Opinion
NO. C 06-05353 JW.
March 31, 2008
ORDER GRANTING IN PART, DENYING IN PART DEFENDANTS' MOTIONS TO DISMISS WITH LEAVE TO AMEND
I. INTRODUCTION
This is a shareholders' derivative action brought on behalf of Nominal Defendant Affymetrix Corporation ("Affymetrix," "Nominal Defendant," or the "Company") against current and former officers and directors of the Company (collectively, "Individual Defendants"). Plaintiffs allege that the Individual Defendants engaged in a scheme to manipulate stock option grant dates so as to maximize profits to themselves at the expense of the Company.
The Individual Defendants are Stephen Fodor, Paul Berg, John Diekman, Edward Hurwitz, Vernon Loucks, Vernon Norviel, Kenneth Nussbacher, Richard Rava, Gregory Schiffman, Susan Siegel, David Singer, Ronald Verdoorn, and John Young.
Presently before the Court is Nominal Defendant and Individual Defendants' various Motions to Dismiss. The Court conducted a hearing on October 31, 2007. Based on the papers submitted to date and oral arguments of counsel, the Court GRANTS in part and DENIES in part Nominal Defendant and Individual Defendants' Motions to Dismiss with leave to amend.
(Defendants' Motion to Dismiss Amended Verified Consolidated Shareholder Derivative Complaint, hereafter, "Affymetrix Motion," Docket Item No. 53; Defendant Ron Verdoon's Notice and Motion to Dismiss Verified Amended Consolidated Shareholder Derivative Complaint, hereafter, "Verdoorn Motion," Docket Item No. 51.)
II. BACKGROUND
A. Factual Allegations
In an Amended Consolidated Shareholder Derivative Complaint filed on April 2, 2004, Plaintiffs allege as follows:
(Verified Amended Consolidated Shareholder Derivative Complaint ¶ 13, hereafter "ACC," Docket Item No. 42.)
Affymetrix is a Delaware corporation with its principal place of business in Santa Clara, California. (ACC ¶ 13.) Affymetrix is engaged in the development, manufacture, sale, and service of consumables and systems for genetic analysis in the life sciences and clinical healthcare. (Id.)
On July 31, 2006, Affymetrix announced it had been engaged in an internal review of historical stock option grant practices from January 1, 1997 through May 31, 2006. (Id. ¶ 171.) The Company reported that it had not identified any pattern or practice of backdating options, and did not anticipate any adjustment to its financial results. (Id.) One week later, on August 9, 2006, Affymetrix announced its review had uncovered documentation lapses for certain options granted between 1997 and 1999 and that it would restate its financial results. (Id. ¶ 172.) Affymetrix reiterated that it had not discovered any pattern or practice of backdating. (Id.)
On August 30, 2006, Affymetrix announced that it had completed its investigation and determined that 97% of the documentation lapses occurred in July 1999. (Id. ¶ 174.) However, because of the vesting schedule of those grants, the Company would have to restate its compensation expenses for 1998-2003. (Id.) The Company recorded additional compensation expenses of $19.8 million for 1998-2002 and $1.7 million for 2003. (Id.) The restatements also yielded a tax benefit of $8.3 million which was recorded for 2005. (Id.)
B. Stock Option Granting, Dating and Pricing
A stock option granted to an employee of a corporation allows the employee to purchase at some future date a specified number of shares of corporate stock at a specified price, called the "exercise price." If the exercise price is the same as the market price of the stock on the date the option is granted, the option is said to be "at-the-money." Under Generally Accepted Accounting Principles ("GAAP"), a company that grants an option "at-the-money" is not required to record the grants as compensation expenses. On the other hand, if the exercise price of the option is less than the market price of the stock on the date the option is granted, the options is said to be "in-the-money." Under GAAP, the company must record a compensation expense for the "in-the-money" option grant, equal to the difference between the exercise price and the market price of the stock on the date the option is granted. Walter L. Lukken and James A. Overdahl, Financial Product Fundamentals: A Guide for Lawyers § 18:2 (5th ed. 2004).
C. Stock Option Backdating
"Stock option backdating" is a phrase that describes a practice in which the record of the option grant deviates from the actual grant date. A stock option is said to have been "backdated" if it was actually granted on one date, but the option itself is dated and is "recorded" on the books of the company as granted on an earlier date. Backdating a stock option is not necessarily improper. Backdating may be improper, however, if the practice misleads shareholders. For example, if the grant date of a stock option to an employee is backdated to a date when the market price was lower than the market price on the actual grant date, the option would be "in-the-money." If the company does not record and report a compensation expense as required by GAAP, any subsequently issued financial statement would be misleading. See 6 Bromberg Lowenfels on Securities Fraud § 17:1 (2d ed. 2007).
