Ziolkowski, et al. v. Michaels Stores, Inc., et al. 06-CV-1215 …securities.stanford.edu/.../MIK_01/200677_o01c_061215.pdf · 2006. 12. 1. · Ziolkowski, et al. v. Michaels Stores,

•UNITED STATES DISTRICTNORTHERN DISTRICT O F

DALLAS DIVISION

JAMES AND CHRISTINE ZIOLKOWSKI,Derivatively On Behalf Of Nominal DefendantMichaels Stores, Inc .,

Plaintiffs ,

vs.

MICHAELS ROULEAU, JOHN C . MARTIN,DOUGLAS B . SULLIVAN, JAMES F .TUCKER, CHARLES J . WYLY, JR., SAMWYLY, RICHARD E . HANLON, RICHARDC. MARCUS, LIZ MINYARD, CECE SMITHAND ELIZABETH VANSTORY,

Defendants,

-and-

MICHAELS STORES, INC .,

Nominal Defendant .

•U .S . DISTRICT COURT

NORTHERN DISTRICT OF TEXAS

OURT FILEDXAS

ii. - 7 X06

CLERK, U.S. DISTRIC RT

ByDeputy j\j

Civ . No .

3-06CV1215- D

DEMAND FOR JURY TRIAL

VERIFIED DERIVATIVE COMPLAINT FOR VIOLATIONS OF SECTION 10(b) OFTHE SECURITIES EXCHANGE ACT AND RULE 10b-5, BREACH OF FIDUCIAR Y

DUTY, AIDING AND ABETTING A BREACH OF FIDUCIARY DUTY, UNJUSTENRICHMENT AND RESCISSION

• SNATURE OF ACTION

1 . Plaintiffs, by their undersigned attorneys, submit this Verified Derivativ e

Complaint. This is a shareholders' derivative action brought in the name of and for the benefit of

nominal defendant Michaels Stores, Inc . ("Michaels Stores" or the "Company") against certain

current and former executive officers and members of the Board of Directors of Michaels Stores .

The action arises from defendants' obtaining, approving and/or acquiescing in the issuance o f

stock options to senior executives that were unlawfully backdated to provide the recipients wit h

windfall compensation at the direct expense of Michaels Stores .

2 . On June 8, 2006, the Company said it will be unable to file its latest quarterl y

report on time because the audit committee of its board of directors had initiated a review of it s

historical stock-option-grant practices . The Company said its board had started the review, whic h

is focused on the period from 1990 to 2001, on a "proactive basis ." This announcement come s

on the heels of an in-depth report into option granting practices that appeared in the The Wall

Street Journal . This report revealed that top executives at numerous companies were backdating

their options in violation of the companies ' own option granting practices . Backdating occur s

when executives backdate their options to an earlier, more advantageous price - rather tha n

paying the market price for the option on the day it is issued . Arthur Levitt, former head of the

Securities and Exchange Commission ("SEC"), has stated that backdating "represents th e

ultimate in greed. It is stealing, in effect . It is ripping off shareholders in an unconscionable

11way .

3 . Backdating stock option grants to obtain beneficial exercise prices is akin t o

picking lottery numbers on the day after the winning numbers are reported in the news . It is a

reckless and unlawful exercise that unjustly appropriates corporation assets and benefits .

1

:' • iAccordingly, all of the now unexercised options should be immediately cancelled and all of th e

financial gains to the recipients who exercised such options should be returned to the Company.

Further, the Company's directors who administered and determined to grant these options utterl y

failed to fulfill their fiduciary duties to the Company and they too are accountable for tha t

failure .

4 . Backdating is the only conceivable explanation for the remarkable pattern of

options grants to Michaels Stores executives during the relevant period . Indeed, the results of a

statistical analysis of the grants to top executives recently published in The Wall Street Journa l

concluded that the chances of these grants actually occurring as claimed were astronomicall y

low .

