Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_06-cv-04128/USCOURTS-cand-5_06-cv-04128-18/pdf.json

Nature of Suit Code: 160
Nature of Suit: Stockholder's Suits
Cause of Action: 28:1331 Fed. Question

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 This disposition is not designated for publication and may not be cited. 1

Case No. C 06-4128 JF

ORDER GRANTING WITH LEAVE TO AMEND MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

AND DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

**E-Filed 11/19/2007**

NOT FOR CITATION

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

IN RE APPLE COMPUTER INC., DERIVATIVE

LITIGATION

Case Number C 06-4128 JF

ORDER GRANTING WITH LEAVE 1

TO AMEND MOTION TO DISMISS

FOR FAILURE TO STATE A CLAIM

AND DEFERRING MOTION TO

DISMISS FOR FAILURE TO MAKE

DEMAND

[re: docket no. 129, 130]

I. BACKGROUND

1. Procedural Background

This derivative action arises from the alleged backdating of stock options by directors and

officers of nominal defendant Apple Computer Inc. (“Apple”). The initial complaint was filed

on June 30, 2006. On November 2, 2006, the Court appointed a leadership structure for this

litigation in light of the consolidation of a number of cases under the above caption. On

December 18, 2006, Plaintiffs filed a consolidated shareholder derivative complaint. On January

18, 2007, Plaintiffs moved to amend their complaint. That request was granted on February 26,

Case 5:06-cv-04128-JF Document 159 Filed 11/19/07 Page 1 of 15
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 The Amended Complaint bears the title “First Amended Shareholder Derivative 2

Complaint.” 

2

Case No. C 06-4128 JF

ORDER GRANTING WITH LEAVE TO AMEND MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

AND DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

2007, and the operative pleading (“the Amended Complaint”) was filed on March 6, 2007. 

2

The Amended Complaint names thirteen defendants (“the Individual Defendants”): Fred

D. Anderson; Timothy D. Cook; Steven P. Jobs; Ronald B. Johnson; Mitchell Mandich; Peter

Oppenheimer; Jonathan Rubinstein; Avadis Tevanian, Jr.; Nancy Heinen; William V. Campbell;

Millard Drexler; Arthur D. Levinson; and Jerome B. York. Complaint ¶¶ 40-52. The Amended

Complaint refers to Anderson, Cook, Jobs, Johnson, Mandich, Rubinstein, and Tevanian as the

“Backdating Defendants;” to Anderson, Cook, Jobs, Johnson, Levinson, Mandich, Oppenheimer,

Rubinstein, Tevanian, and York as the “Insider Selling Defendants;” to Campbell, Drexler,

Levinson, and York as the “Compensation Committee Defendants;” to Campbell, Levinson, and

York as the “Audit Committee Defendants.” Id. ¶¶ 53-56.

The Amended Complaint includes ten state-law claims: (1) breach of fiduciary duty by

option backdating, against the Backdating, Audit Committee, and Compensation Committee

Defendants; (2) breach of fiduciary duty by insider selling, against the Insider Selling

Defendants; (3) aiding and abetting breach of fiduciary duty, against the Audit Committee and

Compensation Committee Defendants; (4) unjust enrichment, against the Backdating and Insider

Selling Defendants; (5) constructive fraud, against the Individual Defendants; (6) abuse of

control, against the Individual Defendants; (7) corporate waste and gift, against the Individual

Defendants; (8) gross mismanagement, against the Individual Defendants; (9) rescission, against

the Individual Defendants; and (10) violation of California Corporate Code. The Complaint also

asserts three federal claims under the Securities Exchange Act: (11) violation of section 14(a);

(12) violation of section 10(b); and (13) violation of section 20(a).

On April 20, 2007, the Individual Defendants moved to dismiss the Amended Complaint

for failure to state a claim upon which relief can be granted, and Apple moved to dismiss the

Amended Complaint for failure to make demand. Plaintiffs oppose the motions. The Court

heard oral argument on September 7, 2007.