D. Procedural History
On August 30, 2006, Irwin Berkowitz ("Berkowitz") filed the first shareholders' derivative complaint on behalf of Affymetrix. (See Docket Item No. 1.) On September 13, 2006, Samuel D. Powers ("Powers") filed a separate derivative action on behalf of Affymetrix alleging the same type of misconduct and harm. On November 20, 2006, the Court consolidated these actions. (See Docket Item No. 31.) On January 10, 2007, Plaintiffs filed a Verified Consolidated Shareholder Derivative Complaint. (See Docket Item No. 33.) On April 2, 2007, Plaintiffs filed an Amended Verified Consolidated Shareholder Derivative Complaint ("Complaint").
The Complaint alleges the following eight causes of action: (1) Violation of § 10(b) and rule 10(b)(5) of the Exchange Act, against all Defendants; (2) Filing of false proxy statements in violation of § 14(a) of the Exchange Act, against all Defendants; (3) Control person liability under § 20(a) of the Exchange Act, against Defendants Fodor, Hurwitz, Nussbacher, Schiffman, Berg, Diekman, Loucks, Singer and Young; (4) A demand for accounting of allegedly fraudulent option grants, against all Defendants; (5) Aiding and abetting the breach of fiduciary duties, against all Defendants; (6) Unjust enrichment and restitution, against all Defendants; (7) Rescission, against all Defendants; and (8) Breach of fiduciary duties for insider trading, against Defendants Berg, Diekman, Fodor, Loucks, Schiffman, Siegel, Singer, and Young.
Presently before the Court are Nominal Defendant and Individual Defendants' various motions to dismiss.
III. STANDARDS
Pursuant to Federal Rule of Civil Procedure 12(b)(6), a complaint may be dismissed against a defendant for failure to state a claim upon which relief may be granted against that defendant. Dismissal may be based on either the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory. Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990); Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 533-534 (9th Cir. 1984). For purposes of evaluating a motion to dismiss, the court "must presume all factual allegations of the complaint to be true and draw all reasonable inferences in favor of the nonmoving party." Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). Any existing ambiguities must be resolved in favor of the pleading. Walling v. Beverly Enters., 476 F.2d 393, 396 (9th Cir. 1973).
However, mere conclusions couched in factual allegations are not sufficient to state a cause of action. Papasan v. Allain, 478 U.S. 265, 286 (1986); see also McGlinchy v. Shell Chem. Co., 845 F.2d 802, 810 (9th Cir. 1988). The complaint must plead "enough facts to state a claim for relief that is plausible on its face."Bell Atlantic Corp. v. Twombly, 550 U.S. ___, 127 S. Ct. 1955, 1974 (2007). Courts may dismiss a case without leave to amend if the plaintiff is unable to cure the defect by amendment. Lopez v. Smith, 203 F.3d 1122, 1129 (9th Cir. 2000).
Claims brought under section 10(b) of the Exchange Act and Rule 10b-5 must meet the particularity requirements of Federal Rule of Civil Procedure 9(b). In re Daou Sys., Inc. Sec. Litig., 411 F.3d 1006, 1014 (9th Cir. 2005). Rule 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity."
Moreover, claims brought under section 10(b) and Rule 10b-5 must also meet the stringent pleading standards of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). To plead a violation of section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, a plaintiff must allege (1) a material misrepresentation or omission of fact, (2) scienter, (3) a connection with the purchase or sale of a security, (4) transaction and loss causation, and (5) economic loss. Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005). The PSLRA amends the Exchange Act to require that a private securities fraud litigation complaint "plead with particularity both falsity and scienter." In re Daou, 411 F.3d at 1014. Specifically, a complaint alleging securities fraud must "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." 15 U.S.C. § 78u-4(b)(1); In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1085 (9th Cir. 2002).
IV. DISCUSSION
A. Statute of Limitations
Defendants move to dismiss Plaintiffs' § 10(b) and § 14(a) claims on the ground that they are barred by the relevant statutes of limitation. (Affymetrix Motion at 25-36.) Since the statute of limitations periods differ for § 10(b) claims and § 14(a) claims, the Court considers each separately.1. Limitations Period for § 10(b) Claims
Defendants contend that any claims under § 10(b) arising from grants made prior to August 30, 2001 are barred by the relevant limitations periods. (Affymetrix Motion at 30.)
