Law School Demand Letter Breaches of Fiduciary Duties Paper

based on the complaint create a demand letter on behalf of Milton Pf to the board of directors including all relevant facts

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ZIMMERMAN, LEVI & KORSINSKY. LLP
(EK 8989)
EduardKorsinsky
39 Broadway,
Suite1601
New York. NY 10006
Tetephonel(212)363-75oo
Facslmile:(212)’363-717|
WABP,KEENAN & BARRETT, P.C.
GeraldBarrett
3838NorthCentralAve.. Suite1720
Phoenix.
Arizona85012
Telepho
ne:(602)279 -17ll
Attorneysfor Plaintiff
LINITEDSTATESDISTRICTCOURT
DISTRICTOF ARIZONA
MILTON PFEIFFER,derivativelyon
Behalfof APOLLO GROUP,INC.,
Plaintiff,
VS.
JOHNG. SPERLING,TODD S.
NELSON,BRIAN E. MUELLER,
KENDA B. GONZALES,DANIEL E.
BACHUS,LAURA PALMER NOONE.,
PETERV. SPERLING,JOHN M.
BLAIR, DINO J. DeCONCINI,HEDY F.
GOVENARandJOHN R. NORTONIII,
Defendants,
and
APOLLOGROIJP,INC.,
NominalDefendant.
Index No.
VERIFIED SHAREHOLDER
DERIVATIVE COMPLAINT
JURY TRIAL DEMANDED
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Plaintiff,by his attorneys,
alleges,uponpersonalknowledgeasto himselfand
2
his own acts,andupon informationandbelief asto all othermatters,andbasedupon
–
the investigation
madeby andthroughhis attorneys,
the following:
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4
NATURE OF THE CASE
5
6
1.
This is a shareholder
derivativeactionon behalfof Apollo Group,Inc.
/
(“Apollo” or the “Company”)againstcertainmembersof its Boardof Directors(the
8
“Board”)andcertainof its executiveofficers(collectively”Defendants”)seekingto
9
remedyDefendants’breachesof fiduciaryduties,unjustenrichment,statutory
1 0 violations,andotherviolationsof law.
11
2.
In grossbreachof their fiduciarydutiesasofficersand/ordirectorsof
t 2 Apollo,the Defendants
colludedwith oneanotherto:
a. improperlybackdategrantsof stockoptionsto the InsiderDefendants
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T4
(definedherein),in violationof the Company’sshareholder-approved
15
stockoptionplans;
b. improperlyrecordandaccountfor the backdatedstockoptions,in
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t7
violationof GenerallyAcceptedAccountingPrinciples(“GAAP”);
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c. improperlytaketax deductions
basedon the backdated
stockoptionsin
19
violationof Section162(m)of thetax Code,26U.S.C.$ 162(m)
20
(“Section162(m)”);
2I
d. produceanddisseminate
to Apollo shareholders
andthemarketfalse
22
financialstatements
andotherSecurities
andExchangeCommission
23
(“SEC”) filings that improperlyrecordedandaccountedfor the
24
backdatedstockoptiongrantsandconcealed
the improperbackdatingof
25
stockoptions.
26
3.
As a resultof the Defendants’
misconduct,
egregious
Apollo has
2 7 sustained
millionsof dollarsin damages,
andtherecipientsof the backdated
stock
2 8 optionshavegarnered
millionsof dollarsin unlawfulprofits.
Complaint
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JURISDICTION AND VENUE
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2
4.
This Court hasjurisdiction over this astion pursuantto 28 U.S.C. $
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1331in that this Complaint statesa federalquestion. This Court also hasjurisdiction
4
over this actionpursuantto 28 U.S.C. $ 1332(a)(2)in that Plaintiff and Defendants
5
are cttizensof different statesand the matter in controversyexceeds$75,000,
6
exclusiveof interestsand costs.This Court has supplementaljurisdiction over the
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statelaw claims assertedhereinpursuantto 28 U.S.C. $1367(a).This action is not a
8
collusiveone to conferjurisdiction on a court of the United Stateswhich it would not
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otherwisehave.
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5.
Venue is proper in this district becausea substantialportion of the
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transactionsand wrongs complained of herein, including the Defendants’primary
I2
participationin the wrongful acts detailedherein,occuffedin this district. One or
1 a
more of the Defendantseither residesin or maintainsexecutiveoffices in this
1J
T 4 district,and Defendantshave receivedsubstantialcompensationin this district by
1 5 engagingin numerousactivities and conductingbusinesshere, which had an effect in
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this district.
PARTIES
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6.
Plaintiff,Milton Pfeiffer,a cttizenof the United States,is, andat all
1 9 timesrelevantwas,a shareholder
Apollo.
of nominaldefendant
20
I.