5 . This action, on behalf of the Company, seeks to remedy the harms caused to

Michaels Stores by the backdating scheme and, in addition, to invalidate and nullify al l

executory options contracts issued pursuant to the scheme. Defendants violated Section 10(b) o f

the Securities Exchange Act of 1934 (the "Exchange Act"), and Rule 1Ob-5 promulgated

thereunder, by participating in the backdating of stock options . By means of the backdatin g

scheme, defendants caused the issuance of options bearing fraudulently low exercise prices t o

Michaels Stores' top executives and directors . Defendants also breached their duties as

fiduciaries of the Company . Defendants owed Michaels Stores duties of care, undivided loyalty ,

good faith and truthful disclosure . The Officer Defendants and the Non-Management Directo r

Defendants (both defined below) breached these duties by obtaining, approving and/o r

acquiescing in the issuance of backdated stock options to Michaels Stores executives . The

Officer Defendants were unjustly enriched by virtue of receiving fraudulently priced stock optio n

grants. The Non-Management Director Defendants - and in particular the members of th e

2

I )

Compensation and Human Resources Committee (the "Compensation Committee") - b y

authorizing, approving and/or acquiescing in the issuance of backdated stock options to th e

Officer Defendants, aided and abetted the Officer Defendants' breach of fiduciary duty, and i n

particular, the Officer Defendants' duties of undivided loyalty to the Company .

PARTIES

6. Plaintiffs currently own Michaels Stores common stock .

7 . Nominal Defendant Michaels Stores is a Delaware corporation with its principa l

executive offices and place of business located in Irving, Texas . It is the nation's largest arts and

crafts specialty retailer .

8 . Defendant Michaels Rouleau ("Rouleau") is the President and Chief Executive

Officer ("CEO") of Michaels Stores . As alleged herein, he received the backdated stock option

grants at issue in this case .

9. Defendant John C . Martin ("Martin") served as Michaels Stores' Chief Operatin g

Officer ("COO"). As alleged herein , he received the backdated stock option grants at issue in

this case .

10. Defendant Douglas B. Sullivan ("Sullivan") served as an Executive Vic e

President at Michaels Stores. As alleged herein, he received the backdated stock option grants at

issue in this case .

11 . Defendant James F . Tucker ("Tucker") serves as Executive Vice President at

Michaels Stores . As alleged herein, he received the backdated stock option grants at issue in thi s

case .

12 . Defendants Rouleau, Martin, Sullivan and Tucker are referred to collectively i n

this Complaint as the "Officer Defendants ."

3

13 . Defendant Charles J. Wyly, Jr . ("Charles Wyly") is Chairman of the Board o f

Directors at Michaels Stores . As a member of the Board of Directors, he authorized and

approved the backdated stock option grants at issue in this case . As alleged herein, he received

the backdated stock option grants at issue in this case .

14. Defendant Sam Wyly ("Sam Wyly") is a Director of Michaels Stores . As a

member of the Board of Directors, he authorized and approved the backdated stock option grant s

at issue in this case . As alleged herein, he received the backdated stock option grants at issue in

this case .

15. Defendant Richard E. Hanlon ("Hanlon") is a Director of Michaels Stores . He

also served on Michaels Stores' Compensation Committee . As a member of the Board of

Directors and as a member of the Compensation Committee, he authorized and approved th e

backdated stock option grants at issue in this case .

16. Defendant Richard C . Marcus ("Marcus") is a Director of Michaels Stores . He

also served on Michaels Stores' Compensation and Audit Committees . As a member of the

Board of Directors and as a member of the Compensation Committee, he authorized an d

approved the backdated stock option grants at issue in this case . As a member of the Audit

Committee, he also approved the Company's false financial disclosures, as alleged herein .

17. Defendant Liz Minyard ("Minyard") is a Director of Michaels Stores . She also

served on Michaels Stores' Compensation and Audit Committees . As a member of the Board o f

Directors and as a member of the Compensation Committee, she authorized and approved th e

backdated stock option grants at issue in this case . As a member of the Audit Committee, she

also approved the Company's false financial disclosures, as alleged herein .

4

! r►18 . Defendant Cece Smith ("Smith") is a Director of Michaels Stores . She also

served on Michaels Stores' Audit Committee . As a member of the Board of Directors, she

authorized and approved the backdated stock option grants at issue in this case . As a member of

the Audit Committee, she also approved the Company 's false financial disclosures, as alleged

herein .

19 . Defendant Elizabeth VanStory ("VanStory") is a Director of Michaels Stores .

She also served on Michaels Stores' Compensation and Audit Committees . As a member of the

Board of Directors and as a member of the Compensation Committee, she authorized an d

approved the backdated stock option grants at issue in this case . As a member of the Audi t

Committee, she also approved the Company's false financial disclosures, as alleged herein .

