Jasper v. Maxim Integrated Products, Inc.

108 F. Supp. 3d 757, 2015 U.S. Dist. LEXIS 71334, 2015 WL 3491134
CourtDistrict Court, N.D. California
DecidedJune 2, 2015
DocketCase No. 15-CV-00481-LHK
StatusPublished
Cited by3 cases

This text of 108 F. Supp. 3d 757 (Jasper v. Maxim Integrated Products, Inc.) is published on Counsel Stack Legal Research, covering District Court, N.D. California primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Jasper v. Maxim Integrated Products, Inc., 108 F. Supp. 3d 757, 2015 U.S. Dist. LEXIS 71334, 2015 WL 3491134 (N.D. Cal. 2015).

Opinion

ORDER SUA SPONTE REMANDING CASE AND DENYING AS MOOT MOTION TO DISMISS

LUCY H. KOH, United States District Judge

Plaintiff Carl Jasper (“Plaintiff’) brings an action for, inter alia, breach of contract against defendant Maxim Integrated Products, Inc. (“Maxim”), his former employer. ECF No. 1 Ex. A (“Compl.”). Before the Court is Maxim’s motion to dismiss. ECF No. 7 (“Mot.”). Plaintiff has opposed the motion, ECF No. 17 (“Opp.”), and Maxim has replied, ECF No. 19 (“Reply”).

The Court finds this matter suitable for decision without oral argument under Civil Local Rule 7 — 1(b) and hereby VACATES the motion hearing and initial case management conference set for June 4, 2015, at 1:30 p.m. Having considered the submissions of the parties, the relevant law, and the record in this case, the Court hereby ORDERS that this case be remanded to Santa Clara County Superior Court for lack of subject matter jurisdiction. Accordingly, the Court DENIES as moot Maxim’s motion to dismiss.

I. BACKGROUND

A. Factual Background

1. The Parties

Maxim, a Delaware corporation with its principal place of business in San Jose, California, is a publicly traded semiconductor company listed on the NASDAQ stock exchange. Compl. ¶ 2. Plaintiff is Maxim’s former chief financial officer (“CFO”). Id. ¶¶ 1, 5. Maxim first hired Plaintiff in May 1998 as a corporate controller. Id. ¶ 5. Plaintiff was promoted to CFO in April 1999. Id. From 1999 until 2007, Plaintiff [759]*759served as Maxim’s principal accounting officer, CFO, and vice president, and he was responsible for Maxim’s accounting, including the accuracy of the company’s financial statements and internal controls. Id. ¶¶ 6, 9.

2. Backdating Stock Options

Beginning in April 2006, Maxim undertook an internal review to determine whether the company had improperly issued backdated stock options. Compl. ¶ 8. In ruling on Plaintiffs appeal from the ensuing Securities and Exchange Commission (“SEC”) enforcement action prosecuted against him, the Ninth Circuit explained the practice of backdating stock options as follows:

A stock option grants the recipient “the opportunity to purchase a certain number of shares of company stock at a given price [called the ‘exercise price’] on or after a predetermined date.” N.M. State Inv. Council v. Ernst & Young LLP, 641 F.3d 1089, 1093 (9th Cir.2011). The recipient may exercise the option by purchasing stock from the company at the exercise price, and he is then free to sell the same stock at its current market price. If the option is issued at an exercise price equal to the current market price, the option is referred to as having been issued “at the money.” Conversely, an “in the money” option is issued at an exercise price that is lower than the current market price. This latter type of option is “in the money” because it is immediately profitable: the price at which the stock may be bought is lower than the price at which it may be sold.
Backdating of options occurs when the company official responsible for administering a company’s stock option plan monitors the price of the company stock and awards an “at the money” stock option grant as of a certain date in the past when the share price was lowest. Id. This “lock[s] in the largest possible gain for the option recipient” but also does not require the company to recognize as an expense the difference between the backdated exercise price and the market price of the stock as of the “legitimate” date of the option’s award. Id. This practice is therefore “akin to betting on a horse race after the horse has already crossed the finish line.” Id. Backdating options is “not in and of itself improper under the law or accounting principles,” but it often leads to violations of the securities laws because “[i]f the company does not properly record the back-dated options, then the company’s reported net income is overstated for each of the years the options vest, potentially deceiving the market and investors.” Id.

SEC v. Jasper, 678 F.3d 1116, 1119-20 (9th Cir.2012) (alterations in original).

After Maxim established a special committee to review all of the company’s grants of employee options, it was discovered that Maxim had issued backdated stock options without properly expensing them. Compl. ¶ 8. Maxim, which is required to file with the SEC Form 10-Q quarterly reports and Form 10-K annual reports that must include audited financial statements, announced in September 2006 that it was unable to timely file these reports because of the backdating investigation. Jasper, 678 F.3d at 1120-21. Due to allegations that Plaintiff, as CFO, was involved in the improper backdating of stock options, Plaintiff resigned from Maxim effective January 31, 2007. Compl. ¶ 9. Plaintiff and Maxim entered into a written severance agreement and release dated February 2, 2007. Id. The Court discusses this agreement in detail below. See infra Part I.A.5.

[760]*7603. SEC Enforcement Action

On December 4, 2007, the SEC filed a civil enforcement action against Plaintiff in the Northern District of California. See SEC v. Jasper, No. 07-06122. The SEC alleged that Plaintiff had “engaged in a scheme to illegally back-date stock options granted to Maxim employees and directors, concealing millions of dollars in expenses from investors and significantly overstating the Company’s income.” Jasper, 678 F.3d at 1119. At Plaintiffs jury trial in April 2010, the evidence showed that from 2000 through 2005, while Plaintiff was CFO, Maxim employees and officers regularly backdated stock options granted to employees and created false paperwork to conceal the true grant dates for those options. Id. at 1120. “[F]or ten consecutive quarters,” the Ninth Circuit explained, “Maxim granted backdated options with an exercise price equal to the lowest price of Maxim stock for each quarter.” Id. The testimony was that, during that time period, “the way the company worked was to grant options at the lowest possible price without taking expense for it.” Id. (ellipsis omitted). The testimony was also that “Maxim’s operating income for fiscal years 2003, 2004, and 2005 alone had been overstated by a minimum of $135 million and as much as $357 million due solely to failure to recognize the true expense of unrecorded, backdated stock options.” Id. at 1121.

Here, as before the Ninth Circuit, Plaintiff “does not dispute his knowledge of or involvement in this fraudulent scheme.” Jasper, 678 F.3d at 1121. “Perhaps,” said the Ninth Circuit, “that is because the evidence is overwhelming.” Id. For instance, the evidence showed “that in late February or early March of 2003, when Maxim stock was over $30 per share, [Plaintiff] sent a memorandum to CEO [Jack] Gifford proposing that to ‘ensur[e]’ that a certain employee ‘stays with Maxim,’ Gifford should ‘grant [the employee] an option now at the Oct price so that he gets a favorable price.’” Id. (third and fourth alterations in original).

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108 F. Supp. 3d 757, 2015 U.S. Dist. LEXIS 71334, 2015 WL 3491134, Counsel Stack Legal Research, https://law.counselstack.com/opinion/jasper-v-maxim-integrated-products-inc-cand-2015.