Case 5:06-cv-04128-JF Document 159 Filed 11/19/07 Page 2 of 15
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3

Case No. C 06-4128 JF

ORDER GRANTING WITH LEAVE TO AMEND MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

AND DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

2. Factual Background

Plaintiffs make the following general allegations. Between fiscal years 1997 and 2002,

Apple granted stock options pursuant to at least three different stock option plans: the 1990 Stock

Option Plan; the 1997 Employee Stock Option Plan; and the 1998 Executive Officer Stock Plan. 

Id. ¶ 78-79. The stated purpose of each plan was to attract and retain the best available personnel

and to provide incentives to such personnel to promote the success of Apple. Id. ¶ 80. The plans

required that the exercise price for any stock option issued be at least 100% of the fair market

value of the common stock on the date of the grant. Id. ¶ 82. 

According to the Amended Complaint:

Defendants, over the course of nearly a decade, abdicated their fiduciary

obligations, and lied to Apple’s public shareholders, by permitting the Board to

manipulate the Company’s stock option plans to maximize compensation to

selected executives. As a result, these favored executives improperly and

unlawfully amassed a fortune in Apple stock and stock options, and caused the

Company to overstate its earnings and issue materially false and misleading

financial statements since at least fiscal 1997, and to restate its reported financial

results for fiscal years 2004 through 2006. 

Id. ¶ 2. Apple “never disclosed that the Apple Board permitted Defendants to manipulate the

Company’s option grants by backdating options and otherwise timing grants to maximize

personal benefits.” Id. ¶ 4. Instead, “the Company deliberately concealed from the investing

public the fact that the Board permitted such manipulation of the stock grant dates and

affirmatively misrepresented that all options were granted at an exercise price equal to the fair

market value on the date of grant.” Id. 

On June 29, 2006, Apple issued a press release announcing that its internal investigation

had discovered “irregularities related to the issuance of certain stock option grants made between

1997 and 2001.” Id. ¶ 5. On July 19, 2006, Apple issued a second press release stating that it did

not anticipate a “material adjustment” to financial results. Id. ¶ 6. However, on August 3, 2006,

Apple announced that it had discovered further irregularities that likely would result in financial

restatements, and that its financial reports for fiscal years 2003, 2004, and 2005 no longer should

be relied upon. Id. ¶ 7. In its annual report for fiscal year ending September 30, 2006, Apple

Case 5:06-cv-04128-JF Document 159 Filed 11/19/07 Page 3 of 15
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Case No. C 06-4128 JF

ORDER GRANTING WITH LEAVE TO AMEND MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

AND DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

made the following disclosures: the originally assigned grant dates for 6,428 grants on 42 dates

were incorrect, causing Apple to recognize a pre-tax stock-based compensation expense of $105

million; Jobs was not only aware of the options backdating but also received some of the grants

and recommended some of the dates chosen; and Board minutes were falsified in order to cover

up the wrongdoing. Id. ¶ 10. One of the largest grants during this period was made to Jobs, in

the form of a grant of options to purchase ten million shares with a grant date of January 12,

2000. Id. ¶ 12. The timing of the grants was such that they occurred either shortly after a drop in

the stock price or shortly before an increase. Plaintiffs argue that: “[t]he timing of these grants

could not have been by pure coincidence.” Id. ¶ 11.

Plaintiffs make the following additional allegations with respect to the Individual

Defendants: Anderson served as the Company’s Executive Vice President and Chief Financial

Officer from April 1996 to June 2004. Id. ¶ 40. Anderson became a member of the Board in

June 2004, at which time he left the officer position he previously had held. Id. ¶ 40, 150. Cook

is Apple’s Chief Operating Officer. Id. ¶ 41. Jobs has been the Chief Executive Officer of

Apple since 2000; he was interim Chief Operating Officer from September 1997 to 2000 and has

been a director since August 1997. Id. at ¶ 42. Johnson has served as a Senior Vice President of

Apple since 2000. Id. ¶ 43. Mandich served as a Senior of Vice President of Apple from

February 1997 to October 2000, when he resigned. Id. ¶ 44. Oppenheimer joined Apple in 1996

and now serves as its Senior Vice President and Chief Financial Officer. Id. ¶ 45. Rubinstein

served as a Senior Vice President of Apple from February 1997 to May 2004. Id. ¶ 46. Tevanian

served as a Senior Vice President of Apple from February 1997 to March 31, 2006, when he

resigned without explanation. Id. ¶ 47. Heinen served as General Counsel to Apple from 1997

until May 2006, when she left the company without explanation, Id. ¶ 48; as General Counsel,