NorninaldefendantApollo is incorporated
underthe laws of the Stateof
2l
Artzonawith its headquarters
in Phoenix,Artzona.Apollo provideshighereducation
22
to workingadultsthroughits subsidiaries:
services
The Universityof Phoenix,Inc.,
^’)
Institutefor Profbssional
Development,
The Collegefor FinancialPlanningInstitutes
LJ
24 CorporationandWesternInternationalUniversity,Inc.
25
8.
DefbndantJohnG. Sperling(“Sperling”)is the founderof Apollo andis
26 currentlyActing ExecutiveChairmanof the Boardof the Company.Sperlingwasthe
27 Chairmanof the Boardfrom the Company’sinceptionthroughJune2004,was
2 8 President
until February1998andChief ExecutiveOfficer (“CEO”) until August
Complaint
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2001.At all timesSperlinghasbeena directorof the Company.He wasappointed
2
Acting ExecutiveChairrnanin January2006uponthe resignationof Todd S. Nelson
a
asChairrnan,
CEO andPresident
of Apollo.
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9.
DefendantTodd S. Nelson(“Nelson”)wasuntil recentlyChairmanof
5
the Board,CEO andPresidentof the Company.Nelsonunexpectedly
resignedfrom
6
the Companyin January2006.NelsonwasPresidentfrom February1998,CEO from
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August2001andChairmanfrom June2004.NelsonjoinedApollo in 1987servingin
8
a varietyof positions,includinga varietyof executivepositionssince1989.
4
9
10.
BrianE. Mueller(“Mueller”)hasbeenPresident
Def’endant
of Apollo
t 0 sinceJanuary2006.Muellerjoinedthe Companyin 1987,servingin a varietyof
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positions,includinga varietyof executivepositionssince 1993.Most recently
t 2 Muellerheldthetitle of ChiefOperatingOfficer”(COO”) prior to his appointment
as
1 3 President
of the Company.
I4
I 1.
Def’endant
KendaB . Gonzales(“Gonzales”)hasbeenChief Financial
1 5 Officer(“CFO”),Secretary
andTreasuryof the CompanysinceOctober1998.
16
12.
DefbndantDanielE. Bachus(“Bachus”)hasbeenChiefAccounting
I 7 OfficerandControllersincejoining the Companyin August2000.
18
13.
DefendantLauraPalmerNoone(“Noone”)hasbeenPresident
of the
I 9 Universityof Phoenix,Apollo’s mostimportantandwell knownsubsidiary,
since
20 September
2000.Noonehasbeenwith theUniversityof Phoenixsince1987.
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14.
DefendantPeterV. Sperling(“P. Sperling”)is SeniorVice President
22 anda directorof Apollo. He hasbeenwith the Companysince1983.P. Sperlingis
23 defendant
Sperling’sson.
24
15.
DefendantJohnBlair (“Blair”) hasbeena directorof Apollo since
2 5 September
2000.Blair servedasa directorof WesternInternational
UniversityInc.,a
2000.
26 wholly-ownedsubsidiaryof Apollo, from 1982to September
27
16.
Dino J. DeConcini(“DeConcini”)hasbeena directorof
Def’endant
2 8 Apollosince1981
.
Complarnt
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17.
DefendantHedyF. Govenar(“Govenar”)hasbeena directorof Apollo
2
sinceMarch 1991.Govenarwasa directorof theUniversityof Phoenixfrom 1992to
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a
Februarv1997,
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18.
5
6
DefendantJohnR. NortonIII (“Norton”)hasbeena directorof Apollo
sinceMarch 1997.
19.
The defendants
identifiedin flfl8and l4- 1B arereferredto hereinasthe
7
“DirectorDefendants.”
The defendants
identifiedin’lTIT8-g
and l1-18 arereferredto
8
hereinasthe “InsiderDefendants.”
FACTS
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10
20.
Apollo hastwo classesof commonstock:ClassA commonstockand
1 1 ClassB commonstock.ClassA commonstock,which is the stockthattradeson
t2
NASDAQ,is non-votingstockwhile ClassB commonstockis votingstock.As of
t3
SperlingandP. Sperlingowned99.56%of the shares
October31,2005,defendants
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SperlingandP. Sperling
of ClassB commonstock.Sinceat least1995,defendants
1 5 haveownedat least82.5%of Apollo’s ClassB commonstock.Accordingly,atall
1 6 relevanttimes,via their ownershipof the ClassB votingstock,defendants
Sperling
t1
andP. Sperlinghavehadvoting controlof the Company,includingcontrolover
1 8 settingexecutive
anddirectorcompensation.
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21.
Underthe termsof Apollo’s stockoptionplan,the exercisepricemust
be no lessthanfair marketvalueof Apollo’s stockon the dateof the grant.
22.
Between1994andthe present,Defendants
causedApollo to file false
22
andmisleadingstatements
with the SECincluding10-Ksfiled with the SECwhich
^ a
statedthatthe optionsgrantedby Apollo carriedwith theman exercisepricethatwas
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24 not lessthanthe fair marketvalueof Apollo stockon the dateof grantandissuance.
