MEMORANDUM AND ORDER
YOUNG, District Judge.
The plaintiffs, Ann Winters (“Winters”) and Laborers’ International Union of North America National (Industrial) Pension Fund (“LIUNA”) (collectively, “Plaintiffs”), bring a shareholder’s derivative action for the benefit of Staples, Inc. (“Staples”) against the defendants, Thomas G. Sternberg, Martin E. Hanaka, John B. Wilson, Louis R. Pepi, Joseph S. Vas-salluzzo, Demos Parneros, Ronald L. Sargent, Patrick Hickey, John J. Mahoney, Susan S. Hoyt, Jeffery L. Levitan, Richard R. Gentry, Jeanne B. Lewis, Edward C. Harsant, John C. Bingleman, David B. Crosier, James C. Peters, Brian T. Light, Joseph G. Doody, Jacques Levy, Jack Vanwoerkom, Robert J. Moore, Deborah G. Ellinger, Robert K. Mayerson, Jeffrey E. Nachbor, Basil L. Anderson, Brenda C. Barnes, Arthur M. Blank, Mary Elizabeth Burton, Rowland T. Moriarity, Robert C. Nakasone, Martin Trust, and Paul F. Walsh (collectively, “Defendants”). The Plaintiffs assert common law claims of breach of fiduciary duty, unjust enrichment, and waste as well as claims pursuant to the Securities and Exchange Act of 1934 (“Exchange Act”) based upon allegedly fraudulent and unlawful actions taken by the officers and directors of Staples. Specifically, the Plaintiffs allege that between 1994 and 2003, corporate officers and directors engaged in a scheme to “backdate” stock options in violation of corporate stock option policies.
The Defendants move to dismiss the complaint, asserting (1) that the Plaintiffs lack standing to bring claims for stock options granted before February 1999; (2) that the statutory claims are time-barred under sections 10(b), 14(a), and 20(a) of the Securities and Exchange Act; (3) that the Plaintiffs have not complied with the demand requirement for shareholder derivative suits delineated by Federal Rule of Civil Procedure 23.1; and (4) that the Plaintiffs fail to satisfy the heightened pleading standards required for claims that allege securities fraud, rendering the complaint insufficient under Federal Rule of Civil Procedure 9(b) and 12(b)(6).
I. Background
A. Jurisdiction
Because the Plaintiffs allege violations of the Securities and Exchange Act of 1934, the Court here has federal question jurisdiction pursuant to 28 U.S.C. § 1331. The Court has supplemental jurisdiction pursuant to 28 U.S.C. § 1367(a) over the remaining claims, insofar as they are part of the same case or controversy from which the federal claim arises.
B. Facts
For the purposes of a motion to dismiss, this Court accepts allegations in the com
plaint as true and draws all inferences in favor of the plaintiff.
Garrett v. Tandy Corp.,
295 F.3d 94, 97 (1st Cir.2002). The facts below are recited in light of this standard.
A stock option is the right to purchase stock in a corporation for a specified period of time at a fixed price (the “exercise price”). Am. Compl. [Doc. 35] ¶ 3. When the market price exceeds the exercise price, an option holder can profit by exercising his option, purchasing stock from the corporation, and reselling it at the (higher) market price.
See id.
The exercise price generally equals the stock’s market price on the date that the stock option is granted.
Id.
In order to increase the value of stock options, however, “backdating” is sometimes used. Instead of recording the date on which the option was actually granted, the corporation manipulates the option by listing an earlier date on which the market price of the stock was lower, which accordingly sets a lower (and more advantageous for the option holder) exercise price.
See id.
¶¶ 3-4.
Staples, a Delaware corporation with its principal executive offices in Framingham, Massachusetts,
id.
¶ 23, grants stock options to strengthen its ability to attract and retain key officers, senior managers, and employees who are expected to contribute to the company’s growth and success.
Id.
¶¶ 9, 12, 75. It does so pursuant to two stockholder-approved plans: the 1987 Stock Option Plan and the 1992 Equity Incentive Plan (collectively, “the Plans”).
Id.
¶ 74. The Plans state that the exercise price of a stock option “may not be less than 100% of the fair market value of the Company’s Common Stock” on the date of the grant.
Id.
¶¶ 77, 80. Fair market value is defined as “the last reported sale price per share of such series of Common Stock on the Nasdaq National Market on the date of grant.”
Id.