Heinen reviewed all company financial statements, press releases and/or other filings with the

SEC. Id. Campbell has served as a director since August 1997, Id. ¶ 49; he also has served as a

member of the Audit Committee since August 1997 and of the Compensation Committee since

August 2001. Id. Drexler has served as a director since 1999, including as a member of the

Case 5:06-cv-04128-JF Document 159 Filed 11/19/07 Page 4 of 15
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 Anderson and Schmidt served together on the Board from August 29, 2006 to 3

September 30, 2006. Id. ¶ 215 & n.7.

5

Case No. C 06-4128 JF

ORDER GRANTING WITH LEAVE TO AMEND MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

AND DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

Compensation Committee since November 2002. Id. ¶ 50. Levinson has served as a director

since fiscal year 2000, including 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 2000. 

Id. ¶ 51. York has served as a director since August 1997, as a member of the Compensation

Committee from August 2001 through November 2002, and as a member of the Audit

Committee since August 1997. Id. ¶ 52.

Plaintiffs allege that between April 2000 and August 2001, Apple had no compensation

committee. Id. ¶ 141. In the absence of such a committee, all such responsibilities belonged to

the full Board. Id. At the time this action was commenced, the Board was comprised of seven

directors: Anderson, Campbell, Drexler, Jobs, Levinson, York, and non-defendant Albert Gore,

Jr. When the Complaint was filed, Anderson had been replaced by non-defendant Eric Schmidt.3

Plaintiffs allege that demand would be futile because Jobs, Anderson, Campbell, Drexler, and

York all have adverse interests that render them incapable of fair, unbiased consideration. Id. ¶

213, 216. 

II. LEGAL STANDARD

1. Motion to Dismiss

For purposes of a motion to dismiss, the plaintiff’s allegations are taken as true, and the

Court must construe the complaint in the light most favorable to the plaintiff. Jenkins v.

McKeithen, 395 U.S. 411, 421 (1969). Leave to amend must be granted unless it is clear that the

complaint’s deficiencies cannot be cured by amendment. Lucas v. Department of Corrections,

66 F.3d 245, 248 (9th Cir. 1995). When amendment would be futile, however, dismissal may be

ordered with prejudice. Dumas v. Kipp, 90 F.3d 386, 393 (9th Cir. 1996). On a motion to

dismiss, the Court’s review is limited to the face of the complaint and matters judicially

noticeable. North Star International v. Arizona Corporation Commission, 720 F.2d 578, 581

(9th Cir. 1983); MGIC Indemnity Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir. 1986); Beliveau

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 California courts follow Delaware law in demand futility cases. See Oakland Raiders 4

v. National Football League, 93 Cal.App.4th 572, 586 n.5 (2001) (“The parties agree that we

may properly rely on corporate law developed in the State of Delaware given that it is identical to

California corporate law for all practical purposes.”).

6

Case No. C 06-4128 JF

ORDER GRANTING WITH LEAVE TO AMEND MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

AND DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

v. Caras, 873 F.Supp. 1393, 1395 (C.D. Cal. 1995). However, under the “incorporation by

reference” doctrine, the Court also may consider documents that are referenced extensively in the

complaint and are accepted by all parties as authentic, even though the documents are not

physically attached to the complaint. In re Silicon Graphics, Inc. Securities Litigation, 183 F.3d

970 (9th Cir. 1999).

2. Demand Requirement

A derivative complaint must “allege with particularity the efforts, if any, made by the

plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and,

if necessary, from the shareholders or members, and the reasons for the plaintiff's failure to

obtain the action or for not making the effort.” Fed. R. Civ. P. 23.1. The existence and

satisfaction of a demand requirement is a substantive issue governed by state law. See Kamen v.