25
23.
In fact,Defendantswereawarethatthe practicesemployedby the Board
to dateswhenthe Company’sshares
26 allowedthe stockoptiongrantsto be backdated
27 weretradingat or nearthe lowestpricefor thatrelevantperiod.By June2006,
backdatingschemehadyieldedstockoptiongrantsto the Company’s
2 8 Defendants’
Complaint
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executiveofficersworth million of dollars,which contributedto Defendants’ability
2
to sellover$I .3 billion worth of Apollo’s stock.
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24.
Certainof Apollo’s backdated
stockoptiongrantsaredescribed
below:
1998Option Grants
25.
Def’endants
datedApollo’s 1998optiongrantson December18, 1998at
6
This wasnearlythe low for the monthof December
$11.39per share(splitadjusted).
7
whenApollo’sstocktradedbetween$10.22and$ 15.06per share.Defendants
8
received281,250,225,000
and49,500options,
Sperling,Nelsonand Gonzales
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respectively,
JorgeKlor de Alva (“Klor
at this price.FormerSeniorVice President
and 112,500options,
1 0 deAlva”) andJery F. Noble(“Noble”)received168,750
ll
respectively,
at thisprice.
T 2 1999Option Grants
1 l J
26.
Def-endants
datedApollo’s 1999optiongrantson April 19, 1999at
– the low of the month.DefendantGonzales
T 4 510.22per share(splitadjusted)
45,000optionsat thisprice.
1 5 received
T 6 2000Option Grants
T7
27.
Defendants
datedmanyof Apollo’s2000grantsasof January12,2000
– not only the low of the month but slso the low
1 8 at $8.39per share(split adjusted)
T 9 of theyear.The stocktradedashigh as$11.33per sharein Januaryandashigh as
20 $22.14per shareduringthe year.Defendants
Sperling,NelsonandGonzales
2I
received28L,,250,225,000
and 56,250options,respectively,
at thisprice.Former
Klor de Alva andNoblereceived56,250and22,500options,respectively,
22 executives
a a
/ 1
alsodatedmanyof Apollo’s grantsasof December15,
at thisprice.Def’endants
– not only the low of the monthbut alsothe
24 2000at $14.84per share(splitadjusted)
2 5 lowfor thefourth quarter of 2000.This stock grantinvolvedsuspicious
timing,as
26 two dayslaterApollo issuedbetterthanexpectedresultswhich causeda dramatic
2 7 andimmediateclimb in the Company’sstock.By December20,2000- a day after
release- Apollo’s stockclosedat $20.89per share.The stockhit its
2 8 the earnings
Complaint
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high for theyearof $22.14persharea few dayslateron December28,2000- a 49%
2
increase
in I trsdingduys.Defendants
Nelson
Sperling,
andNoone
, Gonzales
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received
281,250,225,000,
22,500and22,500
respectively,
options,
atthisprice.
4
FormerCEO of the Universityof PhoenixAnthonyDigiovanni(“Digiovanni”)
5
received22,500optionsat this price.
6
2001Option Grants
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28.
Def-endants
datedApollo’s 2001optiongrantson September
21,2001at
8
$23.33per share- not only the low of the monthbut alsothe low for the second
9
half of 2001.The stocktradedashigh as$28.02per sharein September
andashigh
1 0 as$32.03per sharein the secondhalf of theyear.Defendants
Sperling,Nelson,
1 1 Gonzales
andNoonereceived225,000,225,000,37,500and37,500options,
I2
respectively,
at thisprice.FormerexecutiveDigiovannireceivedI I ,250optionsat
1 3 thisprice.
I4
29.
It w,asnot coincidentlythateachandeveryoneof the stockoptions
1 5 grantedto the InsiderDefendants
weredatedjust beforea substantial
risein Apollo’s
\6
stockprice.
17
30.
The reasonthateachandeverysingleoptiongrantwas followedby a
1 8 substantial
run-upin Apollo’s stockpricewasnot dueto the Defendants’
goodluck,
theprobabilityof suchincreases
T 9 because
in Apollo’s stockpriceis infinitesimal.
20
Rather,theprice increaseis attributedto a schemeknown asbackdatingperpetrated
2I
by the Defendants.
22
3I .
The Defendantspermittedthe manipulationof the grantdatesso thatthe
23
reporteddatesof the grantswerenot the actualdateson which the optionswere
24
granted.In otherwords,the stockoptiongrantswerebackdatedto dateswhenthe
25
marketpriceof Apollo’s stockwasat a low point andwasaboutto rebound.By
26
the grantdatesto coincidewith low pointsin the Company’sstock
manipulating
27
price,theInsiderDefendants
receivedthe lowestpossibleexercisepricefor their
28
optiongrants.As a result,Apollo hasreceivedandwill continueto receiveless
Complaint
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moneyfrom the InsiderDefendantswhenthey exercisetheir optionsat strikepnces
2
lower thanif the optionshadnot beenbackdated.
substantially
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32.
