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 Ronald Lovitt, CA Bar No . 4092 1 lovi tt o lh-sf.com J . Thomas Hann an, CA Bar No . 3914 0 ith(a lh-s£co m Henry I . Bo rnstein, CA Bar No . 75885 hbomsteinna,sbcglobal .net LOVITT & HANNAN , INC. 900 Front Street , Suite 30 0 San Francisco , CA 94111 } A G 22 700 6 Telephone : (415) 362- 8769 Fax : (415 ) 362-7528 . ^ rs T Attorneys for Plaintiff E- FILING GA N JO4 *Addi tional Counsel on Signature Page UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISIO N PHYLLIS JONES, 06- 5 Pi Plaintiff , ) Civil Action No . v . ) FRED D . ANDERSON, JAMES J . BUCKLEY, ) ROBERT CALDERONI, TIMOTHY D . COOK,) VERIFIED DERIVATIVE GUERRINO DE LUCA, IAN DIERY, DANIEL) COMPLAIN T FOR VIOLATION O F L . EILERS, G . FREDERIC FORSYTH, ) THE SECURITIES EXCHANGE ACT, STEVEN P . JOBS , RONALD B . JOHNSON, ) BREACH OF FIDUCIARY DUTY , MITCHELL MANDICH, JONATHAN ) AIDIN G AND ABETTING, UNJUST RUBINSTEIN, MICHAEL H . SPINDLER, ) ENRICHMENT . RESCISSION, AVADIS TEVANIAN, JR ., WILLIAM V . ) GROSS MISMANAGEMENT, AND CAMPBELL, MILLARD DREXLER , ) WASTE OF CORPORATE ASSET S ARTHUR D . LEVINSON, and JERO ME B . ) YORK, ) Defendants, DEMAND FOR JURY TRIA L and APPLE COMPUTER, INC ., Nominal Defendant . VERIFIED DERIVATIVE COMPLAIN T (Cause No . )- Page - 1
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Ronald Lovitt, CA Bar No. 4092 1lovitt o lh-sf.comJ. Thomas Hannan, CA Bar No . 39140ith(a lh-s£co mHenry I . Bo rnstein, CA Bar No . 75885hbomsteinna,sbcglobal .netLOVITT & HANNAN , INC.900 Front Street , Suite 30 0San Francisco , CA 94111 } A G 22 700 6Telephone : (415) 362-8769Fax: (415 ) 362-7528 . ^ rsT
Attorneys for Plaintiff E-FILING GA N JO4*Additional Counsel on Signature Page
UNITED STATES DISTRICT COURTNORTHERN DISTRICT OF CALIFORNIA
FRED D. ANDERSON, JAMES J . BUCKLEY, )ROBERT CALDERONI, TIMOTHY D . COOK,) VERIFIED DERIVATIVEGUERRINO DE LUCA, IAN DIERY, DANIEL) COMPLAINT FOR VIOLATION OFL. EILERS, G . FREDERIC FORSYTH, ) THE SECURITIES EXCHANGE ACT,STEVEN P . JOBS , RONALD B. JOHNSON, ) BREACH OF FIDUCIARY DUTY ,MITCHELL MANDICH, JONATHAN ) AIDING AND ABETTING, UNJUSTRUBINSTEIN, MICHAEL H . SPINDLER, ) ENRICHMENT . RESCISSION,AVADIS TEVANIAN, JR., WILLIAM V . ) GROSS MISMANAGEMENT, ANDCAMPBELL, MILLARD DREXLER , ) WASTE OF CORPORATE ASSET SARTHUR D . LEVINSON, and JEROME B . )YORK, )
"[t]he Company designs, manufactures, and markets personal computers and related software,
services, peripherals, and networking solutions . The Company also designs, develops, and
markets a line of portable digital music players along with related accessories and services
including the online distribution of third-party music, audio books, music videos, short films, and
television shows . . . . The Company sells its products worldwide through its online stores, it s
own retail stores, its direct sales force, and third-party wholesalers, resellers, and value added
resellers ." 2005 Form 10-K (filed December 1, 2005) . 1
C. Officer Defendants .
13. Defendant Fred D. Anderson served as the Company's Executive Vice Presiden t
I and Chief Financial Officer from April 1996 to June 2004 . Anderson has also served on the
Company's Board of Directors since June 2004 . During his tenure, Mr . Anderson has sold more
than 5 million shares of stock for proceeds that exceed $80 million dollars .