Kemper Financial Services, Inc., 500 U.S. 90, 96-97 (1991). When the challenged decision is 4

that of the board in place at the time of the filing of the complaint, failure to make demand may

be excused if a plaintiff can raise a reason to doubt that a majority of the board is disinterested or

independent or that the challenged acts were the product of the board’s valid exercise of business

judgment. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984); see also Ryan v. Gifford, 918 A.2d

341, 352 (Del. Ch. 2007) (discussing Aronson). However, “[w]here there is no conscious

decision by the corporate board of directors to act or refrain from acting, the business judgment

rule has no application.” Rales v. Blasband, 634 A.2d 927, 933 (Del. 1993); see also Ryan, 918

A.2d at 352 (discussing Rales). In such a situation, demand may be excused only if a plaintiff

“can create a reasonable doubt that, as of the time the complaint is filed, the board of directors

could have properly exercised its independent and disinterested business judgment in responding

to a demand.” Id. at 353 (citing Rales, 634 A.3d 933-34). 

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 Because the existence of a viable federal claim is a prerequisite to the exercise of its 5

subject-matter jurisdiction, the Court addresses the three federal claims first.

7

Case No. C 06-4128 JF

ORDER GRANTING WITH LEAVE TO AMEND MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

AND DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

III. ANALYSIS

1. Motion to Dismiss for Failure to State a Claim5

a. Claim Eleven: Violation of Section 14(a)

Rule 14a-9 provides:

No solicitation subject to this regulation shall be made by means of any proxy

statement, form of proxy, notice of meeting or other communication, written or

oral, containing any statement which, at the time and in the light of the

circumstances under which it is made, is false or misleading with respect to any

material fact, or which omits to state any material fact necessary in order to make

the statements therein not false or misleading or necessary to correct any

statement in any earlier communication with respect to the solicitation of a proxy

for the same meeting or subject matter which has become false or misleading.

17 C.F.R. § 240.14a-9(a). To state a claim under Rule 14a-9 and Section 14(a), a plaintiff must

allege that: (1) the defendant made a false or misleading statement or omission of material fact;

(2) the misstatement or omission was made with the requisite level of culpability; and (3) the

statement provided an essential link in the accomplishment of the transaction. Desaigoudar v.

Meyercord, 223 F.3d 1020, 1022 (9th Cir. 2000). 

The Individual Defendants assert that Plaintiff’s Section 14(a) claim is time-barred

because it was not filed within one year after discovery of the facts constituting the violation, or

within three years following publication of the proxy statement as required by statute. However,

Plaintiffs contend that their 14(a) claim sounds in fraud and therefore is governed by 28 U.S.C. §

1658(b), which provides a five-year statute of repose and a two-year statute of limitations for a

“private right of action that involves a claim of fraud, deceit, manipulation or contrivance in

contravention of a regulatory requirement concerning the securities laws.” See Plaintiffs’

Consolidated Memorandum of Points and Authorities in Opposition to Defendants’ Motion to

Dismiss First Amended Shareholder Derivative Complaint (“Opposition”) at 44. 

The Court concludes that § 1658(b) applies to the Section 14(a) claim because such a

claim does not sound in fraud. See In re Exxon Mobil Corp. Sec. Litig., 387 F.Supp.2d 407, 424

Case 5:06-cv-04128-JF Document 159 Filed 11/19/07 Page 7 of 15
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 This Court has held in another action that the PSLRA has foreclosed the application of 6

the “group published pleading” doctrine, which holds that when false or misleading information

is conveyed in group published statements, it is reasonable to presume that the statements are the

result of the collective actions of the company’s officers. In re Nextcard, Inc. Sec. Litig., No. C

01-21029, 2006 WL 708663, at *2-3 (N.D.Cal. March 20, 2006). 

8

Case No. C 06-4128 JF

ORDER GRANTING WITH LEAVE TO AMEND MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

AND DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

(D.N.J. 2005); In re Global Crossing, Ltd. Sec. Litig., 313 F.Supp.2d 189, 196-97 (S.D.N.Y.

2003); In re Zoran Corp. Deriv. Litig., 2007 WL 1650948, at *24 (N.D.Cal. June 5, 2007). As

currently pled, Plaintiffs’ Section 14(a) claim alleges false statements made more than three years

prior to the filing of this action. See Amended Complaint ¶ 277 (alleging false proxy statements

from 1997 to 2002). Accordingly, the claim will be dismissed. While the Court will grant leave

to amend, Plaintiffs should not amend this claim unless they can allege violations of Section

14(a) by the publication of proxy statements that occurred on or after July 30, 2003, and unless

they commenced the present action within one year after discovery of the violation.