20 . Defendants Charles Wyly, Sam Wyly , Hanlon, Marcus, Minyard , Smith an d

VanStory are referred to collectively in this Complaint as the "Non-Management Directo r

Defendants . "

21 . The Officer Defendants and the Non -Management Director Defendants ar e

referred to collectively herein as the "Individual Defendants . "

JURISDICTION AND VENUE

22. This Court has jurisdiction over this action under 28 U.S .C. § 1331, because this

is a civil action arising under the laws of the United States . This Court also has exclusive

jurisdiction over this action pursuant to Section 27 of the Securities Exchange Act, 15 U.S .C . §

78aa, because this action asserts claims under that Act and rules promulgated thereunder . This

Court has supplemental jurisdiction over the non-federal claims asse rted herein under 28 U.S .C .

§ 1367 .

5

23 . Venue is proper in this District because nominal defendant Michaels Stores i s

headquartered in this District and thus a substantial portion of the transactions and wrong s

complained of herein, including the defendants' primary participation in the wrongful act s

detailed herein, occurred in this District . One or more of the defendants either resides in or

maintains executive offices in this District .

FACTUAL ALLEGATION S

24. The Officer Defendants purportedly received grants of stock options from th e

Company on unusually favorable dates over the past several years . These stock options were

claimed to have been granted at or near the stock's annual low, or immediately after a substantia l

dip in the stock price followed by a substantial run-up . Analysis of this seemingly fortuitous

pattern of stock option grants reveals that the pattern could not have resulted innocently . Rather ,

the only possible explanation is that these stock option grants were, in fact, backdated to allow

the options' recipients to enjoy the largest possible returns at the expense of the Company .

25 . A stock option is a right to purchase a particular stock at a fixed price, called th e

"exercise" or "strike" price . When the stock's market price exceeds the strike price, the optio n

holder may purchase the stock at the exercise price and resell it at the higher market price ,

pocketing the difference . The lower the strike price of the option, the larger the sum obtained

when the option is exercised .

26. At all relevant times, stock option grants to the Officer Defendants were require d

to carry a strike price not less than the publicly traded closing price of the stock on the date of

grant. All executive compensation stock options to the Officer Defendants during the relevant

period were issued pursuant to the Michaels Stores Stock Option Plan .

6

27. It is now evident that the Individual Defendants did not comply with th e

requirement that stock options granted to the Officer Defendants be priced on the date of grant o r

issuance . The multi-year pattern of stock option grants on dates with highly favorable exercise

prices - invariably at historic stock price lows or right before a large stock price run-up -

indicates that the purported grant dates of the stock options were not the actual dates on which

the option grants were made. Rather, the pattern indicates that grants to executives were

repeatedly backdated to dates with exceedingly low stock prices .

28 . Statistical analysis conducted by The Wall Street Journal demonstrates that it i s

virtually impossible that the pattern of these grants to have occurred randomly . In this analysis,

The Wall Street Journal concluded that the odds of the pattern of grants received by thes e

defendants occurring by chance were in the millions . Only by backdating the stock option grants

- reviewing the share price in hindsight and retrospectively identifying the low points - could th e

Individual Defendants have achieved this highly suspicious pattern of grants . The practice is the

equivalent of placing a wager on a horse race after the race has already been won and the identit y

of the winning horse is known to all .

29. The backdating of stock option grants and the issuance of these options in th e

amounts awarded to the Officer Defendants caused, and continues to cause, substantial harm t o

the Company. Backdating stock option grants represents a direct and continuing waste o f

valuable corporate assets. Michaels Stores is the counterparty to the option contracts with it s

executives, and the proceeds obtained, and yet to be obtained, by these executives throug h

exercising their backdated stock options are therefore siphoned, on a dollar for dollar basis ,

directly from Michaels Stores . In effect, the backdated grants gave the Officer Defendants an

7

option to purchase Michaels Stores shares directly from the Company at an unfair an d

improperly low price, with the Company making up the difference .

30 . The practice of backdating stock options also substantially harmed , and continues

to harm, Michaels Stores by virtue of the fact that the practice is unlawful, deceitful and cause d

the Company to misreport its financial data . Under the relevant accounting rules, options price d

below the stock's fair market value upon award are considered compensation and must ,

therefore, be treated by the Company as an expense directly impacting earnings . Upon

information and belief, Michaels Stores did not properly expense this compensation to th e

Officer Defendants even though the backdated stock options at issue in this action were priced

below the fair market value of the Company's stock at the date of grant and issuance.