14. Defendant James J . Buckley served as the President of Apple Americas as o f
November 1995 ; Senior Vice President and President, Apple USA as of January 1994 ; the
Company's Vice President and General Manager, Higher Education Division, from April 1992 to
January 1994; Vice President, Northern Operations, from May 1991 to April 1992 ; Vice
President, Central Operations, from April 1988 to May 1991 ; Area director, North Central Area,
from May 1986 to April 1988 ; Director of K-12 and Higher Education Sales from January 1986
From 1993 through 1998, the Company's fiscal year ended on the last Friday of September.From 1999 to the present, the Company's fiscal year has ended on the last Saturday ofSeptember .
VERIFIED DERIVATIVE COMPLAINT(Cause No . ) - Page - 5
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to May 1986; and as K-12 and Higher Education Sales Manager from May 1985 to Januar y
1986 .
15. Defendant Robert Calderoni served as the Company's Senior Vice President ,
Finance and Operation Controller, from July 1996 to November 1997 . During his tenure, Mr .
Calderoni has sold at least 100,000 shares of Apple stock for proceeds that exceed $500,000
dollars .
16. Defendant Timothy D. Cook has served as the Company's Chief Operatin g
Officer from October 2005 to the present ; Executive Vice President, Worldwide Sales and
Operations from January 2002 to October 2005 ; Senior Vice President, Worldwide Operations
Sales, Service and Support from February 1998 to January 2002 ; and as Senior Vice President,
Software Engineering, as of February 1997 . During his tenure, Mr. Cook has sold more than six
million shares of Apple stock for proceeds that exceed $100 million dollars .
17. Defendant Guerrino De Luca served as the Company's Executive Vice President ,
Marketing until October 1997; President of Claris Corporation, an Apple subsidiary, during
1995; Vice President of Marketing and Sales for the Apple software division from 1994 to 1995 ;
Vice President and General Manager of the Personal Interactive Electronics Group for Apple
Europe from 1993 to 1994; and Vice President, Marketing, for Apple Europe from 1992 to 1993 .
18. Defendant Ian Diery served as the Company's Senior Executive Vice Presiden t
and General Manager, Computer Division from July 1993 to April 1995; Executive Vice
President , Worldwide Sales and Marketing from July 1992 to July 1993 ; and as Senior Vice
President of Apple and President, Apple Pacific Division, from October 1989 to July 1992 .
19. Defendant Daniel L . Eilers served as the Company's Senior Vice President, an d
President and CEO of Claris Corporation from March 1991 to December 1995 ; Vice President ,
27. The Defendants identified in Paragraphs 21 to 26 are collectively referred to a s
the "Officer Defend ants ."
D. Compensation and Audit Committee Director Defendants .
28. Defendant William V . Campbell has served as a director of Apple since fiscal
year 1997 . Campbell has also served as a member of the Compensation Committee of the Board
of Directors ("Compensation Committee") since August 2001, and as a member of Audit and I
Finance Committee of the Board of Directors ("Audit Committee") since fiscal year 1998 .2
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29 . Defendant Millard Drexler has served as a director of Apple since 1999 . Drexler
has also served as a member of the Compensation Committee since fiscal year 2002 .
30. Defendant Arthur D. Levinson has served as a director of Apple since fiscal year I
2000. Levinson also served as a member of the Compensation Committee from August 2001
through fiscal year 2003, and as a member of the Audit Committee since fiscal year 2001 .
During his tenure as a board member, Mr. Levinson has sold at least 140,000 shares of Apple
stock for proceeds that exceed $4 million dollars .
31 . Defendant Jerome B. York has served as a director of Apple since fiscal year
1997. York has also served as a member of the Compensation Committee from August 200 1
I through fiscal year 2001, and as a member of the Audit Committee since fiscal year 1998 .