In light of the foregoing discussion, the Court need not reach Defendants’ challenges to

the sufficiency of the allegations. However, assuming without deciding that the Private

Securities Litigation Reform Act (“PSLRA”) also applies to Section 14(a) claims, see e.g. In re

Textainer Partnership Securities Litig., 2005 WL 3801596 (N.D.Cal. March 8, 2005); In re

McKesson HBOC, Inc. Sec. Litig., 126 F.Supp.2d 1248, 1267 (N.D.Cal. 2000), and that Plaintiffs

can assert a claim that is not time-barred, greater specificity likely would strengthen this claim

considerably.6

b. Claim Twelve: Violation of Section 10(b)

i. Statute of Limitations

As noted above, claims of securities fraud are subject to 28 U.S.C. § 1658(b) which

provides:

[A] private right of action that involves a claim of fraud, deceit, manipulation, or

contrivance in contravention of a regulatory requirement concerning the securities

laws, as defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15

U.S.C. § 78c(a)(47)), may be brought not later than the earlier of – 

(1) 2 years after the discovery of the facts constituting the

violation; or

(2) 5 years after such violation.

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 “A statute of repose is a fixed, statutory cutoff date, usually independent of any 7

variable, such as claimant’s awareness of a violation.” Munoz v. Ashcroft, 339 F.3d 950, 957

(9th Cir. 2003) (citing Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350,

363 (1991)). 

 The Court is skeptical of a continuing wrong theory that would create liability under 8

Section 10(b) upon the issuance of a financial statement that merely fails to correct a prior false

9

Case No. C 06-4128 JF

ORDER GRANTING WITH LEAVE TO AMEND MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

AND DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

See, e.g., In re Heritage Bond Litig., 289 F. Supp. 2d 1132, 1147-48 (C.D.Cal. 2003). This

statute of limitations is not subject to equitable tolling. Durning v. Citibank, Int’l, 990 F.2d

1133, 1136-37 (9th Cir. 1993). Because Plaintiffs’ claim under section 10(b) sounds in fraud,

section 1658(b) applies. In light of Plaintiffs’ allegation that the practice of backdating options

came to light in 2005, the two-year discovery period does not bar the instant action at the

pleading stage. Accordingly, the applicable period for this analysis is the five-year period of

repose which commenced on the period after June 30, 2001. 

7

The only allegedly backdated option grants within this period are those alleged to have

occurred in fiscal year 2002. See Amended Complaint ¶¶ 118-119 (discussing period from

October 19, 2001 to December 14, 2001). However, Plaintiffs also allege that Apple filed a

series of false financial statements during the five-year period of repose, raising a question as to

whether the filing of such subsequent false financial statements preserves claims for alleged

options manipulation that occurred outside the period. The Court concludes that in light of the

statute’s focus on the date of the “violation,” the statute of limitations must be applied to the

specific violations alleged. To the extent that Plaintiffs’ claim is based on the backdating itself,

the period of repose began to run on the date that the option grant was made. See Durning, 990

F.2d at 1136 (noting that the federal rule is that a cause of action accrues at the completion of the

sale of the instrument); Falkowski v. Imation Corp., 309 F.3d 1123, 1130 (9th Cir. 2002)

(describing the grant of an option as “a purchase or sale” under the Securities Litigation Uniform

Standards Act). Plaintiffs may be able to state a claim under Section 10(b) and Rule 10(b)(5) for

dissemination of fraudulent financial statements, but the dates of such statements themselves

must fall within the five-year period. Plaintiffs may not avoid the effect of the statute of 8

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statement. Such a theory appears to approximate the effects of the fraudulent concealment

doctrine in relation to equitable tolling, a doctrine that does not apply in the Section 10(b)

context. 

In re Dynex Capital, Inc. Sec. Litig., No. 05 CV 1897, 2006 WL 314524 *5 (S.D.N.Y.

Feb 10, 2006), a New York district court opinion cited by Plaintiffs, does not hold to the

contrary. In that case, the Court expressly distinguished a situation in which the alleged

securities transaction fell within the five-year period from one in which the underlying

transaction fell outside the five-year period. Dynex, 2006 WL 314524 at n.4 (citing Shalam v.