¶ 80. Staples’s Compensation Committee has the sole authority to select the date on which a stock option is granted.
Id.
¶ 87. Its decisions are made with the knowledge and approval of the Board of Directory (“Board”).
Id.
¶ 83. Between 1994 to 2003, the Compensation Committee approved fifty-one stock option grants.
Id.
¶ 85. Of these, eleven coincided with dates having particularly low stock prices.
Id.
In 2006, the practice of backdating stock options was publicly identified, spurring the Securities and Exchange Commission (“SEC”) to investigate the phenomenon.
See id.
¶¶ 5, 10. Staples was not a target of any government inquiry, but it, like many other companies, decided to conduct an internal review of its accounting procedures.
See id.
¶ 13, 70. On November 14, 2006, Staples released the results of its review of stock option granting practices from 1997 to the third quarter of 2006.
Id.
¶ 13. As a result of the audit, Staples “recorded a $10.8 million expense ($8.6 million net of taxes) ... to reflect the cumulative impact of accounting errors due to the use of incorrect measurement dates” with regard to stock-based compensation.
Id.
Staples, however, “concluded that the use of incorrect measurement dates was not the result of intentional wrongdoing and has taken steps to improve the con
trols over its option granting processes.”
Id.
The Plaintiffs allege that this report, along with the fact that eleven stock option grants coincided with particularly low stock prices, demonstrates that the officers and directors of Staples engaged in intentional backdating.
See id.
¶ IB, 109. Additionally, the Plaintiffs allege that Staples understated its compensation expenses and overstated its net income because it did not report the backdated stock options when the Board approved or signed Staples’s proxy statements and annual and quarterly reports, which were filed with the SEC and distributed to shareholders and the public, during the relevant period.
Id.
¶¶ 113,121.
Furthermore, the Plaintiffs allege that the Defendants’ backdating scheme caused Staples to violate well-settled accounting principles (GAAP), leading to material false and misleading statements.
Id.
¶ 155, 158, 162. Specifically, although Staples need not record an expense for stock options granted to employees at the current market price, it is required to record an expense in its financial statements for any stock option granted below the current market price.
Id.
¶ 160. Similarly, the Plaintiffs allege the Defendants caused Staples to violate SEC regulations insofar as it failed to disclose in its filings with that body that its executive officers had been granted stock options with exercise prices below the market value on the date of grant.
Id.
¶¶ 168-70.
Finally, the Plaintiffs allege the Defendants caused Staples to violate IRS Code section 162(m), which limits a publicly traded company’s tax deductions for compensation paid to named executive officers that is not “performance-based.”
Id.
¶ 172. Although the Compensation Committee characterizes the stock options as a program designed to reward employees for “achieving business objectives,” the Plaintiffs assert that backdating produces instant profits regardless of the performance of the individuals to whom the options are granted,
id.
¶ 151, and thus that Staples took deductions for which it was not eligible, resulting in potential back taxes, penalties, and interest,
id.
¶ 171.
C. Parties
The Plaintiffs are Staples stockholders. Winters purchased common stock in February 1999 and continuously has held stock in the company since that time.
Id.
¶ 21. LIUNA purchased common stock in September 2003 and continuously has held stock since that time.
Id.
¶ 22.
The Defendants include those individuals the Plaintiffs allege approved of or received the backdated stock options. These include members of the Board (some of whom served on the Compensation Committee) and twenty-five company executives.
Id.
¶¶ 1, 24-58. The Defendants collectively sold over $446,500,000 in stock, a significant portion of which was obtained through the allegedly backdated stock options.
Id.
¶ 154. Some of the
defendants — specifically, Sternberg, Hana-ka, Wilson, Sargent, Hickey, Mahoney, Mayerson, Nachbor, Anderson, Barnes, Blank, Burton, Moriarity, Nakasone, Trust, and Walsh — also signed SEC forms that inaccurately reported expenses and income of the corporation.
Id.
¶¶ 123-124.
D. Procedural Background
On February 1, 2007, Winters filed a shareholder derivative complaint on behalf of Staples. Compl. [Doc. No. 1]. On March 7, 2007, LIUNA initiated a second suit by filing its own shareholder derivative complaint.
Laborers’ Int’l Union of North Am. Nat’l (Indus.) Pension Fund v. Stemberg, et. al.,
07-10462, 2007 WL 1685450 (D. Mass. filed March 7, 2007) [Doc. 1], By order dated March 26, 2007, this Court consolidated the LIUNA action with the Winters action, whereby all future proceedings were to be filed in the Winters case.