This practiceof backdatingstockoptionsnot only hasbenefitedthe
4
InsiderDefendants
at the directexpense
of Apollo andits stockholders,
but hasalso
5
to APB 25,theapplicable
resultedin the overstatement
of Apollo’sprofits.Pursuant
6
GAAP provisionat the time of the foregoingstockoptiongrants,if the marketprice
on the dateof the grantexceedsthe exercisepriceof the options,the Companymust
8
optionspricedbelowthe
recognizethedifferenceasan expense.This is because
9
stock’sfair marketvaluewhenthey wereawardedbroughtthe recipientan instant
andtherefore
for as additionalcompensation
1 0 papergainthat mustbe accounted
to the Company.As a result,Apollo may haveto restateits
1 1 treatedasan expense
t2
l3
\4
expenses.
financialresultsto reflectthe previouslyunreported
33.
Moreover,Apollo, with theknowledge,approval,andparticipation
of
(i) disseminated
in its Form l0-K
falsefinancialstatements
eachof theDefendants:
1 5 filings filed duringthe periodin which the backdated
stockoptionsweregranted;(ii)
1 6 disseminated
to shareholders
and filed with the SECannualproxy statements
that
1 7 falselyreportsthe datesof the stockoptiongrantsto the InsiderDefendants;
and(iii)
1 8 filed with the SECForm 4 filings that falselyreportsthe datesof the stockoption
1 9 grantsto the InsiderDefendants.
20
34.
Pursuantto Section162(m),compensation
in excessof $l million per
2I
year,includinggainson stockoptions,paidto a corporation’s
five mosthighly
22
compensated
officers is tax deductibleonly if: (i) the compensationis payablesolely
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on accountof the attainmentof one or more performancegoals; (ii) the performance
24 goals are determinedby a compensationcommittee comprisedsolely of two or more
2 5 outsidedirectors,(iii) the material terms under which the compensationis to be paid,
26 including the performancegoals, are disclosedto shareholdersand approvedby u
2 7 majority of the vote in a separateshareholdervote before the payment of the
2B compensation,and (iv) before any paymentof such compensation,the compensation
Complaint
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goalsandany othermaterialtermswerein
committeecertifiesthat the perforrnance
2
fact satisfied.The Defendants
violatedSection162(m)because
thetax deductions
.,
J
for the stockoptiongrantsto the InsiderDefendants
describedabovewerenot
4
payablesolelyon accountof the attainmentof oneor moreperformancegoalsand
5
violatedthetermsof the Company’sshareholder-approved
stockoptionplans.
6
35.
The oddsthatthe InsiderDefendants
receivedtheir stockoptiongrants
/
legitimately,
ratherthanthroughan illegalstockoptionbackdatingscheme,
is
8
infinitesimal.
9
36.
The backdatingallegationsallegedhereinis furthercorroborated
by a
1 0 Wall StreetJournalarticle,publishedMarch I 8,2006,underthe headline”The
1l
PerfectPayday”thatdescribedsimilarstockoptionbackdatingpracticesby
T 2 numerouscompanies.
Accordingto the article,the oddsthat everysinglestock
‘l .l
1J
optiongrantto an officeris followedby a substantial
risein the stock’spriceareone
I4
in severalbillion. Consequently,
manyof thesecompanies
havebecomethe subject
1 5 of investigations
by federaland stateregulatoryauthorities.
16
37.
Moreover,throughoutthe relevantperiodcertainDefendantsexercised
1 7 manyof thesestockoptionscontributingto theirabilityto sellover $1.3billion
1 8 worthof Apollo stocktheyobtainedoftenby cashingin under-priced
stockoptions:
T 9 DEFENDANIT
20
21
22
23
24
25
DATES OF SALE
SHARESSOLD
PROCEEDS
RECEIVED
SPERLING
t2tU9s-UBt04
24,888,104
7,298
$356,83
NELSON
U1 8 t 9 6 – t 1 t 4 t 0 3
4.513.608
65
s I l3 .944.7
GONZALEZ
7t19t01-7t23t03
261.389
$8,650,610
BACHUS
7t10t0r-U12t0s
40,556
$1 , 9 0 0 , 8 7 6
NOONE
U8l0r-12122t05
313,354
$ 17,250
,622
P. SPERLING
I tr8t96-7t2Bt0s
39,598,7
07
8,064
$832,33
BLAIR
t tr8t0r-ttU05
6 6 , 18 5
$3,740,869
DECONCI
419196-t2l30t0s
229^048
$6,990,340
26
27
28
Complaint
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(CIR pdf rnifi elcisDen:oversion)
1
GOVENAR
7t27t00-1t11/0s
169,468
$5,255,495
2
NORTON
7lr0l02-r16t04
184.498
s7.,926,122
J
4
TOTAL
70,324,980
$ 1 , 3 5 4 , 8 ,3656 1
5
6
OBLIGATIONS AND DUTIES OF THE DEFENDANTS
38.