2 From April 2000 to August 2001, the Board of Directors did away with the CompensationCommittee and administered the Company's executive compensation program, including
options, itself. Defendants who served on the Board during that time include Defendants
Campbell, Levinson and York . Should Plaintiff discover additional Apple directors or other
persons who are responsible for the wrongdoing alleged herein, including but not limited toduring the period April 2000 to August 2001, Plaintiff will, to the extent necessary and
appropriate, amend or seek leave to amend this Complaint .
VERIFIED DERIVATIVE COMPLAINT(Cause No . ) - Page - 9
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During his tenure as a board member, Mr . York has sold more than 200,000 shares of Apple
stock for proceeds that exceed $4 million dollars .
32. Defendants Campbell, Drexler, Levinson, and York are referred to collectively as
the "Compensation Committee Defendants ."
33. Defendants Campbell, Levinson, and York are referred to collectively as th e
"Audit Committee Defendants ."
34. The Officer Defendants, Compensation Committee Defendants, and Audit
Committee Defendants identified in Paragraphs 13 to 31 are referred to collectively as the
"Individual Defendants ."
M. JURISDICTION AND VENUE
35. This Court has federal question jurisdiction over the subject matter of this action
pursuant to 28 U .S.C. § 1331, and Section 27 of the Securities Exchange Act of 1934, 15 U .S .C .
§ 78aa, because Plaintiff asserts claims under that Act and the Rules promulgated thereunder .
Alternatively, this Court has jurisdiction over the non-federal claims asserted herein under 28
U.S .C. § 1332 as the Parties are citizens of different states and the amount in controversy in this
matter exceeds $75,000, exclusive of interest and costs . This Court also has supplemental
jurisdiction pursuant to 28 U.S.C. § 1376(a) .
36. Venue is proper in this District because one or more Defendants either resides or
maintains offices in this District, and a substantial portion of the alleged wrongdoing occurred in
this District. Moreover, Defendants have received substantial compensation in this District b y
doing business here and engaging in numerous activities that had an effect in this District .
between the option price and the market price, thereby avoiding both the reporting requiremen t
and compensation expense .
39. Stock options granted to company insiders must be approved in advance by the
Company's Board of Directors and disclosed in order to comply with SEC regulations and
reporting requirements . See, e .g., Regulation S-K. Such approval can be extended through pre-
approval of a prescribed option grant plan or through discretionary grants that are individually
reviewed and approved .
B. Apple's Stock Option Plans.
40. Throughout the relevant time period, Apple maintained several Stock Option
Plans . The Employee Stock Option Plan was created "to attract and retain high quality personnel
for positions of substantial responsibility to provide additional incentive to Employees of the
Company, . . . and to promote the success of the Company's business ." Apple Computer, Inc .
1990 Employee Stock Option Plan (as amended through 12/4/96), § 1 .
41 . In addition, Apple maintained an Executive Officer Stock Plan, the purpose of
which, according to its terms, was "to attract and retain the best available personnel for positions
of substantial responsibility ; to provide additional incentive to the Chairman and/or Executive
Officers and other key employees ; and to promote the success of the Company's Business ."
Apple Computer, Inc . 1998 Executive Officer Stock Plan, dated April 22, 1998, § 1 .3
3 In addition to amending and restating the above Plans , between 1993 and 2000 , the Companyalso maintained an Employees Incentive Stock Option Plan, and Executive Long Term StockOption Plan , among others . Unless otherwise specified , cites herein are to the 1998 ExecutiveStock Option Plan, dated April 22, 1998 , but it is believed that the features regarding stock
VERIFIED DERIVATIVE COMPLAIN T(Cause No . ) -Page - 12
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42. The Plans permitted grants of stock options, stock purchase rights or stoc k
appreciation rights ("SARs"), up to a specified maximum, at the discretion of the administrator ,
each fiscal year.
43. The Plans were to be administered by the Board or a committee designated fo r
that purpose . The Plans specified that to the extent that any options or SAR's granted by the
plan were to be "performance-based compensation" the Plan must be administered by a
committee of two or more outside directors . As explained in paragraphs 47 to 49 below, the
relevant stock option Plans were administered by the Stock Option Committee until April 2005,
then by the Compensation Committee, except from April 2000 to August 2001, during which
time Apple's executive compensation plans, including the relevant option Plans, were
administered by the Board of Directors .