On July 2, 2007, the Defendants filed their motion to dismiss. Defs. Mot. Dismiss [Doc. No. 17]. On September 27, this Court heard oral argument on the motion and .permitted the Plaintiffs to amend their complaints in order to remedy their perceived deficiencies. The Plaintiffs filed the amended complaint, which is the subject of this memorandum, on October 11.
A parallel shareholder derivative suit on behalf of Staples is pending in the Delaware Court of Chancery.
See Conrad v. Blank, et al.,
C.A. No. 2611-VCL, 2007 WL 2593540 (Del.Ch. Sept. 7, 2007) (denying in part defendants’ motion to dismiss). In December 2006, Donna Conrad (“Conrad”) filed a complaint against current and former directors and officers of Staples alleging breach of fiduciary duty and other common law causes of action based upon stock option backdating.
Id.
at *1. Twenty-one of Staples’s directors and officers are named defendants in both the Winters and Conrad suits.
On March 1, 2007, the
Conrad
defendants filed a motion to dismiss, arguing that Conrad had not initiated a demand required under Delaware Court of Chancery Rule 23.1 and that she also lacked standing to bring a portion of her claims.
Conrad,
2007 WL 2593540, at *2. Conrad argued a demand was excused because the defendants were conflicted and unable to make an independent determination in response to the demand.
Id.
The Court of Chancery held that Conrad adequately alleged that a demand would be futile and denied the defendants’ motion to dismiss on that ground.
Id.
at *11. The Chancery Court, however, conditionally held that Conrad lacked standing as to conduct that occurred before she purchased stock in 1998, contingent on another stockholder who has standing to contest the earlier conduct intervening in the suit.
Id.
at *2.
II. DISCUSSION
A. Standard for Analysis
In addressing a motion to dismiss, the plaintiffs allegations are taken as true, and the Court must construe the complaint in the light most favorable to the plaintiff.
Jenkins v. McKeithen,
395 U.S. 411, 421, 89 S.Ct. 1843, 23 L.Ed.2d 404 (1969). The analysis for a motion to dismiss does not change because a heightened pleading standard is imposed.
Aldridge v. AT.
Cross Corp.,
284 F.3d 72, 78 (1st Cir.2002);
see also Bell Atlantic v. Twombly,
— U.S. -, 127 S.Ct. 1955, 1964-66, 167 L.Ed.2d 929 (2007);
Brown v. Sweeney,
526 F.Supp.2d 126, 128-30 (D.Mass.2007). A court must still draw all reasonable inferences from the allegations of the complaint to the benefit of the plaintiff when determining whether the plaintiff has satisfied the more stringent pleading requirements.
Aldridge,
284 F.3d at 78.
The Plaintiffs here must meet two heightened pleading standards. Federal Rule of Civil Procedure 9(b) requires that complaints alleging fraud “state with particularity the circumstances constituting fraud.” Fed.R.Civ.P. 9(b). In addition, the Private Securities Litigation Reform Act (“PSLRA”) must be satisfied. Under this statute, a complaint alleging a misleading statement or omission 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). To comply with this mandate, a plaintiff must specify the identity of the speaker, where and when the statement was made, and why the statement was fraudulent.
Fitzer v. Security Dynamics Techs., Inc.,
119 F.Supp.2d 12, 18 (D.Mass.2000). Complaints will fail for insufficient specificity if they are based on information and belief but fail to identify the source of information and reason for belief.
Id.
Additionally, the PSLRA requires that, for those causes of action which require proof of scienter, the plaintiff plead with particularity facts “giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2). In determining whether the plaintiff has satisfied this requirement, courts must evaluate the inferences that can be drawn from the facts taken collectively, rather than by reference to “individual allegation^], scrutinized in isolation.”
Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
— U.S. -, 127 S.Ct. 2499, 2509, 168 L.Ed.2d 179 (2007). At the same time, courts must take into account “plausible nonculpable explanations for the defendant’s conduct,” which detract from the strength of the inference of scienter.
Id.
Ultimately, in order for the complaint to survive, a court must conclude that “a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.”
Id.
at 2510.
Having mapped the legal landscape, the Court now addresses the Defendants’ arguments with respect to the amended complaint.