By reasonof theirpositionsasofficersandlordirectorsof the Company
8
andbecauseof their ability to controlthe businessandcorporateaffairsof the
9
Company,the Defendantsowedthe Companyandits shareholders
the fiduerary
1 0 obligationsof good faith,trust,loyalty,anddue care,andwereandarerequiredto
1l
usetheirutmostability to controlandmanagethe Companyin a fat,just, honest,
1 2 andequitablemanner.The Defendants
wereandarerequiredto act in furtherance
of
1 3 the bestinterestsof the Companyandits shareholders
so asto benefitall
t4
shareholders
equallyandnot in furtherance
of their personalinterestor benefit.Each
1 5 directorandofficer of the Companyowesto the Companyandits shareholders
the
1 6 fiduciaryduty to exercisegoodfaith anddiligencein the administration
of the affairs
t7
of the Companyandin the useandpreservation
of its propertyandassets,andthe
1 8 highestobligations
of fair dealing.
I9
39.
TheDefendants,
because
of theirpositionsof controlandauthorityas
20
directorsand/orofficersof the Company,wereableto anddid, directlyand/or
2l
indirectly,exercisecontroloverthe wrongfulactscomplainedof herein.
22
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40.
To dischargetheir duties,the officersanddirectorsof the Company
wererequiredto exercisereasonable
andprudentsupervisionoverthe management,
24 policies,practices
andcontrolsof the Company.By virtueof suchduties,the officers
2 5 anddirectorsof the Companywererequiredto, amongotherthings:
a. exercisegoodfaith in ensuringthatthe affairsof the Companywere
in an efficient,business-like
mannerso asto makeit possible
conducted
to providethe highestqualityperformance
of its business;
26
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Complaint
(CIB pclf lnnfielcisDernoversiun)
b . exercisegoodfaith in ensuringthatthe Companywas operatedin a
diligent,honestandprudentmannerandcompliedwith all applicable
including
federaland statelaws,rules,regulationsandrequirements,
actingonly within the scopeof its legalauthority;
controlandsupervisionoverthe officersand
c . exercisereasonable
employees
of the Company;
d. establishguidelinesand policies adequatelygoverningthe Company’s
stock option accountingand stock option granting practices;
andfunctioningsystemof
e . to maintainandimplementan adequate
information
internalfinancialand accountingcontrolsandmanagement
wouldbe safeguarded,
its
systems,
suchthatthe Company’sassets
financialstatements
andinformationwould be accuratelyrecordedand
wouldbe givenpromptnoticeof
reported,andcorporatemanagers
wouldbe
sothatrisk to the corporation
seriousproblemsor divergences
minimized;
filing and/or
exercisegoodfaith in supervisingthe preparation,
pressreleases,
audits,reportsor
of financialstatements,
dissemination
otherinformationrequiredby law, andin examiningandevaluatingany
reportsor examinations,
audits,or otherfinancialinformation
concerningthe financialconditionof the Company;
g. exercisegoodfaith in ensuringthatthe Company’sfinancialstatements
with GAAP; and
werepreparedin accordance
h. refrain from unduly benefitingthemselvesand other Companyinsiders
at the expenseof the Company andlor its stockholders.
41.
The Defendantsbreachedtheir fiduciary dutiesby:
a. colludingto backdatestockoptiongrants;
b. colludingto violateGAAP andSection162(m);
to Apollo shareholders
andthe
c. colludingto produceanddisseminate
that improperlyrecordedand
marketfalsefinancialstatements
the improper
accountedfor the backdatedoptiongrantsandconcealed
backdatingof stockoptions;and
27
28
Complaint
(CrR pdf nnfielcls lle moversroni
andfalseForm 4 filings in order
d. colludingto file falseprox\/statements
to concealthe improperbackdatingof stockoptions.
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42.
The Defendants’foregoing,
misconductwasnot, andcouldnot have
4
judgment.Rather,it wasintendedto, and
been,an exerciseof goodfaithbusiness
5
did, undulybenefitthe Defendantsat the expenseof the Company.
6
43.
foregoingbreaches
As a directandproximatelesultof the Defendants’
n
I
millionsof dollarsin damages,
of fiduciaryduties,the Companyhassustained
8
expenses
andtax liabilities
compensation
includingbut not limitedto, the additiorral
9
the Companywasrequiredto incur andlossof fundspaid to the Companyupon
1 0 exercise
of options.
PLAINTIFF’S DEMAI{I)
l1
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15
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44.
Plaintiffbringsthis actionderivativelyon behalfof the Companyto
redressthe injuriessufferedby the Companyasa directresultof Defendants’
violationsof the federalandstatelawsallegedherein.