If the expiration of the applicable statute of limitations is apparent from the face of the complaint, the defendant may raise a statute of limitations defense in a Rule 12(b)(6) motion to dismiss. Jablon v. Dean Witter Co., 614 F.2d 677, 682 (9th Cir. 1980). This is true even though expiration of the limitations period is an affirmative defense because Federal Rule of Civil Procedure Rule 9(f) "makes averments of time and place material for the purposes of testing the sufficiency of a complaint."Suckow Borax Mines Consol. v. Borax Consol., 185 F.2d 196, 204 (9th Cir. 1950).
Under the Sarbanes-Oxley Act of 2002, the statute of limitations for a claim brought under § 10(b) is two years from the discovery of facts constituting the violation but no more than five years from the date of the violation. 28 U.S.C. 1658(b)(1)(2). The two-year statute of limitations is not subject to equitable tolling. See Durning v. Citibank, Int'l, 990 F.2d 1133, 1136-37 (9th Cir. 1993). The five-year outer limitations period in a § 10(b) claim serves as a statute of repose in lieu of equitable tolling. See Lampf, 501 U.S. at 363 (construing the former statute, which imposed a one and three-year limitation).
In 2002, Congress passed the Sarbanes-Oxley Act extending the statute of limitations for Section 10(b) actions. Pub.L. No. 107-204, 116 Stat. 745 (2002), codified in part at 28 U.S.C. § 1658(b).
"A statute of repose is a fixed, statutory cutoff date, usually independent of any 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)).
In Section 10(b) claim proceeding under a theory that a loss is linked to the making of a false representation, a plaintiff must show reliance on either: (1) an untrue statement of material fact; or (2) a material omission by one who had a duty to disclose. See 17 C.F.R. § 240.10b-5(b). Such a violation is considered to have occurred on the date that the false representation was made, not the date of the conduct which gave rise the representation. See Lampf, 501 U.S. at 364; In re Prudential Ins. Co. of Am. Sales Practices Litig., 975 F. Supp. 584, 605 (D. N.J. 1996). This is especially true for a securities case based on a "fraud on the market" theory because proof that investors in the market relied on an allegedly false representation is presumed only when the representation is publically disclosed, e.g., through a financial statement such as a Form 10-K.
See Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 128 S. Ct. 761, 769 (2008). In the context of an options backdating case based on a fraud on the market theory, this means the backdating of an option grant, in and of itself, does not give rise to the violation. Rather, the violation occurs when a false representation concerning the option grant is publically disclosed because it is only at that point that investors reliance may be presumed. Cf. id.
Thus, the two-year statute of limitations period begins to run on one of the following two dates: (1) the date the investor has actual notice that the representation is false; or (2) the date the investor, with some form of reasonable diligence, would have been placed on inquiry notice. See Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 951 (9th Cir. 2005). However, the five-year statute of limitations period begins to run on the date of the false representation. See Lampf, 501 U.S. at 364; In re Prudential 975 F. Supp. at 605. Each false representation may constitute a separate violation of § 10(b); the five-year period begins to run with respect to each violation when it occurs. In re Zoran.Corp. Derivative Litigation, 511 F. Supp. 2d 986, 1014 (N.D. Cal. 2007). A plaintiff may not recover for reliance on representations made prior to the five-year statute of limitations period under a theory of continuing wrong. Id.
In this case, Plaintiffs allege § 10(b) claims using a fraud on the market theory. (ACC ¶¶ 208-13.) Since this case involves allegedly secret backdating practices, which an ordinary investor would not be expected to discover, the two-year statute of limitations period did not start to run until these practices were allegedly revealed on July 31, 2006. The first derivative action against Affymetrix was filed on August 30, 2006 by Irwin Berkowitz which became the lead case in this Consolidated Action. (See Docket Item No. 1.) Accordingly, the Court finds that the two-year statute of limitations does not bar any of Plaintiffs' Section 10(b) claims.
(ACC ¶¶ 52-55, 171.) See In re Zoran, 511 F. Supp. 2d at 1014 (finding that investors cannot detect secret backdating inside a company, so the two-year statute of limitations does not apply).
