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In re Veeco Instruments

June 14, 2006

IN RE VEECO INSTRUMENTS, INC. SECURITIES LITIGATION
THIS DOCUMENT RELATES TO:
EDWARD J. HUNEKE, DERIVATIVELY ON BEHALF OF VEECO INSTRUMENTS, INC., PLAINTIFF,
v.
EDWARD H. BRAUN, PETER J. SIMONE, RICHARD A. D'AMORE, JOEL A. ELFTMANN, HEINS K. FRIDRICH, DOUGLAS A. KINGSLEY, DR. PAUL R. LOW, ROGER D. MCDANIEL, IRWIN H. PFISTER, AND WALTER J. SCHERR, INCLUSIVE, DEFENDANTS, AND VEECO INSTRUMENTS, INC., NOMINAL DEFENDANT.
DAVID ALTMAN, DERIVATIVELY ON BEHALF OF VEECO INSTRUMENTS, INC., PLAINTIFF,
v.
EDWARD H. BRAUN, JOHN F. REIN, JR., WALTER J. SCHERR, IRWIN H . PFISTER, ROGER D. MCDANIEL, PAUL R. LOW, DOUGLAS A. KINGSLEY, HEINZ K. FRIDRICH, JOEL A. ELFTMANN, RICHARD A. D'AMORE, AND PETER J. SIMONE, DEFENDANTS, AND VEECO INSTRUMENTS, INC., NOMINAL DEFENDANT.
AUGUST SCHUPP, III, DERIVATIVELY ON BEHALF OF VEECO INSTRUMENTS, INC., PLAINTIFF,
v.
EDWARD H. BRAUN, RICHARD A. D'AMORE, JOEL A. ELFTMANN, HEINZ K. FRIDRICH, DOUGLAS A. KINGSLEY, PAUL R. LOW, ROGER D. MCDANIEL, IRWIN H. PFISTER, WALTER J. SCHERR, PETER J. SIMONE, JOHN P. KIERNAN, AND JOHN F. REIN, JR., DEFENDANTS, AND VEECO INSTRUMENTS, INC., NOMINAL DEFENDANT.



ORDER AND DECISION DENYING DEFENDANTS' MOTION TO DISMISS CONSOLIDATED DERIVATIVE SUITS

McMahon, J.

These consolidated derivative actions are related to (and have been consolidated for discovery purposes with) a securities fraud class action suit against Veeco Instruments, Inc. ("Veeco" or "the Company") and several of its high-ranking officers, currently pending before this Court under the caption In re Veeco Instruments, Inc. Securities Litigation, 05 MD 1695.

Plaintiffs Huneke, Altman, and Schupp (the "derivative plaintiffs" or "plaintiffs"), each holders of Veeco common stock, assert claims on behalf of Veeco against the following current and former members of the Company's board of directors: Edward Braun, Peter Simon, Richard D'Amore, Joel Elftmann, Heinz Fridrich, Douglas Kingsley, Paul Low, Roger McDaniel, Irwin Pfister, and Walter Scherr ("defendants").*fn1 Plaintiffs allege, inter alia, that defendants breached their fiduciary duties to the Company by failing to oversee, monitor, and manage Veeco's internal accounting controls and compliance with federal export control laws, and thus are liable to Veeco for any resulting losses it sustained.

Defendants move to dismiss the consolidated derivative actions, pursuant to Federal Rule of Civil Procedure 23.1, for failure to make a pre-suit demand on the board of directors.

Derivative plaintiffs oppose the motion, arguing, inter alia, that demand would have been futile, because a majority of the directors-- including Braun (who is CEO of Veeco and a named defendant in the pending securities fraud class action), and Elftmann, Fridrich, Kingsley, Simone and Pfister (who are members of the Company's Audit Committee)-- face a substantial likelihood of personal liability, and thus were not capable of making an independent and disinterested decision regarding the prosecution of this action. Therefore, plaintiffs contend that demand was excused.

For the reasons discussed below, defendants' motion to dismiss is denied.