KPMG, L.L.P., No. 05 CV 3602, 2005 WL 2139928 *2 (S.D.N.Y. Sept. 6, 2005)). 

10

Case No. C 06-4128 JF

ORDER GRANTING WITH LEAVE TO AMEND MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

AND DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

limitations by combining allegations of recent financial statements and time-barred option

backdating. Because the claim under section 10(b) as currently pled depends upon such a

combination, it will be dismissed. The Court will grant leave to amend so that Plaintiffs may

allege independent wrongful acts that occurred on or after June 30, 2001. 

ii. Sufficiency of the Allegations

Section 10(b) makes it unlawful 

[t]o use or employ, in connection with the purchase or sale of any security

registered on a national securities exchange or any security not so registered . . . 

any manipulative or deceptive device or contrivance in contravention of such rules

and regulations as the Commission may prescribe as necessary or appropriate in

the public interest or for the protection of investors.

15 U.S.C. § 78j(b). Rule 10b-5 makes it unlawful for any person to use interstate commerce 

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material

fact necessary in order to make the statements made, in the light of the

circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would

operate as a fraud or deceit upon any person, in connection with the purchase or

sale of any security.

17 C.F.R. § 240.10b-5. In cases involving publicly-traded securities and purchases or sales in

public securities markets, the elements of an action under Section 10(b) and Rule 10b-5 are: (1)

a material misrepresentation or omission; (2) scienter; (3) a connection with the purchase or sale

of a security; (4) reliance; (5) economic loss; and (6) loss causation. Dura Pharmaceuticals, Inc.

v. Broudo, 544 U.S. 336, 341-42 (2005).

Plaintiffs must meet two heightened pleading standards. First, Fed. R. Civ. P. 9(b)

requires that “the circumstances constituting fraud . . . be stated with particularity.” The Ninth

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Case No. C 06-4128 JF

ORDER GRANTING WITH LEAVE TO AMEND MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

AND DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

Circuit has explained that a “plaintiff must include statements regarding the time, place, and

nature of the alleged fraudulent activities, and that mere conclusory allegations of fraud are

insufficient.” In re GlenFed, Inc. Securities Litigation, 42 F.3d 1541, 1548 (9th Cir. 1994). A

plaintiff asserting fraud “must set forth an explanation as to why the statement or omission

complained of was false or misleading.” Id. (internal quotation marks omitted); see also Yourish

v. California Amplifier, 191 F.3d 983, 992-93 (9th Cir. 1999). 

Second, the Private Securities Litigation Reform Act (“PSLRA”) raises the pleading

standard further:

(1) Misleading statements and omissions

In any private action arising under this chapter in which the plaintiff alleges that

the defendant– 

(A) made an untrue statement of a material fact; or

(B) omitted to state a material fact necessary in order to make the statements

made, in the light of the circumstances in which they were made, not misleading;

the complaint shall specify each statement alleged to have been misleading, the

reason or reasons why the statement is misleading, and, if an allegation regarding

the statement or omission is made on information and belief, the complaint shall

state with particularity all facts on which that belief is formed.

(2) Required state of mind

In any private action arising under this chapter in which the plaintiff may recover

money damages only on proof that the defendant acted with a particular state of

mind, the complaint shall, with respect to each act or omission alleged to violate

this chapter, state with particularity facts giving rise to a strong inference that the

defendant acted with the required state of mind.

15 U.S.C. § 78u-4b(1)-(2).

In connection with their 10(b) claim Plaintiffs allege the following:

Defendants had actual knowledge of the misrepresentations and omissions of

material facts set forth herein, or acted with reckless disregard for the truth in that

they failed to ascertain and to disclose such facts, even though such facts were

available to them. Defendants’ material misrepresentations and/or omissions were

done knowingly or recklessly and for the purpose and effect of concealing the

truth.