The first three allegedly false representations upon which the Complaint is based are proxy statements filed with the SEC on April 29, 1999, April 28, 2000, and April 30, 2001. (Id. ¶ 59.) Since the five-year statute of limitations period began on August 30, 2001, the Court finds that Plaintiffs' Section 10(b) claims based on these statements are time barred. The remainder of the allegedly false representations are proxy statements filed after August 30, 2001. Accordingly, the Court finds the five-year statute of limitations does not bar any of Plaintiffs' Section 10(b) claims with respect to these later filed statements.
2. Limitations Period for § 14(a) Claims
The Court now proceeds to consider whether Plaintiffs' Section 14(a) claims are time barred. The parties raise essentially identical issues with regard to the statute of limitations for § 14(a) as they did for § 10(b). (Affymetrix Motion at 30; Memorandum in Opposition to Dismiss Amend Verified Consolidated Shareholder Derivative Complaint 34, hereafter, "Opposition," Docket Item No. 62.)
Section 14(a) creates a cause of action for injury arising from the filing of a fraudulent proxy statement. 15 U.S.C. § 78n(a). For § 14(a) claims, the statute of limitations is one year from the discovery of facts constituting the violation but no more than three years from the date of the violation. See Lampf, 501 U.S. at 363; Ceres Partners v. GEL Associates, 918 F.2d 349, 362-63 (2d Cir. 1990). The extended limitations period under Sarbanes-Oxley does not apply to § 14(a) claims because, unlike § 10(b) claims, § 14(a) claims do not require scienter or a showing of fraudulent intent. See In re Global Crossing, Ltd. Sec. Litig., 313 F. Supp. 2d 189, 196-97 (S.D. N.Y. 2003).
For similar reasons to those set forth with respect to Plaintiffs' Section 10(b) claims, the Court finds that the three-year statute of limitations bars Plaintiffs' Section 14(a) claims to the extent they are based on false proxy statements filed with the SEC before August 30, 2003.
B. Demand Futility
Defendants move to dismiss the entire Complaint on the ground that Plaintiffs lack standing to bring a derivative action because they failed to make a pre-suit demand on the board of Affymetrix. (Affymetrix Motion at 13.)
Pursuant to the Federal Rules of Civil Procedure 23.1 and the corresponding Delaware Chancery Court Rule 23.1, a plaintiff in a shareholders' derivative action must either allege that he or she made a pre-suit demand upon the company's board of directors to pursue the corporate claim, or allege that a majority of the directors are incapable of making an impartial decision regarding such a claim. Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993).
The latter method, pursued in this case, requires a plaintiff create a reasonable doubt that: "(1) the directors are disinterested and independent; and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment." Id. at 930; Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984). The two prong Aronson test is disjunctive. "If a derivative plaintiff can demonstrate a reasonable doubt as to the first or second prong of the Aronson test, then he has demonstrated that demand would have been futile." Seminaris v. Landa, 662 A.2d 1350, 1354 (Del.Ch. 1995). To satisfy the first prong of the Aronson test, a plaintiff may create a reasonable doubt as to a director's disinterest by alleging particularized facts that the director has a financial interest in the challenged transaction or that the director faces a "substantial likelihood of liability" resulting from it. Aronson, 473 A.2d at 814; Rales, 634 A.2d at 936. Alternatively, a plaintiff may create a reasonable doubt as to a director's independence by alleging particularized facts that suggest the director is beholden to an interested director such that his or her "discretion would be sterilized." Aronson, 473 A.2d at 814; Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1050 (Del. 2004). To satisfy the second prong of theAronson test, a plaintiff must show that the challenged transaction was not the product of a good faith exercise of the director's business judgment. Aronson, 473 A.2d at 814.
However, a court does not analyze demand futility under Aronson when the board did not approve the challenged transaction. For instance, when the board delegates its authority to approve the challenged transaction to a committee under Delaware law, and the committee is comprised of less than a majority of the board, the futility of a pre-lawsuit demand is analyzed under Rales. See, e.g., Conrad v. Blank, 2007 WL 2593540 at *14 (Del.Ch. 2007). The Rales test excuses demand if the plaintiff creates a reasonable doubt that a majority of the board, at the time the complaint is filed, can exercise "its independent and disinterested business judgment in responding to the demand."Rales, 634 A.2d at 933. Similar to the Aronson test, a director is not considered disinterested if the director "will receive a personal financial benefit from a challenged transaction that is not equally shared by the stockholders." Rales, 634 A.2d at 936. The requisite doubt may also be shown by alleging particularized facts that individual directors will be exposed to a substantial likelihood of liability as a result of the derivative claim. Id.