44 . The Plans required that, absent specific approval by the Administrator, or a
merger or acquisition, the exercise price for any stock option issued under the Plan must be at
least 100% of the Fair Market Value on the date of the grant and, for Employees who own stock
representing more than 10% of the voting power of the Company or any parent or subsidiary, at
least 110% of the Fair Market Value on the date of the grant . Plan at § 9(a)(i)-(iii) . The Fair
Market Value is defined in the Plans as "the closing sales price for such stock (or the closing bid,
if no sales were reported) as quoted on [Nasdaq or other exchange] or system, on the date of
determination or, if the date of determination is not a trading day, the immediately precedin g
grant dates and fair market value and other salient features of the Plans for purposes of thisComplaint were identical across all Plans unless otherwise noted .
VERIFIED DERIVATIVE COMPLAIN T(Cause No . ) -Page - 13
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trading day, as reported in The Wall Street Journal or such other source as the Administrator
deems reliable[ .]" Plan at § 2(p) (For certain plans in effect before 1998, the Fair Market Value
was determined at closing on the day immediately preceding the date of determination) . The
Plans further specified that "[t]he Fair Market Value of the Shares shall be determined as of the
time the Option with respect to such Shares is granted ." Plan at § 6(a) .
45. For all Plans of which Plaintiff is aware, the date of the option grant was defined I
as "the date on which the Administrator makes the determination granting such Award, or such I
other later date as is determined by the Administrator ." Plan at § 13 . None of the Plans I
I permitted the Administrator to establish a grant date that preceded the determination date .
46. By establishing a stock option grant date that preceded the date upon which th e
stock option was actually granted, the Company violated the terms of the Plans .
C. The Apple Stock Option/Compensation Committee .
47. From the beginning of the relevant period until April 1995, the Board maintained
a Stock Option Committee, which was responsible for the administration and granting of stock
option grants . In April 1995, the Stock Option Committee was dissolved by the Board and its
functions were assumed by the Compensation Committee . 1996 Proxy Statement, Form DEF-
14A (filed Dec. 19, 1995) . The Stock Option Committee and Compensation Committee are
jointly referred to herein as the "Compensation Committee . "
VERIFIED DERIVATIVE COMPLAINT(Cause No . ) - Page - 14
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48. During the relevant period, Defendants Campbell, Drexler, Levinson, and York
served on the Compensation Committee .
49. The Compensation Committee was responsible for approving stock option plan s
or grants . Specifically, the Compensation Committee was responsible for reviewing and
approving compensation and awards under Apple's compensation and incentive plans and
programs for Apple's executive officers, as well as for administering the Company's stock
option and other stock-based plans . Pursuant to this authority, during the relevant Period, the
Compensation Committee was responsible for determining the stock option awards that are the
subject of this litigation, in the amounts set forth below .
D. The Apple Audit Committee .
50. During the relevant period, Defendants Campbell, Levinson, and York served on
the Audit Committee, which was to be comprised of not less than three directors who satisfied
the independence requirements of applicable NASDAQ and SEC rules .
51 . The Board's Audit Committee was responsible for monitoring the Company' s
financial reporting, including compensation reporting . Indeed, the stated purpose of the Audit
Committee is as follows :
4 As noted in footnote 2, above, from April 2000 to August 2001, the Board did not have aCompensation Committee and administered the Company's executive compensation program,
including options, itself. Defendants who served on the Board during that time includeCampbell, Drexler, Levinson, and York . Should Plaintiff discover additional Apple directors
or other persons who are responsible for the wrongdoing alleged herein, including but notlimited to during the period April 2000 to August 2001, Plaintiff will, to the extent necessaryand appropriate, amend or seek leave to amend this Complaint .
The primary purpose of the Committee is to assist the Board in oversightand monitoring of: (i) the Corporation's financial statements and other
financial information provided by the Corporation to its shareholders andothers; (ii) compliance with legal and regulatory requirements ; (iii) the
independent auditors, including their qualifications and independence; (iv)the Corporation's systems of internal controls, including the internal auditfunction; and (v) the auditing, accounting, and financial reporting processgenerally .
Apple Computer, Inc . Audit and Finance Committee Charter ("Audit Committee Charter"), § 1 .