Amended Complaint ¶ 286. This allegation is insufficient to create the strong inference of

scienter required by the PSLRA, even when it is viewed in light of the factual allegations found

elsewhere in the Amended Complaint. Rather, Plaintiffs’ pleading in its present form is

characterized by conclusory, general, and non-individualized assertions as to all of the

Defendants. The only individualized allegation is that Apple found in the course of its

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 Plaintiffs also include allegations of scheme liability. See, e.g., Amended Complaint ¶¶ 9

282-83, 285. The issue of whether a scheme liability claim may be brought pursuant to § 10(b)

was argued before the Supreme Court on October 9, 2007 in Stoneridge Inv. Partners, LLC v.

Scientific-Atlantic, Inc., No. 05-1974. No opinion has been issued in that case to date. The

Ninth Circuit has explained that:

Participation in a fraudulent transaction by itself, however, is insufficient to

qualify the defendant as a “primary violator” if the deceptive nature of the

transaction or scheme was not an intended result, at least in part, of the

defendant’s own conduct. We hold that to be liable as a primary violator of §

10(b) for participation in a “scheme to defraud,” the defendant must have engaged

in conduct that had the principal purpose and effect of creating a false appearance

of fact in furtherance of the scheme. It is not enough that a transaction in which a

defendant was involved had a deceptive purpose and effect; the defendant’s own

conduct contributing to the transaction or overall scheme must have had a

deceptive purpose and effect.

Simpson v. AOL Time Warner Inc., 452 F.3d 1040, 1048 (9th Cir. 2006). Because the Amended

Complaint contains insufficient allegations that the various defendants’ contributions to the

overall scheme had a deceptive purpose and effect, the scheme allegations also will be dismissed. 

While Plaintiffs may include such allegations of scheme liability in an amended complaint, the

Court has considerable doubt that Plaintiffs will be able to state a claim for scheme liability. 

12

Case No. C 06-4128 JF

ORDER GRANTING WITH LEAVE TO AMEND MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

AND DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

investigation that Jobs was aware of the backdating. See Amended Complaint ¶ 173. In order to

meet the requirements of the PSLRA, Plaintiffs must provide more detailed allegations giving

rise to a stronger inference of scienter on the part of each defendant. 

9

iii. Claim Thirteen: Violation of Section 20(a)

To state a claim under Section 20(a), a plaintiff must allege (1) a primary violation of

federal securities laws; and (2) that the defendant exercised actual power or control over the

primary violator. Howard v. Everex Systems, Inc., 228 F.3d 1057, 1065 (9th Cir. 2000). The

statute of limitations analysis pertaining to the Section 10(b) claim applies equally to the Section

20(a) claim. See, e.g., In re Heritage Bond Litigation, 289 F. Supp. 2d at 1148. Because

Plaintiffs have failed to state a claim for a primary violation of the securities laws, this claim also

will be dismissed with leave to amend.

c. Claims Under State Law

As discussed above, Plaintiffs have yet to state a federal claim that is not time-barred and

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Case No. C 06-4128 JF

ORDER GRANTING WITH LEAVE TO AMEND MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

AND DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

that meets the heightened pleading requirements of federal law. Because the Court would lack

jurisdiction to entertain Plaintiffs’ state law claims in the absence of a valid federal claim, the

Court need not address the sufficiency of the state law claims at this time. However, Defendants

appear to raise a number of valid arguments with respect to these claims, and Plaintiffs may wish

to amend the claims accordingly. 

2. Motion to Dismiss for Failure to Make Demand

Apple also moves to dismiss the Amended Complaint for failure to make demand. It

argues that demand is not excused because Plaintiffs’ allegations do not show that a majority of

the Board faces a substantial risk of liability or that the Board’s independence otherwise has been

compromised. In light of its conclusion that Plaintiffs have yet to state a claim for violation of

federal law, the Court need not address this aspect of Defendants’ motion at this time. 

IV. ORDER

Good cause therefor appearing, IT IS HEREBY ORDERED that Defendants’ motion to

dismiss for failure to state a claim is GRANTED with leave to amend, and Defendants’ motion to

dismiss for failure to make demand is DEFERRED. Any amended pleading shall be filed within 

thirty (30) days of the date of this order.

DATED: November 19, 2007.