B. Standing
Section 327 of the Delaware Code requires that “any derivative suit instituted by a stockholder of a corporation ... shall ... avert ] in the complaint that the plaintiff was a stockholder of the corporation at the time of the transaction of which such stockholder complains....” 8 Del. C. § 327. The stock must also be held throughout the litigation.
See Ryan v. Gifford,
918 A.2d 341, 359 (Del.Ch.2007). The Plaintiffs, therefore, must have held stock from 1994 to present in order to
challenge all eleven stock option grants relied upon in the complaint.
The original complaint failed to identify at what specific times the Plaintiffs were Staples shareholders. When the Defendants raised this issue at oral argument, the Plaintiffs explained that they did not hold stock until February 1999. The Court cautioned the Plaintiffs that standing was an issue with regard to claims based on behavior prior to that time, and the Plaintiffs responded that they would locate additional shareholders who purchased stock prior to February 1999 to intervene. The Plaintiffs, however, have not done so. As a result, the Plaintiffs lack standing to challenge the conduct taken by the Defendants prior to February 1999 because neither Winters nor LIUNA held stock before this time. The Plaintiffs here thus may challenge only the stock option grants made on June 6, 2000, August 1, 2000, December 4, 2001, and July 1, 2003; the Plaintiffs may also challenge only the proxy statements issued April 19, 1999, May 9, 2001, May 3, 2002, and May 5, 2004.
C. Time-bar Defense
Prior to 2002, private securities claims under section 10(b) were barred if they were not brought within the earlier of one year after the discovery of the fact constituting the violation or three years after such violation.
See Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson,
501 U.S. 350, 364, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991). The Sarbanes-Oxley Act altered the statute of repose with regard to these claims, extending it to the earlier of two years after the discovery of the facts constituting the violation or five years after the violation. Sarbanes-Oxley Act of 2002, PL 107-204 § 804(a)(2)(b), 116 Stat. 745, 801 (2002) (codified at 28 U.S.C. § 1658(b)). The Sarbanes-Oxley Act. however, did not affect the time limits fox bringing actions arising under other securities laws, including section 14(a).
See In re Global Crossing, Ltd. Sec. Litig.,
313 F.Supp.2d 189, 196-97 (S.D.N.Y.2003). Accordingly, the statute of repose for the Plaintiffs’ claims under section 14(a) remains the earlier of one year after the discovery of the fact constituting the violation or three years after such violation.
1. Section 10(b) and 20(a) Claims
Winters filed her complaint on February 1, 2007. The Defendants argue that, under Sarbanes-Oxley, the Plaintiffs cannot assert section 10(b) claims based on stock option grants prior to February 2, 2002, as any violation arising out of those grants would have occurred more than five years before the suit was instituted. Defs. Mem. Supp. [Doc. 18] at 16-17.
The Defendants rely upon this Court’s decision in
Continental Bank, National Association v. Ludlow, 777
F.Supp. 92, 102 (D.Mass.1991), for the proposition that the five-year statute of repose runs from the exact date that the stock option was granted. Defs. Mem. Supp. at 17. The Defendants are incorrect. In
Continental,
misrepresentations about the true value of the security (there, Seabrook Bonds) occurred in 1984, 1985, and 1987.
Id.
at 102. This Court determined that the plaintiffs claim was time-barred, ruling that “the repose period begins when the
last
alleged misrepresentation was made by any of the [participants.”
Id.
(emphasis added).
Here, the Plaintiffs assert that the Defendants’ actions caused Staples to make misrepresentations in a series of fi
nancial statements, the last of which was filed on February 28, 2006. Pls. Mem. Opp. [Doc. No. 19] at 16. Under
Continental,
therefore, the five-year statute of repose did not begin to run until that date. The argument that the Plaintiffs should have filed suit sooner given the circumstances of this case is incredible. Backdating was a practice unknown to the investing public in general until it was brought to light by press reports and academic research in early 2006. Am. Compl. ¶¶ 5-6. Furthermore, Staples shareholders arguably did not have notice that Staples itself engaged in backdating and that its previous financial reports thus contained inaccuracies until Staples released the results of its internal audit in November 2006. This Court’s conclusion, which follows
Continental,
best serves the policy behind the state of repose for this type of securities fraud claim and is compatible with this District’s recent decisions.
