Another Dismissal Denied in Backdating Class Action

On November 6, 2007, the court in the Brooks Automation options backdating-related securities class action lawsuit substantially denied the defendants’ motions to dismiss. A copy of the opinion of Judge Rya Zobel of the District Court of Massachusetts can be found here. The Brooks Automation decisions joins the recent Openwave Systems decision (refer here), as one of now several decisions in which motions to dismiss have been denied in options backdating-related securities class actions. A complete list of the dismissals, denials and settlements in options backdating lawsuits can be found here.

The defendants had moved to dismiss the plaintiff’s claims under Section 10 of the ’34 Act on the grounds of loss causation, scienter and the statute of limitations.

With respect to loss causation,

Defendants argue that Brooks has not adequately alleged loss causation because Brooks’ stock price rose after the March 18, 2006 Wall Street Journal article and again after the July 31, 2006 publication of the Restatement. However, plaintiffs have alleged particular details regarding the decline in Brooks’ stock price that occurred during the period from May 11, 2006, through May 22, 2006, when Brooks made several successive disclosures regarding investigations into its stock option practices.

The court said that "although the parties dispute the exact timing of some of the disclosures and the resultant effect they may have had on the stock price, the complaint’s allegations of loss causation are … sufficient at this stage."

With respect to the issue of scienter, the court said that defendants’ argument that the challenged grants "were part of either legitimate, demonstrable patterns or predetermined dates is credible." However, the court went on to note that "the data compiled by plaintiffs and the Wall Street Journal regarding stock price movements on grant dates, together with Brooks’ Restatement, in which it admitted that millions of options were accounted for on incorrect grant dates, creates a reasonable inference that intentional backdating may have occurred." The court did go on to find that with respect to the individual who served as the company’s CFO from November 1998 through October 2002, and with respect to one individual who served on the Board’s audit and compensation committees, that the individual allegations did not adequately scienter (although the former CFO’s motion to dismiss was denied as to control person liability allegations.)

The court also found that a factual issue remained on the question as to when the plaintiffs had or could have sufficient information available to trigger the running of that statute of limitations. The court also found that the plaintiffs’ allegations under the ’33 Act were also sufficient to survive a motion to dismiss. Judge Zobel did grant the dismissal motion of PricewaterhouseCoopers.

In substantially denying the defendants' motions to dismiss, Judge Zobel clearly seems to have been influenced by the fact that the company had been required to restate its prior financials and that the company’s special committee found that the company had not properly accounted for its options grants. Judge Zobel also refers throughout the opinion to the allegations in the civil complaint filed by the SEC against the company’s former CEO. The implicit admission that options were backdated, and the presence of a separate SEC action, contrast with the circumstances surrounding the backdating allegations against Amkor Technologies, whose motions to dismiss were recently granted (refer here). The differing circumstances may perhaps explain the different outcomes.

In any event, the Brooks Automation dismissal denial has been added to my running tally of options backdating lawsuit dismissals, denials and settlements, which can be accessed here.