The reasonable doubt requirement forms a "sufficiently flexible and workable" standard, allowing the stockholder to obtain "`the keys to the courthouse' in an appropriate case where the claim is not based on mere suspicions or stated solely in conclusory terms." Beam, 845 A.2d at 1050. While is true that directors are usually entitled to a presumption that they acted in the best interests of the company, backdating options qualifies as one of those "rare cases [in which] a transaction . . . cannot meet the test of business judgment." Ryan v. Gifford, 918 A.2d 341, 355-56 (Del.Ch. 2007).
In this case, the board did not directly approve stock option grants; instead, it delegated the responsibility to the compensation committee, which does not form a majority of the board. (See, e.g., ACC ¶¶ 184-193.) Thus, the Court conducts its analysis under the Rales test. At the time the present case was filed, the Affymetrix Board was comprised of eight directors. (Id. ¶ 188.) However, the Court takes judicial notice under Federal Rule of Evidence 201 that when Plaintiffs filed the operative Complaint on April 2, 2007, there were nine directors. (Motion, Exs. A, B.) These directors were Defendants Fodor, Berg, Young, Diekman, Loucks, and Singer, and non-parties Susan D. Desmond-Hellman, Robert H. Trice, and Robert P. Wayman. Therefore, to prove demand futility, Plaintiffs would have to show that, on April 2, 2007, five of the directors were not disinterested with respect to this case.
1. Stock Options Backdating
Since it affects the demand futility analysis in this case, the Court examines whether Plaintiffs have adequately pleaded occurrences of stock option backdating. Plaintiffs allege as follows:
In direct violation of the nondiscretionary terms of the company's stock option plans, Affymetrix's directors, together with its top officers, granted millions of dollars of stock options to themselves and other Affymetrix insiders. (ACC ¶ 34.) Moreover, as part of this scheme, Defendants granted stock options with exercise prices less than 100% of the fair market value of Affymetrix common stock on the date of the grant. (Id.) The same analytical methods that have uncovered other backdating schemes yield the same result when performed on Affymetrix's historical stock option granting practices. (Id. ¶ 35.) Specifically, the statistics show that the market price of Affymetrix stock rose by at least 18% within the 20 days after date of each grant between 1998 and 2002. (Id. ¶¶ 37-51.) Based on the analytical methods described above, this means 100% of the Affymetrix discretionary options granted between 1998 and 2002 were backdated in violation of the company's stock option plans. (Id. ¶ 36.)
These allegations state that the price of Affymetrix stock on the recorded grant dates was lower than the price on the date that the stock was actually granted. The Complaint goes on to outline the exact dates of each grant and provides charts showing how the grant date provided statistically improbable gains. (Id. ¶¶ 37-51.) The Delaware Court of Chancery has approved of the use of a statistical methodology to support an allegation that stock options have been backdated. Ryan, 918 A.2d at 354-55. Accordingly, the Court finds that these allegations, along with the allegations in the Complaint that describe backdating with lesser specificity, are sufficient to allege backdating for purposes of showing demand futility.
2. Receipt of Allegedly Backdated Options
Plaintiffs contend that a reasonable doubt exists as to the disinterestedness of Defendants Fodor, Berg, Young, Diekman, Loucks, and Singer because they have received backdated stock options. (Opposition at 5.)
The Delaware Court of Chancery has considered whether the receipt of backdated stock creates reasonable doubt as to the disinterestedness of a director under a Rales analysis. See Conrad, 2007 WL 2593540. The court found that directors who have received backdated options "have a strong financial incentive to maintain the status quo by not authorizing any corrective action that would devalue their current holdings or cause them to disgorge improperly obtained profits. This creates an unacceptable conflict that restricts them from evaluating the litigation independently." Id. at *18. Courts in the Northern District of California applying Delaware law have also found that a director would be interested if he or she received backdated stock options. In re Zoran, 511 F. Supp. 2d at 1003; In re CNET Networks, Inc., 483 F. Supp. 2d 947, 958 (N.D. Cal. 2007).
With respect to the six directors in question, Plaintiffs allege as follows:
Fodor, Berg, Young, Diekman, Loucks and Singer all received improperly backdated stock options. (ACC ¶ 189.) On July 1, 1999 a total of 800,000 (split-adjusted) options were granted to four executives, including Affymetrix's founder, CEO, and director, Fodor. (Id. ¶ 39.) On June 30, 2001, a total of 50,000 options were granted to Affymetrix's directors, Berg, Diekman, Loucks, Singer and Young. (Id. ¶ 43.) Each of these grants were backdated. (Id. ¶¶ 34-51.)