See, e.g., In re Stone & Webster, Inc. Sec. Litigation,
2006 WL 1738348, *3 (D.Mass. June 23, 2006) (Zobel, J.) (“The three-year period of repose begins to run on the date that the fraudulent activity occurred, which in securities fraud cases is the date of the defendant’s last fraudulent misstatement”);
Quaak v. Dexia, S.A.,
357 F.Supp.2d 330, 337 (D.Mass.2005) (Saris, J.). Accordingly, the Plaintiffs’ section 10(b) claims are not time-barred by the five-year statute of repose, insofar as the complaint was filed less than one year after the period began.
A section 20(a) claim is dependent on establishing an “independent violation of the securities laws.”
In re Focus Enhancements, Inc. Sec. Litig.,
309 F.Supp.2d 134, 157 (D.Mass.2001) (Woodlock, J.). Because this Court concludes that the section 10(b) claims are not time-barred, the Plaintiffs’ section 20(a) claim also is timely.
2. Section lU(a) Claims
Because Winters filed her complaint on February 1, 2007, any alleged section 14(a) violations that were discovered before February 2, 2006, or that occurred before February 2, 2004, are time-barred. The Plaintiffs cite as a basis for their claim a misrepresentation that allegedly occurred on May 5, 2004, when Staples filed a proxy statement that stated that stock options given to some Defendants were granted on July 1, 2003 at an exercise price equal to the “fair market value per share of Staples common stock on the date of the grant.” Pis. Opp. Mem. at 17.
The Defendants argue that the one-year, rather than three-year, time limit should apply and bar the section 14(a) cause of action based on this proxy statement because the Plaintiffs could have discovered the misrepresentation prior to February 2, 2006. Def. Mem. Supp. at 17. As discussed above, however, and as the Plaintiffs illustrate throughout the complaint, the concept of backdating was a practice unknown to shareholders and the general public prior to 2006. This Court concludes that the three-year period applies and that, therefore, the section 14(a) claims based on the May 5, 2004 proxy statement are not time-barred.
D. Failure to Demand
A derivative complaint must “state with particularity any effort made by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members[,] and the reasons for not obtaining the action or not making the effort.” Fed.R.Civ.P. 23.1(b)(3). The existence and satisfaction of a demand requirement is a substantive issue governed by the law of the state of incorporation.
Kamen v. Kemper Fin. Servs., Inc.,
500 U.S. 90, 108-
109, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991).
Staples is incorporated in Delaware. Under the law of that state, when ;he challenged decision is that of the Board in place at the time the complaint is Bled, failure to make a demand may be sxcused if a plaintiff “can raise a reason to loubt that: (1) a majority of the board is iisinterested or independent or (2) the jhallenged acts were the product of the Doard’s valid exercise of business judgment.”
Ryan,
918 A.2d at 352;
see also Aronson v. Lewis,
473 A.2d 805, 812 (Del.1984). The Plaintiffs acknowledge no de-nand was made on the Board before instituting this action, Am. Compl. ¶¶ 187-88, jut assert their failure is one that should tie excused.
First, the Plaintiffs allege that the 3oard is incapable of making an indepen-lent and disinterested decision to institute md vigorously prosecute this action.
Id.
J187. Specifically, at the time this action :ommenced, the Board consisted of two lefendants who personally received al-eged backdated stock options and four lefendants who were members of the Compensation Committee that allegedly ‘ailed to administer the Plans in a proper nanner.
Id.
¶ 188. Another three Board nembers are defendants who participated n or approved the filing of inaccurate re-)orts and statements with the SEC.
Id.
1¶ 188, 191, 197-98. The Plaintiffs also irgue that the demand is excused because he misconduct was not an exercise of good aith business judgment.
Id.
¶ 201. The Plaintiffs contend that the backdated stock iptions were ultra vires and undermined he shareholder-approved Plans.
Id.
[¶ 201-203.
The Defendants requested that this Court stay consideration of the demand equirement until after the Delaware Court of Chancery rendered its decision on the same issue in
Conrad.
Defs. Mem. Supp. at 19. The Court of Chancery has done so, agreeing with Conrad that the demand requirement was excused. Specifically, the Court of Chancery concluded that two Board members who received backdated stock options were not disinterested, as “both 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.”
Conrad,
2007 WL 2593540, at *7. The Court of Chancery similarly concluded that the “allegations of the complaint were sufficient to excuse demand on the members of the Compensation Committee” because they faced “a substantial likelihood of personal liability for breaching their fiduciary duties.”