31 . Further, the option backdating likely caused Michaels Stores to violate the

Internal Revenue Code . Indeed, compensation from exercised stock options issued under the

backdating scheme that was previously deducted, was in fact, nondeductible under Sectio n

162(m) of the Internal Revenue Code . Accordingly, the Company will likely be required to pa y

additional taxes and interest associated with deductions it previously took for compensatio n

associated with such exercised stock options .

32. Backdating stock options also severely undermines the already grossly excessiv e

incentives that purportedly justified the use of stock options to compensate Michaels Stores '

management. Stock option compensation is intended to encourage management to maximize th e

return to shareholders by aligning the interests of management with those of shareholders . In

contract, by permitting the Officer Defendants to receive stock option grants backdated to

correspond to low points in the stock price, the Non-Management Director Defendants created a n

absurd incentive for management to engineer dips and volatile swings in the stock price .

8

LlFurther, the size and terms of the grants were so excessive that they incentivized management t o

retire rather than work .

33 . Issuing backdated stock options is unlawful, ultra vires and outside the scope o f

legitimate and permissible business conduct . The practice is inherently manipulative and

involves a substantial likelihood that business records were intentionally falsified . Issuing

backdated stock options is, therefore, not a form of business conduct and is not protected by th e

business judgment rule .

DERIVATIVE ACTION ALLEGATION S

34 . Plaintiffs bring this action derivatively on behalf and for the benefit of Michael s

Stores to redress injuries suffered, and yet to be suffered, by the Company as a direct an d

proximate result of the breaches of fiduciary duty and other legal violations alleged herein .

Michaels Stores is named as a nominal defendant solely in a derivative capacity .

35 . Plaintiffs are all holders of Michaels Stores common stock who are prepared t o

adequately and fairly represent the interests of the Company and its shareholders in thi s

litigation .

36. Plaintiffs presently own Michaels Stores common shares . Plaintiffs owned

common shares of Michaels Stores at the time of the injurious acts complained of herein .

37. The wrongful acts complained of herein subject , and will persist in subjecting, th e

Company to continuing harm because the adverse consequences of the injurious actions are stil l

in effect .

38. The wrongful actions complained of herein were fraudulently concealed fro m

Michaels Stores shareholders .

39 . This is not a collusive action to confer jurisdiction on a court of the United States .

9

DEMAND EXCUSED ALLEGATION S

40. Plaintiffs have made no demand on the Michaels Stores Board of Directors t o

institute an action in connection with the wrongs alleged herein . Such demand would be futil e

and useless and is excused .

41 . Between 1997 and 2002 defendant Rouleau was the recipient of stock options ,

which Plaintiffs allege were back-dated . Because Rouleau received a personal financial benefi t

from the challenged transactions, he is interested and demand upon him is futile .

42 . Between 1997 and 2002 defendant Charles Wyly was the recipient of stoc k

options, which Plaintiffs allege were back-dated. Because Charles Wyly received a persona l

financial benefit from the challenged transactions, he is interested and demand upon him is futile .

43 . As members of the Compensation Commi ttee, defendants Hanlon , Marcus and

Minyard were at relevant times responsible for overseeing the Company 's compensation ,

employee benefit and stock option plans . They were also responsible for supervising incentive

compensation programs for the Company's employees . As members of the Compensation

Committee, defendants Hanlon, Marcus and Minyard at various times authorized and enable d

Michaels Stores to back-date stock options issued to Officer Defendants . By such actions ,

defendants Hanlon, Marcus and Minyard breached their fiduciary duties to Michaels Stores . The

back-dating of stock options was in direct violation of the stock option plans . Based upon the

foregoing, it is doubtful that the challenged transactions were the product of defendants Hanlon ,

Marcus and Minyard's proper exercise of business judgment and therefore demand is futile an d

excused .

44 . Under the 1997 Stock Option Plan, the stock option exercise is determined by th e

Board. Thus, as members of the Board each of the Defendants authorized and enabled Michael s

10

Stores to back-date stock options issued to Officer Defendants . By such actions, Defendant s

breached their fiduciary duties to Michaels Stores . The back-dating of stock options was in

direct violation of the stock option plans . Based on the foregoing, it is doubtful that th e

challenged transactions were the product of Defendants' proper exercise of business judgmen t

and therefore demand is futile and excused .