These allegations state that six of the nine directors received backdated options and are alone sufficient to create reasonable doubt as to the disinterestedness of these directors underConrad. Since these directors constitute a majority of the board, the Court finds that Plaintiffs have sufficient pleaded demand futility.
Defendants contend that judicially noticeable facts show that grants to outside directors were made pursuant to an option plan that specified the grant date in advance, which would preclude backdating. (Motion at 10.) Defendants point to the "1996 Director's Plan," which provides for annual grants to outside directors on the date of the first meeting of the board immediately following each annual meeting of the shareholders. (Motion, Ex. N.) Defendants are correct that "[m]ere reliance on the numbers is not sufficient [to allege financial interest] when plaintiffs are confronted with a legitimate, judicially-noticeable explanation for the grant date." CNET Networks, 483 F. Supp. 2d at 960. However, the only evidence the Court could take judicial notice of is "1996 Director's Plan" and the dates of the shareholder meeting in each relevant year. Even if the Court were to do so, Defendants have not presented any judicially noticeable evidence that the grants were actually made at the first meeting of the board in accordance with the plan. The Court declines to infer that the grants were properly made without this evidence, especially in light of Plaintiffs allegations that the stock option grants were not made in accordance with plans under which they were granted. (ACC ¶¶ 33-34.)
During oral argument, counsel for Plaintiffs contended that since the directors could choose to hold a board meeting at any time, they chose to hold their meeting when the stock price was at an historic low. If in fact, these grants were made at board meetings dates that were set in advance of or at the same time as the grant, then they may not be "backdated" as the Complaint alleges.
C. Continuous Ownership
In the alternative, Defendants move to dismiss the entire Complaint on the ground that Plaintiffs have failed to adequately plead that they have continuously owned Affymetrix stock. (Affymetrix Motion at 24.)
The Ninth Circuit reads Rule 23.1 to require that the derivative plaintiff: (1) was a shareholder at the time of the alleged wrongful acts; and (2) retain ownership of the stock for the duration of the lawsuit. Lewis v. Chiles, 719 F.2d 1044, 1047 (9th Cir. 1983). Thus, a derivative plaintiff has no standing to sue for misconduct that occurred prior to the time he became a shareholder of the corporation. Kona Enterprises, Inc. v. Estate of Bishop, 179 F.3d 767, 769 (9th Cir. 1999); see also In re Sagent Technology, Inc. Derivative Litig., 278 F. Supp. 2d 1079, 1096 (N.D. Cal. 2003).
In this case, Plaintiffs allege, "Plaintiffs Irwin Berkowitz, Samuel D. Powers, and Norman Boltz are, and were at all relevant times, shareholders of nominal Defendant Affymetrix." (ACC ¶ 12.) This statement is insufficient to plead continuous ownership because Plaintiffs have not alleged when that they purchased the shares and whether they continue to hold them; similar conclusory allegations have been rejected as insufficient for purposes of Rule 23.1. See In re Computer Sciences Derivative Litig., No. 06-05288, 2007 WL 1321715 at *15 (C.D. Cal. March 26, 2007); see also In re Omnivision Techs. Inc., No. 04-02297, 2004 U.S. Dist. LEXIS 22215 at *10-11, 16 (N.D. Cal. October 26, 2004).
Accordingly, the Court finds that Plaintiffs' Complaint fails to adequately plead standing as required under Rule 23.1. Since this defect in Plaintiffs' pleading is curable, the Court will grant leave to amend.
V. CONCLUSION
The Court GRANTS in part and DENIES in part Nominal Defendant and Individual Defendants' various Motions to Dismiss with leave to amend. Plaintiffs shall file an Amended Complaint on or before May 1, 2008.
The Amended Complaint shall not allege § 10(b) violations based on representations made prior to August 30, 2001 or § 14(a) violations based on representations made prior to August 20, 2003. The Amended Complaint shall include specific pleading with respect to the Lead Plaintiffs' purchases of Affymetrix shares and whether those shares have been continuously held. Further, the issue of demand futility with respect to Amended Complaint shall not be raised by motion to dismiss absent a showing in accordance with Civil Local Rule 7-9.
The Court sets a Case Management Conference for June 2, 2008 at 10 a.m. Pursuant to the Civil Local Rules of Court, the parties shall file a Joint Case Management Conference on or before May 23, 2008.