney Randall K. Pulliam Bart Dalton (#187930) 11311 Arcade Dr., Suite 200 Little Rock, AR 72212 Telephone: (501) 312-8500 Facsimile: (501) 312-8505 - and - BARON & BUDD, P.C. Russell Budd Burton LeBlanc 3102 Oak Lawn Avenue, Suite 1100 Dallas, TX 75219 Telephone: (214) 521-3605 Facsimile: (214) 520-1181 Lead Counsel for Lead Plaintiff LABATON SUCHAROW LLP Jonathan Gardner 140 Broadway New York, New York 10005 Telephone: (212) 907-0700 Facsimile: (212) 818-0477 Counsel for Lead Plaintiff Case 2:07-cv-07114-CAS-FMO Document 77 Filed 10/06/08 Page 70 of 70