Conrad,
2007 WL 2593540, at *9 (citing Ryan). Therefore, the Court of Chancery denied the motion to dismiss for failure to meet the demand requirement.
Id.
The Plaintiffs here make similar, if not the same, factual allegations as those set forth in
Conrad.
This Court accordingly adopts the analysis set forth by the Court of Chancery and excuses the Plaintiffs from the demand requirement.
E. Failure to State a Claim
1. The Section 10(b) Claims
To state a claim for securities fraud under section 10(b), a plaintiff must allege that: (1) the defendant “made a materially false or misleading statement or failed to state a fact necessary to make a statement not misleading; (2) in connection with the purchase or sale of a security; (3) with the intent to deceive, manipulate, or defraud; and that (4) [the defendant] was injured by his reasonable reliance” on the misrepresentations.
Rodriguez-Ortiz v. Margo Caribe, Inc.,
490 F.3d 92, 96 (1st Cir.2007).
The Plaintiffs allege that the Defendants misrepresented the grant date of specific stock options with the intent to deceive Staples for their personal benefit and that these statements induced Staples to “sell” its securities at a financial loss of $10,800,000. Pis. Opp. Mem. at 11. The Defendants argue the Plaintiffs cannot state a claim under section 10(b) because the stock option grants are not “sales,” Staples was not actually harmed, and the Plaintiffs have not pled with particularity that the statements were material. Defs. Mem. Supp. at 8.
The Defendants assert that stock option grants cannot be considered to be “sales” because they were conferred on the individual defendants as compensation. Defs. Mem. Supp. at 11. The language of section 10(b), however, “must be read flexibly, not technically and restrictively.”
Superintendent of Ins. of State of New York v. Bankers Life & Cas. Co.,
404 U.S. 6, 12, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971);
see also Feldberg v. O’Connell,
338 F.Supp. 744, 746 (1972) (Ford, J.) (noting that the word “sale” in the context of section 10(b) “has been broadly interpreted by the courts”). Because the majority of the individual defendants who received the stock option grants later sold them for profit and at a loss to Staples, the Plaintiffs make sufficient allegations to satisfy this element of a section 10(b) claim.
Next, the Defendants argue Staples has not suffered economic harm as a result of the stock option grants. Defs. Mem. Supp. at 11-12. The result of Staples’s internal audit, which explained that “the company has recorded a $10.8 million expense ... due to the use of incorrect measurement dates,” Am. Compl. ¶ 110, easily dispenses with the Defendants’ assertion. Because the alleged backdating is directly linked to this $10,800,000 loss, the Plaintiffs have adequately pled this element of the claim.
With regard to the Defendants’ final argument about the materiality of the alleged statements, the First Circuit has held that whether a statement is material is a question of fact for the jury and thus should not be decided by a court in the context of a motion to dismiss. Instead, this Court should “review the complaint only to determine that it pleads the existence of such statements and presents a plausible jury question of materiality.”
In re Cabletron Sys., Inc.,
311 F.3d 11, 34 (1st Cir.2002). A fact is considered material if it is substantially likely “that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”
Id.
at 34 (quoting
Basic Inc. v. Levinson,
485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988)).
The Plaintiffs allege that the Defendants made the following materially false or misleading statements:
(1) from 1994 to 2003, individual defendants who were members of the Compensation Committee granted backdated stock options to officers and directors, Am. Compl. ¶¶ 83-103,107-08;
(2) from 1995 to 2004, certain officers who are defendants caused Staples to file false Form 4s with the SEC that concealed the backdated stock options,
id.
¶ 152;
(3) Individual defendants caused Staples to file false annual proxy statements,
id.
¶¶ 130-151;
(4) Sternberg, Hanaka, Wilson, Sargent, Hickey, Mahoney, Nachbor, Anderson, Barnes, -Blank, Burton, Moriarity, Naka-sone, Trust, and Walsh filed and disseminated to shareholders annual reports misrepresenting Staples’ finances,
id.
¶¶ 123-125; and
(5) Sargent and Mahoney filed and disseminated to Staples’ shareholders Certifications of the Chief Executive Officer and Chief Financial Officer, which stated that the annual reports complied with SEC regulations and fairly presented, in all material respects, the financial conditions of Staples,
id.
¶ 129.
Even assuming that these alleged statements should be considered to raise a sufficient question of materiality for the purposes of the present motion under
Cabletron,
the Plaintiffs must also satisfy the heightened pleading requirement of Federal Rule of Civil Procedure 9(b). Accordingly, the Plaintiffs must specify the identity of the speaker, where and when the statement was made, and why the statement was fraudulent.