45 . The wrongful acts complained of herein were self dealing, outside the scope o f

the Board of Directors' authority and served no legitimate business purpose . Such acts were not ,

nor could they have been, the product of a valid or good faith exercise of business judgment .

Such acts were, moreover, unlawful and incapable of ratification . Accordingly, the action s

complained of herein are not protected by the business judgment rule, and the relate d

requirement of pre-suit demand on the Board of Directors is therefore inapplicable and excused .

46 . The wrongful acts complained of herein were, furthermore, approved by and/o r

performed for the benefit of an overwhelming majority of the Board of Directors as it i s

presently constituted . As members of the Board of Directors during the period of backdating ,

every single current Non-Management Director Defendant approved backdated stock options .

Moreover, a majority of the current Board of Directors' members either personally benefite d

from backdated stock options or were members of the Compensation Committee that wa s

directly responsible for authorizing the backdated stock options .

47 . Accordingly, a majority of the members of the Board of Directors as presently

composed were either directly responsible for administering the unlawfully backdated optio n

grants challenged in this litigation or directly and personally benefited from the backdated grants .

There is substantial reason to doubt that the current members of the Board of Directors ca n

and/or will pursue litigation to remedy harms resulting from their own performance of, and/o r

11

S •acquiescence in, unlawful acts with no ascertainable connection to the exercise of busines s

judgment .

48 . There is also substantial reason to doubt that the current members of the Board o f

Directors are sufficiently independent to prosecute this action . The members of the Board o f

Directors have themselves each individually gained tremendous wealth through their own receip t

and exercise of Michaels Stores stock options since at least the outset of this time period .

CAUSE OF ACTION

COUNT I

AGAINST THE INDIVIDUAL DEFENDANTS FOR VIOLATION OF SECTION 10(b) OF THE

SECURITIES EXCHANGE ACT AND RULE 10(b)-5 PROMULGATED THEREUNDE R

49. Plaintiffs incorporate by reference and reallege each and every allegatio n

contained above as though fully set forth herein .

50. This Count is brought pursuant to Section 10(b) of the Exchange Act and Rul e

I Ob-5(a), (b), and (c) against all Individual Defendants on behalf of Michaels Stores .

51 . During the relevant period, the Individual Defendants, individually and in concert ,

directly and indirectly, by use of the means or instrumentalities of interstate commerce, th e

mails, and/or the facilities of a national securities exchange :

(a) Employed devices, schemes, and/or artifices involving the issuance of

fraudulently priced options to defraud Michaels Stores ;

(b) Made untrue statements of material fact and/or omitted to state material

facts necessary in order to make the statements made, in light of the circumstances i n

which they were made, not misleading, in order to defraud Michaels Stores ; and/or

12

M •(c) Engaged in acts, practices, and a course of conduct that operated as a frau d

or deceit upon Michaels Stores causing the issuance of fraudulently priced option s

contracts .

52. The Individual Defendants made material misrepresentations concerning th e

validity of and the true grant dates for the stock option contracts at issue in this action knowingly

and/or in reckless disregard for the truth, with the purpose and effect of misleading an d

defrauding Michaels Stores concerning fraudulently priced options contracts .

53. The Individual Defendants used or engaged in devices , schemes, a rtifices ,

practices and/or courses of conduct knowingly and/or in reckless disregard of the truth, with th e

purpose and effect of misleading and defrauding Michaels Stores .

54 . By virtue of the foregoing, the Individual Defendants have violated Section 10(b )

of the Exchange Act and Rule I Ob-5 promulgated thereunder .

55 . As detailed herein , Michaels Stores suffered significant damages as a direct resul t

of its issuance of fraudulently priced stock options, which options were issued as a direct an d

proximate result of Defendants' misconduct alleged herein .

COUNT II

AGAINST THE INDIVIDUAL DEFENDANTS FOR BREACH OF FIDUCIARY DUT Y



57. The Individual Defendants , by reason of their positions as fiduciaries of th e

Company, owed duties of due care, undivided loyalty, good faith, and truthful disclosure. The

Individual Defendants violated and breached these duties . Each of the Officer Defendants was a

recipient of backdated options bearing fraudulent prices . Each of the Non-Management Directo r

13

Defendants approved, ratified or was otherwise responsible for administering and/or permitting

the backdated options to be granted to the Officer Defendants .