45.
The Boardof Directorsof Apollo consistsof the followingsix
Sperling,P. Sperling,Blair,DeConcini,GovenarandNorton.
individuals:defendants
asthe Companywould
Despitethe factthattime was(andstill is) of the essence
sufferirreparableinjury if plaintiff delayedin filing suit on behalfof Apollo, plaintiff
madea pre-suitdemandon the Apollo Iloard to takelegalactionagainstDefendants
a replyon or beforeNovemberJ,2006 asking
on August9, 2006.Plaintiffrequested
thatthe Boardindicatethe remedialstepsthatthe Boardof Directorsintendedto take
for the demiseof its
to vindicatetherightsof Apollo againstthepersonsresponsible
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26
goodwillandreputation.
thatthe Boardtake
Plairrtiffspecificallyrequested
business,
action(i) to recoverfrom the Boardmembersandofficersthe amountof damages
by the Companyas a resulto1’theimproperlybackdatedstockoption
sustained
improperlyawardedstockoptions,and
grants,(ii) to recoverfrom the officers1.he
27
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Complaint
(C’lBpdf lln fi elclsDemor,’ersioni
1 (iii) to coffectdeficiencies
in the Company’sinternalcontrolsandequity
2
a
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practices.
compensation
46.
As of the dateof this filing, 90 dayslater,the Apollo Boardhasfailedto
4
indicatethat it intendsto takeany actionagainstthe personsresponsibleandfurther
5
hasfailedto remedyany of the harm sufferedby the Company.
6
4l .
In any event,demandagainstthe Apollo Boardis futile asdefendants
I
SperlingandP. Sperlingvia their ownershipof the ClassB votingstockhavehad
8
votingcontrolof the Company,at all relevanttimes,includingcontroloversetting
9
executiveanddirectorcompensation.
Accordingly,defendants
SperlingandP.
F,
1 0 Sperlingwould be unwilling to takeany actionagainsttheir interestand,giventhat
1 1 they effectivelycontrolthe Companyandthe Apollo Board,the Boardwould be
l2
13
I4
unwillingto takeany suchaction.
48.
Furthermore,
the entireApollo Boardis neitherindependent
nor
in the outcomeof this litigationbecause:
disinterested
theirunwillingness
a. Themembersof Apollo’s Boardhavedemonstrated
l5
I6
andlorinability to act in compliancewith their fiduciaryobligationsand/orto sue
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and/ortheir fellow directorsandalliesin the top ranksof the corporation
themselves
1 8 for theviolationsof law complained
of herein.These arepeopletheyhavedeveloped
relationships
1 9 professional
with, who aretheir friendsandwith whom they have
20 entangling
financialalliances,interests
andtherefore,theyarenot
anddependencies,
2 T ableto andwill not vigorouslyprosecute
any suchaction,
b. The Apollo Board of Directorsand seniormanagementparticipatedin,
22
2 3 approvedand/or permitted the wrongs allegedherein to have occuffed and
24 participatedin efforts to concealor disguisethosewrongs from Apollo’s
2 5 stockholdersor recklesslyandlornegligentlydisregardedthe wrongs complainedof
2 6 herein,and are thereforenot disinterestedparties.As a result of their accessto and
2 7 review of internalcorporatedocuments,or conversationsand connectionswith other
2 8 corporateofficers, employees,and directorsand attendanceat managementand/or
Complaint
l3
(C’il} pdf
rmfields f)ernoversion)
I
Boardmeetings,eachof the Defendantsknewthe adversenon-publicinformation
2
regardingthe improperstockoptiongrantsandfinancialreporting.Pursuantto their
a
J
specificdutiesasBoardmembers,the DirectorDefendants
arechargedwith the
4
management
of the Companyandto conductits businessaffairs.Defendants
5
breached
the fiduciarydutiesthat they owedto Apollo andits shareholders
in that
6
they failedto preventand correctthe improperstockoptiongrantingandfinancial
/
reporting.Certaindirectorsarealsodominatedandcontrolledby otherdirectorsand
8
cannotactindependently
of them.Thus,theApollo Boardcannotexercise
9
independent
objectivejudgmentin decidingwhetherto bring this actionor whether
l0
to vigorouslyprosecute
this actionbecause
eachof its membersparticipated
ll
personallyin the wrongdoingor aredependent
uponotherDefendantswho did.
12
c. The actscomplainedof constitute
violationsof the fiducraryduties
l3
owedby Apollo’s officersanddirectorsandtheseactsareincapableof ratification.