See also prior Audit and Finance Committee Charter, attached as Appendix A to Apple's Prox y
Statement, Form DEF 14A, filed with the SEC March 12, 2001 ("2001 Audit Committee
Charter"), which contains nearly identical language .
52. The Audit Committee Charter provides the Audit Committee with broad authorit y
and responsibility for the Company's financial reporting, including the following :
DUTIES AND RESPONSIBILITIES . To fulfill its responsibilities, theCommittee shall :
Independent Auditor
1 . Appoint, compensate, and oversee the work of the independentauditors (including resolving disagreements between Management and theindependent auditors regarding financial reporting) for the purpose of
preparing or issuing an audit report or related work.
Financial Reporting
9. Review with Management and the independent auditor :
• The Corporation's annual audited financial statements, and relatedfootnotes, and quarterly unaudited financial statements, includingthe disclosures under "Management's Discussion and Analysis of
Financial Condition and Results of Operations," prior to filing theCorporation's Annual Report on Form 10-K and Quarterly Reportson Form 10-Q, respectively, with the SEC .
• The independent auditors' audit of the annual financial statementsand their report thereon.
• The accompanying management Letter and any reports withrespect to interim periods .
• Any major changes to the Corporation's accounting principles andpractices . . . .
• Other matters related to the conduct of the audit that are to becommunicated to the Committee under Generally AcceptedAuditing Standards .
10 . Review with Management, the independent auditors, and theCorporation's counsel, as appropriate, any legal and regulatory mattersthat may have a material impact on the financial statements, relatedcompliance policies, and programs and reports received from regulators .
11 . Review and discuss earnings press releases prior to publicdisclosure .
12. Provide a report for inclusion in the Corporation's proxy statementin accordance with the rules and regulations of the SEC .
14. Discuss with the independent auditors the financial statements andaudit findings , including any significant adjustments, Managementjudgments and accounting estimates , significant new accounting policiesand disagreements with Management and any other ma tters described inSAS No. 61, as may be modified or Supplemented .
Management Discussions
26. Inquire about the application of the Corporation's accountingpolicies and its consistency from period to period, and the compatibility ofthese accounting policies with Generally Accepted Accounting Principles,and, when applicable, the provisions for future occurrences that may havea material impact on the financial statements of the Corporation .
VERIFIED DERIVATIVE COMPLAINT(Cause No . ) - Page - 17
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Audit Committee Charter, § V . See also 2001 Audit Committee Charter, which contains nearl y
identical language .
E. Stock Option Grants to the Officer Defendant s
53. From 1993 to 2001, the Compensation Committee granted certain Apple stoc k
options to the Officer Defendants , as follows :
fficerPurported
Date of GrantNumber
of O tionsExercise
Price
Subsequent10-Day
Increase>5%
Anderson, Fred D . 4/1/96 400,000 $24.56 5.30%4/21/97 100,000 $18.387/11/97 500,000 $13 .25 22 .60%
The Wall Street Journal, Online . Printed August 18, 2006 .
61. In addition, the following charts provide specific examples of the extraordinary I
pattern of Apple's stock grants during the relevant period :
September 14, 1993 - November 10, 1993
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op t
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$30 -
P8
10/1211993 -
S26Options Granted on
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$24
10/13/1993 -$22 Options Granted on
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ein
Sep 14, Sep 19, Sep 24, Sep 29, Oct 04, Oct 09, Oct 14, Oct 19, Oct 24, Oct 29, Nov 03, Nov 08,1993 1993 1993 1993 1993 1993 1993 1993 1993 1993 1993 1993
VERIFIED DERIVATIVE COMPLAINT(Cause No . ) - Page - 22
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IV
$3 4
$32
$30
Sep 09, Sep 14, Sep 19, Sep 24, Sep 29, Oct 04, Oct 09, Oct 14, Oct 19, Oct 24, Oct 29,1994 1994 1994 1994 1994 1994 1994 1994 1994 1994 199 4
July 8, 1997 - September 3, 199 7
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8/5/1997 -Options Granted on820,250 Shares
$1 0
Jul 08 , Jul 13, Jul 18, Jul 23, Jul 28, Aug 02, Aug 07, Aug 12, Aug 17, Aug 22, Aug 27, Sep Ol,1997 1997 1997 1997 1997 1997 1997 1997 1997 1997 1997 1997
28 II VERIFIED DERIVATIVE COMPLAINT(Cause No . ) - Page - 23
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Nov 20, Nov 25, Nov 30, Dec 05, Dec 10, Dec 15, Dec 20, Dec 25, Dec 30, Jan 04, Jan 09, Jan 14, Jan 19, Jan 24,1997 1997 1997 1997 1997 1997 1997 1997 1997 1998 1998 1998 1998 199 8
Nov 15, Nov 20, Nov 25, Nov 30, Dec 05, Dec 10, Dec 15, Dec 20, Dec 25, Dec 30, Jan04, Jan 09,1999 1999 1999 1999 1999 1999 1999 ,1999 1999 1999 2000 2000
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December 14, 1999 - February 10, 200 0
62. As the research by Professor Lie and others demonstrates, while positive returns
for a single grant might be innocently explained, a consistent pattern of frequent and well-timed
grants makes backdating the most plausible--if not the only plausible--explanation . See, e .g.,
Charles Forelle, How the Journal analyzed Stock-Option Grants, The Wall Street Journal, March
18, 2006 ("It is very unlikely that several grants spread over a number of years would all fall on
high-ranked. days [i .e. most favorable to the recipient] .") .