58 . The Directors, including the Officer Defendants, the Non-Management Director s

and, particularly those directors who were members of the Compensation Committee during th e

period that the backdated options were granted, each abandoned and abdicated his or he r

fiduciary responsibilities to the Company . Their conduct could not have been an exercise o f

good faith business judgment . Further, those directors who were members of the Audit

Committee breached their fiduciary duties to the Company by allowing the filing an d

dissemination of false and inaccurate financial statements not prepared in accordance wit h

GAAP.

59 . As a direct and proximate result of the Individual Defendants' breach of fiduciar y

duty and waste of corporate assets, the Company has sustained, and will continue to sustain ,

substantial harm .

60. The Individual Defendants are liable to the Company as a result of the acts

alleged herein .

COUNT III

AGAINST THE NON-MANAGEMENT DIRECTOR DEFENDANTS FOR AIDING AND

ABETTING A BREACH OF FIDUCIARY DUT Y

61 . Plaintiffs incorporate by reference and reallege each and every allegation


62. By reason of their positions as fiduciaries of the Company, the Officer Defendants

owed duties of due care, undivided loyalty, good faith, and truthful disclosure . The Office r

Defendants violated and breached these duties .

14

°Y • •

63 . By virtue of their role in creating and administering the Company's stock option

plan, and their approval and authorization of the stock options that were backdated as allege d

herein, the Non-Management Director Defendants were able to, and in fact did, render aid an d

assistance to the Officer Defendants in their breach of fiduciary duty . The Non-Management

Director Defendants did so knowing, or but for their gross negligence would have known, of the

Officer Defendants ' fiduciary breach .

64. As a direct and proximate result of the Non-Management Director Defendants '

aiding and abetting the Officer Defendants ' breach of fiduciary duty, the Company has sustained ,

and will continue to sustain, substantial harm .

65 . The Non-Management Director Defendants are liable to the Company as a resul t

of the acts alleged herein .

COUNT IV

AGAINST THE OFFICER DEFENDANTS FOR UNJUST ENRICHMENT



67. As a direct and proximate result of the acts alleged herein, the Officer Defendant s

wrongfully deprived the Company of substantial wealth and were unjustly enriched thereby .

68 . The Officer Defendants are liable to the Company as a result and should be

required to disgorge their unjust gains and return them to the Company .

COUNT V

AGAINST THE OFFICER DEFENDANTS FOR RESCISSIO N



15

. ~Y•

70 . As a result of the acts alleged herein , all stock option contracts between th e

Officer Defendants and Michaels Stores entered into during the relevant period were obtaine d

through the Officer Defendants' fraud, deceit, and abuse of control . Further, the backdated stoc k

options and the shares underlying these options were not duly authorized by the Board, as wa s

legally required, because they were not authorized in accordance with the terms of publicly filed

contracts - including the Plan and the Officer Defendants' employment agreements - approve d

by Michaels Stores shareholders and filed with the SEC .

71 . All stock option contracts between the Office Defendants and Michaels Store s

entered into during the relevant period should, therefore, be rescinded, with all sums paid unde r

such contracts returned to the Company, and all such executory contracts cancelled and declare d

void .

PRAYER FOR RELIEF

WHEREFORE, Plaintiffs demand judgment as follows :

A. Awarding to the Company money damages against all Individual Defendants ,

jointly and severally, for all losses and damages suffered as a result of the acts and transaction s

complained of herein ;

B. Awarding to the Company restitution from each of the Officer Defendants an d

ordering disgorgement of all profits, benefits, and/or other compensation obtained by the Office r

Defendants as a result of the acts and transactions complained of herein ;

C. Rescission of all option contracts granted to the Officer Defendants as a result o f

the acts and transactions complained of herein and the cancellation, nullification, and declaratio n

as void of any and all current or future obligations of the Company under all executory contract s

obtained by the Officer Defendants as a result of the acts and transactions complained of herein ;

16

D . Formation of a constructive trust to hold all executory options contracts issued t o

the Officer Defendants ;

E . Awarding punitive damages against the Officer Defendants ;

F. Awarding to Plaintiffs the costs and disbursements of the action, including

reasonable attorneys' fees, accountants' and experts' fees, costs, and expenses ; and

G. Granting such other relief as the Court may deem just and proper .

JURY DEMAND

Plaintiffs demand a trial by jury on all claims so triable .