14
d. Themembersof Apollo’s Boardhavebenefited,andwill continueto
l5
benefit,from the wrongdoinghereinallegedandhaveengagedin suchconductto
1 6 preservetheir positionsof controlandthe perquisites
derivedthereof,andare
1 7 incapable
of exercisingindependent
objectivejudgmentin decidingwhetherto bring
1 8 this action.
e. Any suit by the currentdirectorsof Apollo to remedythesewrongs
19
20
wouldlikely furtherexposethe liability of Defendants
underthe federalsecurities
2I
laws,whichcouldresultin additionalcivil andlorcriminalactionsbeingfiled against
22
oneor moreof the Defendants,
thus,they arehopelesslyconflictedin makingany
23
independent
supposedly
determination
whetherto suethemselves.
24
f. Apollo hasbeenandwill continueto be exposedto significantlosses
25
dueto the wrongdoingcomplainedof herein,yet the currentBoardhasnot filed any
26
lawsuitsagainstitself or otherswho wereresponsible
for that wrongful conductto
21
attemptto recoverfor Apollo anypartof the damagesApollo sufferedandwill suffer
28
thereby.
Complaint
t4
(C’IBpilf
nnfi elclsDenror,ersion )
g. In orderto properlyprosecutethis lawsuit,it would be necessary
for the
I
2
directorsto suethemselves
andthe otherDefendants,
requiringthemto expose
J
a
themselves
andtheir comrades
to millionsof dollarsin potentialcivil liability and
4
criminalsanctions,
or IRS penalties.
Thistheywill not do.
h. In orderto bring this actionfor breachingtheir fiduciaryduties,the
5
6
membersof the Apollo Boardwould havebeenrequiredto suethemselves
and/or
I
their fellow directorsandalliesin the top ranksof the Company,who aretheir
8
personalfriendsandwith whom theyhaveentanglingfinancialalliances,interests
Fl
which they would not do.
anddependencies,
COUNT I
10
9
l1
AGAINST ALL DEFENDANTS FOR BREACH OF FIDUCIARY DUTY
t2
13
t4
l5
t6
t7
18
19
20
49.
with the sameforceand
Plaintiff incorporates
the precedingparagraphs
effectasif they were setforth herein full.
50.
The Defendants
By reasonof
owethe Companyfiduciaryobligations.
their fiduciaryrelationship,the Defendants
owedandcontinueto owe the Company
the highestobligationof good faith, fair dealing,loyalty and honesty.
5I .
Eachof the Defendantsviolatedandbreachedtheir fiduciarydutiesof
goodfaith,fair dealing,loyalty,andhonesty.
52.
Eachof the Defendants
breachedtheir fiduciaryduty, by authorizing,or
of duty,as follows:
by abdication
a. permittingthe stockoptionsgrantedto the InsiderDefendants
to be
22
backdated;
2I
^^l
, / 1
the financialresultsof the Companyanddisseminating
b. misrepresenting
to Apollo shareholders
andthe marketfalsefinancialstatements
that
grants;
improperlyrecordedandaccounted
for the backdatedoption
24
25
26
c. filing falseproxy statements
andfalseForm 4 filings in orderto conceal
the improperbackdatingof the stockoptions;
27
28
Complaint
(C{R pdf rmfi elclsl)etnoversion )
d. failing to recoverthe ill-gottengainsof the recipientsof the stock
optionsor to coffectthe Company’spubliclyreportedfinancialresults.
I
2
–
J
53.
As a directandproximateresultof Defendants’failureto performtheir
4
fiduciaryobligations,the Companyhassustainedsignificantmonetarydamages.
As
5
a resultof the conductallegedherein,Defendants
areliableto the Company.
6
7
COUNT II
8
AGAINST THE INSIDER DEFENDANTSFOR UNJUST ENRICHMENT
9
10
ll
12
13
14
l5
t6
17
18
54.
Plaintiff incorporates
with the sameforceand
the precedingparagraphs
effectasif they were setforth herein full.
55.
The InsiderDefendants
wereunjustlyenrichedat the expense
of andto
the detrimentof Apollo andits stockholders.EachInsiderDefendantreceivedunder
pricedbackdated
stockoptiongrants,asallegedherein.
56.
Plaintiffseeksrestitutionfrom the InsiderDefendants,
andthe Court
shouldorderthemto disgorgeto the Companyall of the backdated
stockoptions
theyreceived,includingtheproceeds
of any suchoptionsthathavebeenexercised
sold,pledgedor otherwisemonettzed.
COUNT III
r9
20
2T
AGAINST ALL DEFENDANTSFOR
VTOLATION OF SECTTON10(b)OF THE SECURTTTES
EXCHANGE ACT_
OF 1934AND RULE l0b-s PROMULGATE THEREUNDER
22
23
57.
Plaintiff incorporates
the precedingparugraphs
with the sameforceand
24 effectasif they were setforth herein full.
25
58.
Eachof the Defendants
intentionallyor recklesslyemployeddevices,
2 6 schemes,
in acts,practices,
anda courseof
andartificesto defraudandengaged
2l
which operatedasa fraudanddeceituponthe Company.
business
28
Complaint
(C’lBpdf rmfielcisDernovers
ioni
1
2
1
J
59.