See Fitzer,
119 F.Supp.2d at 18. The Defendants argue the Plaintiffs have failed to do so because they did not identify the speaker of each alleged misstatement. Defs. Mem. Supp. at 6-7. The Plaintiffs respond that it is unnecessary to specify the identity of each speaker under the group-published information doctrine, which permits a plaintiff to “impute false or misleading statements conveyed in annual reports, quarterly and year-end financial results, or other group-published information to corporate officers.” Pls. Opp’n. Mem. at 6 (quoting
In re Raytheon Sec. Litig.,
157 F.Supp.2d 131, 152 (D.Mass.2001) (Saris, J.)). The First Circuit, however, gives a very limited scope to this doctrine in securities fraud actions, and the application of this doctrine to cases of this nature is not well-settled.
See Cabletron,
311 F.3d at 40.
Here, the majority of the alleged misstatements, specifically those that were made in proxy statements or annual reports and were disseminated to third parties, appear to fall under the group-published doctrine. The complaint, however, also relies upon statements made by specific members of the Compensation Committee to Staples during the process of granting stock options, which fall outside the group-published doctrine. With regard to these statements, the Plaintiffs provide little, if any, information about the exact content of the misstatements. Instead, they simply repeat that, in connection with each stock option grant, “the Compensation Committee ... had the sole authority to choose the date, and, in fact, did choose the date on which this stock option was granted .... and knowingly used hindsight to pick the date when Staples’ stock was at a monthly low.” Am. Compl. ¶¶ 87, 89, 91, 93, 95, 99, 101, 103. It simply cannot be inferred from these allegations what statements were made or what member of the Compensation Committee made them.
More importantly, the Plaintiffs must also plead facts from which a strong inference of knowledge or a high degree of recklessness on the part of individual defendants can be drawn.
Aldridge,
284 F.3d at 82. In evaluating whether this is the case, the First Circuit has declared that “each securities fraud complaint must be analyzed on its own facts; there is no one-size-fits-all template.”
Cabletron,
311 F.3d at 32. Courts in this Circuit, howeevr, have recognized a number of factual scenarios that are relevant to the question of scienter, including,
inter alia,
a divergence between internal reports and public statements, the disclosure of inconsistent information shortly after the making of a statement or omission, accounting shenanigans, actions taken solely out of self-interest, significant GAAP violations, and the existence of motive and opportunity.
In re Sonus Networks, Inc. Sec. Litig.,
2006 WL 1308165, *12-13 (D.Mass. May 10, 2006) (Woodlock, J.). In addition, because securities fraud claims based on backdating
have unique characteristics and evidentia-ry difficulties, courts have been willing to consider a variety of information, such as the statistical probability about the rate of return the individual defendants received based on the stock option grants, to support an inference of scienter in these cases.
See In re Zoran Corp. Derivative Litig.,
511 F.Supp.2d 986, 1004 (N.D.Cal.2007).
To support the inference of scien-ter here, the Plaintiffs rely upon the fact that the exercise price of eleven stock option grants coincides with particularly low closing prices or immediately precedes a significant increase in Staples’s stock. Am. Compl. ¶ 85. The Plaintiffs further allege that the Defendants filed reports and proxy statements that misrepresented the financial health of the company.'
Id.
¶¶ 113, 121. This argument, however; is circular; whether the filings contained misstatements is contingent on whether the alleged backdating occurred. Indeed, the only specific evidence that supports an inference of scienter involves the July 3, 2003 stock option grant; insofar as Staples did not file its report regarding that grant with the SEC until three weeks after the deadline. This unexplained delay, combined with the fact that Staples later filed a corrected exercise price that can be traced to the July 10, not the July 3, closing price, does raise this Court’s eyebrows. Standing alone, however, it does not lead to a strong inference of scienter.
It is true that the requisite inference of scienter may arise through consideration of the facts taken collectively.
Tellabs, Inc.,
127 S.Ct. at 2509. Even when the complaint is considered from this perspective, it is difficult here to see a pattern supporting a strong inference of scienter. As the Defendants point out, the Plaintiffs allege only eleven of
fifty-one
stock option grants occurred at suspicious times, and this Court can readily imagine plausible, nonculpable explanations for the post-grant rise in stock price with regard to this small subset.