Dated: July _, 2006 Respectfully submitted,

KILGORE & KILGORE, PLL C

By : d W" A-4N .Theodore C . AndersonTexas Bar No . 01215700W .D. MastersonTexas Bar No . 13184000John H. Crouch, IVTexas Bar No . 00783906Robert M. BehrendtTexas Bar No . 240122703109 Carlisle StreetDallas, Texas 75204Telephone : (214) 969-9099Facsimile: (214) 953-013 3

SCOTT + SCOTT, LLCDavid R. Scott108 Norwich AvenueP . O. Box 192Colchester, CT 06415Telephone : (860) 537-5537Facsimile : (860) 537-443 2

SCOTT + SCOTT, LLCGeoffrey M. Johnson33 River StreetChagrin Falls, OH 44022Telephone: (440) 247-8200

17

,~ •

18

•

Facsimile : (440) 247-8275

Counsel for Plaintiffs

i • •

VERIFICATION

We, James Ziolkowski and Christine Ziolkowski, hereby verify that we hav e

reviewed the foregoing Verified Shareholder Derivative Complaint and have authorized

its filing and the foregoing is true and correct to the best of our knowledge, informatio n

and belief.

We verify under penalty of perjury that the foregoing is true and correct .

Dated: . ~^ &t, \ 6 , 2006

Dated :~~~ _ 16 , 2006

%JS 44 (Rev 3/99) CIVIL COVER SHEE TThe JS-44 civil cover et and ~.h 'n~rm~ation Z~ftained herein neither replace nor sup p lement the fi lin and service of pleadings or other papers as requiredby law, except as provided (a'cal l 1~of court . This form, approved by the Judicial Conference of the United States in September 1974, is required for theuse of the Clerk of Cour edcpose of initiating the civil docket sheet . (SEE INSTRUCTIONS ON THE REVERSE OF THE FORM .)

1 . (a) PLAI DEFENDANT S

JAMI~D CHRISTINE ZIOLKOWSKI MICHAELS ROULEAU, JOHN C . MARTIN, DOUGLAS B .SULLIVAN, JAMES F . TUCKER, et al . ,

(b) County of Residence of First Listed Buf(EXCEPT IN U .S . PLAINTIFF

(C) Attorney ' s (Firm Name, Address , and Telephone Num er)Theodore C AndersonK il gore & Kilgore PLLC CLERK OF3109 Car lisle, Suite 200, Dallas , Tex as 75204 , o-rt igRN_ DI~T

of Residence of First Liste d(IN U .S . PLAINTIFF CASES ONLY)

IN LAND CONDEMNATION CASES, USE THE LOCATION OF THE

LAND INVOLVED

Known)

-06 CV1215- DII . BASIS OF JURISDICTION (Place an "X" in One Box Only) III. CITIZENSHIP OF PRINCIPAL PARTIES(Place an "X" in One Box for Plaintiff

(For Diversity Cases Only) and One Box for Defendant )PTF DEF PTF DEF

❑ 1 U.S. Government x 3 Federal Question Citizen of This State 1 ❑ 1 Incorporated or Principal Place ❑ 4 4Plaintiff (U .S Government Not a Party) of Business In This State

2 U.S . Government ❑ 4 Diversity Citizen of Another State 2 2 Incorporated and Principal ❑ 5 ❑ 5Defendant (Indicate Citizenship of Parties of Business In Another Stat e

in Item III)Citizen or Subject of a ❑ 3 ❑ 3 Foreign Nation ❑ 6 ❑ 6

Foreign Count

IV. NATURE OF SUI T (Place an "X" in One Box Only)CONTRACT TORTS FORFEITURE/PENALT BANKRUPTCY OTHER STATUTE S

❑ 130 Miller Act ❑ 315 Airplane Product Med Malpractice ❑ 625 Drug Related Seizure ❑ 423 Withdrawal ❑ 430 Banks and Banking❑ 140 Negotiable Instrument Liability ❑ 365 Personal Injury - of Property 21 USC 28 USC 157 ❑ 450 Commerce/ICC Rates/etc

❑ 150 Recovery of Overpayment 320 Assault Libel & Product Liability ❑ 630 Liquor Laws ❑ 460 Deportation,

& Enforcement of Judgment Slander 368 Asbestos Personal 640 R R & Truck PROPERTY RIGHTS 470 Racketeer Influenced and