The Companyrelieduponthe Defendants’fraudin grantingthe Insider
Defendants
optionsto purchasesharesof Apollo commonstock.
60.
As a directandproximateresultof the Defcndants’fraud,the Company
4
hassustained
millionsof dollarsin damages,
includingbut not limitedto, the
5
additionalcompensation
expenses
andtax liabilitiesthe Companywasrequiredto
6
incurandlossof fundspaidto the Companyuponexerciseof options.
,7
I
8
9
10
COUNT IV
AGAINST ALL DEFENDANTSFOR
VIOLATION OF Q 14 (a) OF THE SECURITIESEXCIIANGE ACT OF 1934
l1
I2
t3
l4
l5
T6
t7
1B
19
20
2T
22
23
24
25
26
2l
28
61.
with the sameforceand
Plaintiff incorporates
the precedingparagraphs
effectasif they were setforth herein full.
62.
in the
The Defendants
issued,causedto be issued,andparticipated
to shareholders
that were
issuanceof materiallyfalseandmisleadingstatements
theperiodthatthe
in the Company’sdefinitiveproxiesfiled encompassing
contained
backdatedstockoptionsweregranted.Theseproxieswerefalseandmaterially
misleadingin that Defendantswereaware,or shouldhavebeenaware,but did not
amongotherthings,that:(a)the dateson optionsgrantedto employees,
disclose,
includingDefendants
who wereup for boardreelection,werebackdatedto favorthe
recipient;(b) the Companydid not properlycalculatethe exercisepriceof options
issuedto the officersanddirectors,and(c) the Company’sinternalcontrolsand
practiceswereinadequate.
accounting
63.
By reasonof the conductallegedherein,eachDefendantviolated
Exchange
Act of 1934.The misstatements
and
SectionA (a) of the Securities
omissionswerematerial.The informationwould havebeenmaterialto the
in determiningwhetherto electdirectorsto managethis
Company’sshareholders
Company.
Complaint
(CIB pdf nnfielcisl)er:rovers
ioni
I
64.
Plaintiff, on behalf of the Comp?ny,thereby seeksto void the election
2
of Director Defendantsbasedupon the misleading and incompleteproxy materials,
J
–
and is entitled to recover damagesto compensatethe Company for all damages
4
resultingfrom Defendants’violation of Sectionru @).
5
6
COUNT V
.7
I
AGAINST ALL DEFENDANTS FOR WASTE OF CORPORATE ASSETS
8
9
l0
11
t2
65.
Plaintiff incorporates
the precedingparagraphs
with the sameforceand
effectasif they were setforth herein full.
66.
wastedcorporateassets,
by
By the foregoingconduct,the Defendants
amongotherthings,makingimproperstockoptiongrantsto its officersanddirectors,
1 a
IJ
l4
15
l6
failingto recoverthem,andexposingthe Companyto civil andcriminalliability,for
whichtheyareliable.
61.
Apollo in an amountto be
The Defendants’actionshavedamages
provenat trial.
t7
PRAYER FOR RE,LIEF
18
t9
20
2l
22
23
24
25
26
27
28
as
WHEREFORE,Plaintiff praysfor relief andjudgmentagainstDefendants
follows:
A.
Againstall of the Defendantsandin favor of the Companyfor the
amountof damagessustainedby the Companyasa resultof the Defendants’
andviolationof Section10(b)
of fiduciaryduties,wasteof corporateassets,
breaches
Act of 1934.
and 14(a)of theExchange
B.
and
Awardingto the Companyrestitutionfrom the InsiderDefendants,
of all profits,benefitsandother
eachof them,andorderingdisgorgement
asa resultof the conductalleged
obtainedby the InsiderDefendants
compensation
herein;
Complaint
(C{B pdf lnnhelcls f)en:oversion’t
I
C.
Grantingappropriateequitablerelief
2
D.
Grantingsuchotherandfurtherrelief asthe Courtdeemsjust and
a
J
proper.
JURY DEMAND
4
5
6
-/
Plaintiffdemandsa trial by jury on all issuesso triable.
Respectfullysubmittedthis 9thday of November,2006.
By:
8
S/GERALDBARRETT
WARD, KEENAN & BARRETT,P.C.
GeraldBarrett
3838NorthCentralAve.,Suitell20
Phoenix.
Arizona85012
(602)219-1717
Telephone:
9
10
1t
and-
T2
1 a
t 1
ZIMMERMAN, LEVI & KORSINSKYLLP
EduardKorsinsky
JosephE. Levi
39 Broadway,Suitel60l
New York. NfY 10006
(212)363-7s00
Fax:(212)363-717
|
T4
15
l6
1 –
T I
Attornevsfor Plaintiff Milton Pfeiffer
18
I9
20
2\
22
23
24
25
26
27
28
Complaint