63 . Plaintiff alleges that the reason for the extraordinary pattern set forth in the abov e
I data can only be that the purported grant dates set forth therein were not the actual dates o n
I which the stock option grants were made . Rather, at the behest of the Officer Defendants, th e
1 . Committee Defendants improperly backdated the stock option grants to make it appear as though
a number of companies, including Affiliated Computer Services, Inc . ("ACS"), KLA Group, Inc .
("KLA"), Comverse Technology, Inc. ("Comverse"), and Vitesse Semiconductor Corporation
("Vitesse"), that defied random chance . The Wall Street Journal, together with finance
professors Eric Lie and David Yermack and statistician John Emerson, studied patterns of
particularly favorable stock grants at certain companies and calculated the probability of such
patterns occurring randomly and concluded that the odds were improbable . The Journa l
reported , for example, that all six of the stock options gr anted by ACS to its former CEO Jeffrey
Rich displayed a pattern of profitability that could not be explained by chance :
In a striking pattern all six of his stock-option grants from 1995 to 2002were dated just before a rise in the stock price, often at the bottom of asteep drop .
Just lucky? A Wall Street Journal analysis suggests the odds of this
happening by chance are extraordinarily remote -- around one in 300billion . The odds of winning the multistate Powerball lottery with a $1ticket are one in 146 million .
Suspecting such patterns aren't due to chance, the Securities andExchange Commission is examining whether some options carry favorablegrant dates for a different reason : They were backdated .
Charles Forelle and James Bandler , The Perfect Payday, The Wall Street Journal , March 18 ,
12006 .
88. Since the date of The Wall Street Journal article, more than 80 companie s
reported internal and/or governmental investigations of their backdating practices . Charles
Forelle and Nick Wingfield, Apple Spots More Options Missteps, The Wall Street Journal, Aug .
4, 2006. Additional research by Professor Lie suggests that between the period 1996-2005,
18 .9% of unscheduled "in the money" option grants to top executives were backdated o r
I manipulated, by nearly one-third of the companies investigated .
89. On June 29, 2006, Apple was the latest to announce that an inte rnal investigation
had discovered irregularities related to the issuance of certain stock option grants made between
1997 and 2001 . Specifically, the Company stated :
Apple® today announced that an internal investigation has discoveredirregularities related to the issuance of certain stock option grants madebetween 1997 and 2001 . One of the grants in question was to CEO SteveJobs, but it was subsequently cancelled and resulted in no financial gain tothe CEO. A special committee of Apple's outside directors has hiredindependent counsel to perform an investigation and the company hasinformed the SEC . Apple executives will refrain from commenting furtheron this matter until the independent investigation is concluded.