❑ 151 Medicare Act ❑ 330 Federal Employers' Injury Product ❑ 650 Airline Regs❑ 820 Copyri ghts

Corrupt Organization s❑ 152 Recovery of Defaulted

❑

Liability Liability ❑ 660 Occupational❑ 830 Patent

❑ 810 Selective Service

<Student Loans 340 Marine PERSONAL PROPERTY Safety/Health ❑ 840 Trademark850 Securities/Commodities /J

(Excl Veterans) ❑ 345 Marine Product ❑ 370 Other Fraud ❑ 690 Other Exchang ef O3 371 T h L d ❑ 875 C Ch llverpayment❑ 15 Recovery o

of Veteran's Benefits ❑Liabilit y

350 Motor Vehiclein en ing❑ rut

❑ 380 Other Personal LABOR SOCIAL SECURITYustomer a enge

12 USC 341 0

❑ 160 Stockholders' Suits ❑ 355 Motor Vehicle Property Damage❑ 710 Fair Labor Standards ❑ 861 HIA (1395ff)

❑ 891 Agricultural Act s❑ 190 Other Contract Product Liability ❑ 385 Property Damage Act ❑ 862 Black Lung (923) ❑ 892 Economic S tabil Act❑ 195 Contract Product Liability ❑ 360 Other Personal Injury Product Liability

❑ 720 Labor/Mgmt Relations ❑ 863 DIWC/DIWW (405(8))

n l Matt rs❑ 893 Ener A tal Io A t❑ 894 E Al l t A t

REAL PROPERTY CIVIL RIGHTS P R I S 0 N E R ❑ 864 SSID Title XVI

gy cnergy oca ionn c

❑ 895 Freedom of

0 d2 d C ❑ 4I _111 10118❑ 510 M V

❑ 730 Labor/Mgmt Reporting

l A t& D

❑ 865 RSI (405(g)) Information Ac ton emnation❑ 1 Lan 41 Voting otions to acate osure cisc

❑ 900 Appeal of Fee❑ 220 Foreclosure 442 Employment Sentence ❑ 740 Railway Labor Act FEDERAL TAX SUITS

xx Determination Unde r

❑ 230 Rent Lease & Ejectment ❑ 443 Housing/ Habeas Corpus❑ 870 Taxes (U S Plaintiff

EqualAccess to Justice❑

240 Torts to Land Accommodations❑

530 General 790 Other Labor Litigationor Defendant) ❑ 950 Constitutionality of

❑ 245 Tort Product Liability ❑ 444 Welfare ❑ 535 Death PenaltyState Statutes

❑ 290 All Other Real Property ❑ 440 Other Civil Rights ❑ 540 Mandamus & Other ❑ 791 Empl Ret Inc ❑ 871 IRS-Third Party ❑ 890 Other Statutory Action s❑ 550 Civil Rights Security Act

26 USC 7609❑ 555 Prison Condition

V. ORIGIN(PLACE AN "X" IN ONE BOX ONLY)

Transferred fromanother district

App eal to DistrictJudge fro m

X I Original ❑ 2 Removed from ❑ 3 Remanded from ❑ 4 Reinstated ❑ 5 (specify) ❑ 6 Multidistrict ❑ 7 Magistrate

Proceeding State Court Appellate Court or Litigation JudgmentReopene d

VI. CAUSE OF ACTION (Cite the U S Civil Statute under which you are filing and write brief statement of cause

Do not cite jurisdictional statutes unless diversity )

Violations of Section 10(b) of the Securities Exchange Act and Rule I Ob- 5, Breach of Fiduciary Duty, Aiding and Abetting a Breach of Fiduciary Duty, Unjust Enrichment and Rescissio n

VII . REQUESTED IN D CHECK IF THIS IS A CLASS ACTION DEMAND CHECK YES only if demanded in complaint

COMPLAINT : UNDER F R C .P . 23 JURY DEMAND : X Yes ❑ No

VIII . RELATED CASE (S) (Seeinstructions)

IF ANY JUDGE DOCKET NUMBER

DATE ATTORNEY OF RECORD

RECEIPT 9 AMOUNT ___ APPLYING IFP JUDGE MAG JUDGE

Ziolkowski, et al. v. Michaels Stores, Inc., et al. 06-CV-1215 …securities.stanford.edu/.../MIK_01/200677_o01c_061215.pdf · 2006. 12. 1. · Ziolkowski, et al. v. Michaels Stores,

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