The opinion of the court was delivered by: Denise Cote, District Judge
This document relates to all actions.
Plaintiff brings this action on behalf of a putative class of all persons or entities who purchased or acquired common stock in Openwave Systems, Inc. ("Openwave"), the self-proclaimed "leading provider of open software products and services for the communications industry," during a class period that spanned from September 30, 2002 through October 26, 2006. Plaintiff alleges that Openwave's stock price dropped dramatically as a result of the defendants' seven-year-long stock options backdating scheme, which forced Openwave to restate its previously-filed financial statements for fiscal year 2000 through the third quarter of 2006 by more than $182 million.
Plaintiff brings claims under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act") against Openwave, certain of its officers and directors, the underwriters of its December 2005 stock offering, and its auditor. Defendants have moved to dismiss all claims. Defendants' motion to dismiss the Securities Act claims is granted; the motion to dismiss the Exchange Act claims is granted in part.
The following facts are taken from the First Corrected Consolidated Amended Class Action Complaint (the "Complaint") filed on August 3, 2007 and the documents to which it refers, unless otherwise noted.
On May 29, 2007, the Arkansas Teacher Retirement System, a public pension benefit fund that holds assets of approximately $10 billion for the benefit of current and retired Arkansas public school teachers, was appointed lead plaintiff in this action. Plaintiff claims to have purchased shares of Openwave common stock during the class period, and to have suffered financial loss as a result of the federal securities laws violations alleged in this suit.*fn1
Openwave, a corporation organized under the laws of the State of Delaware with its principal place of business in California, develops software products and services for the telecommunications industry. Throughout the class period, Openwave was listed and publicly traded on the NASDAQ exchange under the symbol "OPWV."
2. The Individual Defendants
Under the Securities Act, plaintiff has brought claims against two Openwave officers: David C. Peterschmidt, who served as President, CEO, and a director from November 2004 through March 2007, and Harold L. Covert, Jr., who is currently CFO and Executive Vice President of Openwave, and served as a director and chairman of the audit committee of the company from April 2003 to September 2005. Plaintiff has also brought Securities Act claims against five directors of the company: M. Bernard Puckett, Kenneth D. Denman, Bo C. Hedfors, Gerald Held, and Masood Jabbar. Collectively, these defendants will be referred to as the "Individual Securities Act Defendants."
Under the Exchange Act, plaintiff has brought claims against Peterschmidt and Covert, as well as eight additional officers. They are: Donald J. Listwin, President, CEO, and a director of Openwave from September 2000 to April 2003; Alan J. Black, formerly Senior Vice President of Finance and Administration, CFO, and Treasurer; Joshua A. Pace, formerly Vice President of Finance and Chief Accounting Officer; Allen E. Snyder, Chief Operations Officer until November 30, 2006; Steve Peters, formerly Senior Vice President, Legal Officer, Vice President, and General Counsel of Openwave, and currently its Executive Vice President and Chief Administrative Officer; Alain Rossmann, Chairman and CEO until June 2001; Simon Wilkinson, Vice President of Sales and Client Business from July 2004 through January 2005, and currently Senior Vice President and General Manager; and David J. Kennedy, Chief Operating Officer from August 2001 through September 2003, an advisor from October 2003 to June 2005, and a director from October 2002 to June 2005. In addition to the directors listed above, plaintiff has brought Exchange Act claims against former directors Roger L. Evans and Andrew W. Verhalen. Collectively, these defendants will be referred to as the "Individual Exchange Act Defendants."*fn2
3. The Underwriter Defendants
Defendants Merrill, Lynch, Pierce, Fenner & Smith Incorporated, Lehman Brothers Inc., J.P. Morgan Securities Inc., and Thomas Weisel Partners LLC (the "Underwriter Defendants") provided underwriting services for Openwave's December 2005 common stock offering. Plaintiff alleges that, as "part of their duties as underwriters," these defendants were paid for their underwriting services and provided equity research coverage of Openwave.
Finally, plaintiff brings a claim under the Securities Act against defendant KPMG LLP ("KPMG" or the "Auditor Defendant") which served as Openwave's auditor. Plaintiff alleges that, for each of the fiscal years covered by the class period, KPMG issued "an unqualified audit opinion on the Company's consolidated financial statements."
II. The Backdating Scheme
Between 2000 and 2006, Openwave granted stock options to its officers, directors and employees pursuant to at least three different stock option plans, the stated purpose of which was to "attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees and Consultants of the Company and its Subsidiaries and to promote the success of the Company's business." Under two of Openwave's stock option plans, the board of directors or a designated committee was responsible for determining the exercise price of each option grant; under the third plan, the board alone was responsible for setting the exercise price. Each of these plans was subject to limitations; the most important of these limitations for the purposes of the instant litigation was that the stock options must not have an exercise price less than the fair market value of a share of Openwave common stock on the date of the grant. Openwave repeatedly represented to its shareholders and the public that it was issuing stock options in compliance with the terms of the stock option plans.
Each stock option gave the recipient the right to buy one share of Openwave stock from the company at a set price, called the "exercise price" or "strike price," on a future date after the option vested. By granting a stock option with an exercise price lower than the market price on the date of the grant, a company effectively grants an employee an instant opportunity for profit. This backdating, plaintiff alleges, removed the officers' incentive to promote Openwave's success and, contrary to the company's SEC filings concerning options grants, did nothing to "align the financial interests of the executive officers with the performance of the Company business objectives, and reward executives for their ongoing contributions to the organization."
Backdating also has accounting consequences for the grantor company. Openwave repeatedly represented in its financial statements that the company had elected to follow various generally accepted accounting principles. Those principles include Accounting Principles Board Opinion No. 25 ("APB No. 25"), which governed accounting for stock-based compensation through June 2005. APB No. 25 required companies to record the "intrinsic value" --- generally the market value -- of an option at the time it is granted. If an option had been issued at market price on the date of its issuance, the grantee need not have reported the grant as income, and the grantor company need not have reported it as employee compensation. But if an option had been backdated, APB 25 required the company to record as compensation the amount by which the market price exceeded the exercise price for the duration of the grant's vesting period, which was generally ten years in Openwave's case. Plaintiff alleges that Openwave failed to do so, thereby materially underreporting the company's compensation expenses and inflating its earnings per share in each year of the vesting period.*fn3
III. The Secondary Offering
During the class period, Openwave conducted a secondary offering of its stock. In December 2005, the company filed a set of offering documents with the SEC. Those documents included financial data for fiscal years 2002 through 2005, and incorporated by reference Openwave's Form 10-K for the year ending June 30, 2005 as well as a letter from defendant KPMG addressed to the Openwave board of directors consenting to Openwave's use of KPMG's September 12, 2005 audit report in the offering documents and to Openwave's referring to KPMG as "Experts" in the offering documents. The Underwriter Defendants served as the managers of this offering.
IV. The Scheme Becomes Public
On March 18, 2006, The Wall Street Journal published an article concerning the manipulation of stock options by public companies. The article discussed the possibility that the companies had backdated the stock options to dates with lower strike prices, or "spring loading" the options by granting them on strike dates ahead of the release of positive corporate news. The publication of this article spurred investigations by the Securities and Exchange Commission ("SEC"), executive resignations, and financial restatements by public companies implicated in stock-manipulation schemes. On May 22, 2006, Openwave issued a press release announcing that the SEC had initiated an informal inquiry into the company's historical practice of granting stock options. The press release advised that "the SEC letter ...