 

JEREMY FOGEL

United States District Judge

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Case No. C 06-4128 JF

ORDER GRANTING WITH LEAVE TO AMEND MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

AND DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

This Order has been served upon the following persons:

Genevieve A. Cox Genevieve.Cox@mto.com, sophia.leshin@mto.com 

Travis E. Downs , III travisd@lerachlaw.com, e_file_sd@lerachlaw.com 

Yohance Claude Edwards yohance.edwards@mto.com, milvi.giesinger@mto.com 

Juli E. Farris jfarris@kellerrohrback.com, bleland@kellerrohrback.com,

mbates@kellerrohrback.com 

Howard D. Finkelstein fk@classactionlaw.com 

David Malcolm Furbush dfurbush@omm.com, dedmondson@omm.com,

dshah@omm.com, lnewell@omm.com, vtran@omm.com 

Sarah A. Good sgood@howardrice.com, bhastings@howardrice.com 

Jason Mark Habermeyer jhabermeyer@howardrice.com, ccamp@howardrice.com 

Sean M. Handler , Esq ecf_filings@sbtklaw.com, der_filings@sbtklaw.com.com 

Willem F. Jonckheer wjonckheer@schubert-reed.com 

Jeffrey R. Krinsk jrk@classactionlaw.com, fk@classactionlaw.com 

Elizabeth A. Leland bleland@kellerrohrback.com, chopkins@kellerrohrback.com,

dwilcher@kellerrohrback.com 

Ronald Lovitt rl@lh-sf.com, davies@lh-sf.com 

Mark Cotten Molumphy mmolumphy@cpmlegal.com, jacosta@cpmlegal.com,

oszeto@cpmlegal.com, pskahan@cpmlegal.com 

Jerry E. Nastari jen@coreylaw.com, deg@coreylaw.com 

Alan R Plutzik aplutzik@bramsonplutzik.com 

Juden Justice Reed jreed@schubert-reed.com, akeng@schubert-reed.com,

plee@schubert-reed.com, rschubert@schubert-reed.com 

George A. Riley griley@omm.com, cchiu@omm.com, mhenderson@omm.com 

Jerome Cary Roth Jerome.Roth@mto.com, susan.ahmadi@mto.com 

Lynn Lincoln Sarko lsarko@kellerrohrback.com 

Kathryn Anne Schofield kschofield@bramsonplutzik.com,

moldenburg@bramsonplutzik.com 

Robert C. Schubert rschubert@schubert-reed.com 

Emanuel Shachmurove mshachmurove@sbtklaw.com 

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Case No. C 06-4128 JF

ORDER GRANTING WITH LEAVE TO AMEND MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

AND DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

Luann Loraine Simmons lsimmons@omm.com, cchiu@omm.com, cholsome@omm.com,

smeblin@omm.com 

Kelly L Sommerfeld ksommerfeld@cpsmlaw.com, jacosta@cpsmlaw.com 

John W. Spiegel spiegeljw@mto.com, berryjm@mto.com, finchac@mto.com,

giesingermj@mto.com, stonelc@mto.com, voigtsam@mto.com 

Mary Sikra Thomas mthomas@gelaw.com, memaryt@verizon.net 

Shawn A. Williams shawnw@lerachlaw.com, aelishb@lerachlaw.com,

cwood@lerachlaw.com, e_file_sd@lerachlaw.com,

e_file_sf@lerachlaw.com, jdavis@lerachlaw.com,

moniquew@lerachlaw.com, travisd@lerachlaw.com 

Elizabeth B. Wydra elizabethwydra@quinnemanuel.com,

veronicavelilla@quinnemanuel.com 

Scott Justin Yundt syundt@mandhllp.com, aarnall@mandhllp.com,

dhoward@mandhllp.com, gmurray@mandhllp.com 

Eric L. Zagar ezagar@sbtklaw.com, der_filings@sbtklaw.com,

kpopovich@sbtklaw.com, rwinchester@sbtklaw.com 

Notice has been delivered by other means to:

Sarina M. Hinson 

The Garcia Law Firm

1 World Trade Center

Suite 1950

Long Beach, CA 90831

Carl Holliday Moor 

Munger Tolles & Olson LLP

355 S Grand Ave 35FL

Los Angeles, CA 90071-1560

Richard S. Schiffrin 

Schiffrin & Barroway LLP

280 King of Prussia

Radnor, PA 19087

Case 5:06-cv-04128-JF Document 159 Filed 11/19/07 Page 15 of 15