Facts

Veeco Instruments is a Delaware corporation which designs, manufactures, markets and services a broad line of tools, equipment and systems, including epitaxial process equipment, for use in the data storage, semiconductor, compound semiconductor/ wireless and high-brightness light emitting diode industries. Consolidated Amended Verified Shareholder Derivative Complaint ("Cplt.") ¶ 34. Until November 2003, Veeco manufactured and sold only one type of epitaxial equipment, the Molecular Beam Epitaxy ("MBE") system. Consolidated Amended Class Action Complaint ("Class Cplt.") ¶ 29.

Defendants Braun, Simone, D'Amore, Elftmann, Fridrich, Kingsley, Low McDaniel and Pfister are current directors of Veeco. Cplt. ¶¶ 16-24. Defendant Scherr was a director until May 2005, when his term expired. Cplt. ¶ 25. Simone, Elftmann, Fridrich, Kingsley, and Pfister are also members of Veeco's Audit Committee. Cplt. ¶¶ 17, 19, 20, 21, 24. Braun, who has served as Veeco's Chief Operating Officer since January 1990, is the only member of the board who is also an officer. Cplt. ¶ 16.

The TurboDisc Acquisition

On November 3, 2003, Veeco acquired Emcore Corporation's TurboDisc division, which manufactures Metal Organic Chemical Vapor Deposition ("MOCVD") technology, a more advanced line of epitaxial deposition technology than Veeco's existing product. Cplt. ¶ 35. Veeco declared that the acquisition would "create a Global Leader in Compound Semiconductor Deposition Technologies" by making Veeco "uniquely able to provide 'one-stop' shopping for epitaxial deposition solutions-- both MOCVD and MBE." Cplt. ¶¶ 35, 36. The acquisition cost Veeco over $60 million, which represented more than 20% of Veeco's equity. Cplt. ¶ 42; Class Cplt. ¶ 32.

Upon Veeco's announcement of the TurboDisc acquisition, the price of Veeco stock jumped from $25.30 to $26.39, and continued to climb to a high of $34.40 on January 20, 2004. Class Cplt. ¶ 31.

On February 11, 2005, Veeco announced that it would postpone the release of audited results for the 2004 fourth quarter and full year pending completion of an internal investigation of "improper accounting transactions" at its TurboDisc division. Cplt. ¶ 67. Veeco stated that the investigation focused principally on the value of inventory, accounts payable and certain liabilities, as well as certain revenue transactions at TurboDisc. Id. Veeco indicated that the investigation likely would lead to adjustments in Veeco's pre-tax earnings for the nine months ending on September 30, 2004, requiring the restatement of its financial statements for the first three quarters of 2004. Class Cplt. ¶ 2.

Following this announcement, Veeco stock fell from $18.86 at the close of trading on February 10, to $16.95 at the close of trading on February 11-- a decrease of $1.90 per share or 10.07%. Cplt. ¶ 68; Class Cplt. ¶ 3. In the weeks following the disclosure, the price of Veeco stock continued to slide, falling to $13.97 at the close of trading on March 14, 2005. Class Cplt. ¶ 3.

On March 16, 2005, Veeco announced that it had completed its internal investigation and had determined that its previously issued financial statements for the first three quarters of 2004 overstated its pre-tax earnings by a total of $10.2 million. Accordingly, Veeco's quarterly reports would be amended to decrease pre-tax earnings by $2.8 million, $4.3 million and $3.1 million for the quarters ending on March 31, 2004, June 30, 2004, and September 30, 2004, respectively. Cplt. ¶¶ 70, 71.

On April 5, 2005, Veeco issued restatements of its previously reported financial statements for each of the first three quarters of 2004. Cplt. ¶ 72. In each of the Amended Forms 10-Q, Veeco attributed the restatement to the actions of a "single individual at TurboDisc whose employment had been terminated." Cplt. ¶ 73.

Alleged Violations of the Federal Export Control Laws

In February 2004, a Veeco employee reviewing overseas sales and shipments for export law compliance reported that he/she uncovered the shipment of a restricted item to Malaysia. Cplt. ΒΆ 84. According to the employee, following his/her report, Veeco conducted an audit which revealed that at least nine other shipments, worth a ...


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