"Apple is a quality company , and we are proactively and transparentlydisclosing what we have discovered to the SEC," said Apple CEO SteveJobs . "We are focused on resolving these issues as quickly as possible. "
90. Subsequent news reports revealed that the grant of 10 million shares to Mr . Jobs
was awarded on the date of the stock's lowest closing price for the month of January 2000 and
that the stock price rose 30% in the 20 trading days following the grant . James Bandler, Nick
Wingfield and William M. Bulkeley, Apple and CA Report Problems in Options Grants, The
Wall Street Journal, June 30, 2006 . Moreover, while the grants themselves had been cancelled in
2003 as Apple reported, Mr . Jobs received five million shares of restricted stock in exchange for
options. Heather Won Tesoriero, Options Backdating: New Bruises on Apple, The Wall Street
Journal Online LawBlog, Aug . 4, 2006 .
91 . Apple has acknowledged that one of the transactions in question in it s
investigation of "irregularities related to the issuance of certain stock option grants" is the
January 2000 grant (identified above) of stock options to Defendant Jobs, which were late r
cancelled in March 2003 in a transaction in which Jobs exchanged options from this and at least
I one other grant for five million shares of restricted stock. These shares were later sold in March
2006 for nearly $300 million dollars .
92. Like the stock options examined by The Wall Street Journal, the pattern o f
options grants to Apple executives seem more than randomly fortuitous . The more likely reason
for the extraordinary pattern exhibited by Apple was that the Officer Defendants' stock options
were improperly backdated, as alleged herein . Indeed, Apple has since acknowledged that the
stock option grants were irregular and likely resulted in material misstatements of their financial
results .
93. Although the company stated, as part of its third quarter revenue and earn ings
report issued and filed with the SEC as a Form 8-K on July 19, 2006, that "based upon the
irregularities identified to date, management does not anticipate any material adjustment to the
financial results included in this earnings release," shortly thereafter, the company announced
that "the Company has discovered additional evidence of irregularities [and] that the Company
will likely need to restate it historical financial statements to record non-cash charges for
compensation expense relating to past stock option grants ." Press release dated August 3, 2006
and filed with the SEC as an exhibit to Form 8-K .
94. The August 3, 2006 Form 8-K, stated the following :
On August 3, 2006, management of Apple Computer, Inc . (Apple)concluded, and the Audit and Finance Committee of Apple's Board ofDirectors approved the conclusion, that Apple's financial statements forthe fiscal years ended 2003, 2004 and 2005, the interim periods containedtherein, the fiscal quarters ended December 31, 2005 and April 1, 2006,and all earnings and press releases and similar communications issued byApple relating to periods commencing on September 29, 2002 should nolonger be relied upon.
Ronald Lovitt, CA Bar No . [email protected]. Thomas Hannan, CA Bar No . [email protected] I . Bornstein, CA Bar No . 39140hbomstein@sbcglobal .netLOVITT & HANNAN, INC .900 Front Street, Suite 300San Francisco , CA 9411 1(415) 362-8769 (phone ) ; (415) 362-7528 (fax )
Lynn Lincoln [email protected] E. Farris, CA Bar No .. 141716j farris@kel lerrohrback . comElizabeth A. Leland
bleland@kellerrohrback .comCari C. [email protected] ROHRBACK L.L.P .1201 Third Avenue, Suite 3200Seattle, WA 98101-3052(206) 623-1900 (phone) ; (206) 623-3384 (fax)
Gary A. Gottoggotto@kellerrohrback .comKELLER ROHRBACK P .L.C .National Bank Plaza3101 North Central Avenue, Suite 900Phoenix, AZ 8501 2(602) 248-0088 (phone) ; (602) 248-2822 (fax)
Karen Hanson Riebelkhriebel@locklaw .comLOCKRIDGE GRINDAL NAUEN, PLL P100 Washington Ave . So ., Suite 2200Minneapolis, MN 5540 1(612) 339-6900 (phone ) ; (612) 339-0981 (fax)
Attorneysfor Plaintiff
VERIFIED DERIVATIVE COMPLAINT(Cause No . ) - Page - 50
VERIFICATION
I, Phyllis Jones, herby verify that I have reviewed the foregoing Verified Derivative
Complaint for Violation of the Securities Exchange Act, Breach of Fiduciary Duty, Aiding and
Abetting, Unjust Enricb ent and Rescission, and authorized its filing and that the foregoing i s
true and correct to the best of ipy knowledge, information and belief
I verify under penalty of perjury that the foregoing is lace art cor=L