Backdating stock options violates Staples’s internal protocols; moreover, it constitutes blatant fraud. The ultimate question is: did it occur here? Upon the record before this Court, a factfinder could reach a conclusion in the affirmative. .But while the inference that backdating occurred is reasonable, it is not compelling or even, as required, strong.
What is necessary, of course, is factual discovery to uncover the thought processes of the Compensation Committee. Why did it award these stock options when it did, for what conduct, against what corporate operational background, in light of what projected stock price? Perversely, however, in enacting the PSLRA, Congress has barred precisely the discovery most necessary to uncover such fraud.
See
15 U.S.C. § 78u-4(b)(3)(B) (“[A]ll discovery and other proceedings shall be stayed during the pendency of any motion to dis-miss_”). What’s more, Congress has
prescribed a relatively short statute of limitations, making it less likely that the victims of fraud will uncover it by other means in time to do anything about it.
No one suggests that securities fraud is not a concern of Congress. The statutory scheme demonstrates, however, that Congress is content to rely on the underfunded SEC and the state courts, rather than on federal court adjudication,
to monitor the nation’s financial markets. As these are policy decisions of Congress, this Court has no alternative — even in this close case — but to obey. The complaint here does not adequately plead a strong inference of scienter, and therefore, the alleged violations of section 10(b) must be dismissed.
But see infra
pp. 253.
2. The Section 11(a) Claims
Section 14(a) seeks to “prevent management or others from obtaining authorization for corporate action by means of deceptive or inadequate disclosure in proxy solicitation.”
J.I. Case Co. v. Borak,
377 U.S. 426, 431, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964). To state a claim under the section, plaintiffs must allege that: “(1) a proxy statement contained a material misrepresentation or omission which (2) caused the plaintiff injury and (3) the proxy solicitation itself, rather than the particular defect in the solicitation materials, was ‘an essential link in the accomplishment of the transaction.’ ”
In re Tyco Int’l, Ltd.,
2007 WL 1703023, *12 (D.N.H. June 11, 2007) (quoting
Gen. Elec. Co. v. Cathcart,
980 F.2d 927, 932 (3d Cir.1992)). In other words, the Plaintiffs must establish a “causal nexus” between their alleged injury and the corporate transaction authorized, or defeated, by the allegedly false and misleading proxy statements.
See Royal Bus. Group, Inc. v. Realist, Inc.,
933 F.2d 1056, 1063 (1st Cir.1991).
As a result of the statute of limitations, the May 5, 2004 proxy statement is the only statement from which a viable section 14(a) claim can arise. In that statement, the Defendants reported that stock options were granted on July 1, 2003 and that the exercise price was equal to the “fair market value per share of Staples common stock on the date of the grant.” Am. Compl. ¶ 146. The Plaintiffs thus allege that the Defendants made a material
misrepresentation by failing to report the true value of the compensation given to corporate officers.
Id.
¶ 147. Notably, however, the Plaintiffs fail to even suggest, much less specifically allege, that any transaction that caused injury was authorized or defeated as a result of the May 5, 2004 proxy statement.
The Plaintiffs, therefore, fail to state a cause of action under section 14(a) and claims are accordingly dismissed.
8. The Section 20(a) Claims
To state a claim of securities fraud under section 20(a), a plaintiff is required to plead: (1) a primary violation of the securities laws; and (2) that the defendant exercised actual power or control over the primary violator.
See In re Stone & Webster, Inc., Sec. Litig.,
414 F.3d 187, 194 (1st Cir.2005);
Aldridge,
284 F.3d at 85. Because the section 10(b) claims are insufficiently pled, the Plaintiffs also have failed to state a claim under section 20(b).
F. Supplemental Common Law Claims
Because all the federal claims are subject to dismissal, the usual practice in the First Circuit is to dismiss the related common law claims as well.
See Rodriguez v. Doral Mortgage Corp.,
57 F.3d 1168, 1177 (1st Cir.1995) (“As a general principle, the unfavorable disposition of a plaintiffs federal claims at the early stages of a suit ... will trigger the dismissal without prejudice of any supplemental state-law claims.”).
But see In re TJX Cos. Retail Sec. Breach Litig.,
527 F.Supp.2d 209, 214, 2007 WL 4404166, *3-*4 (D.Mass.2007),
appeal pending
(transferring case to state court after federal claims dismissed). This Court, however, retains jurisdiction over the state law claims because there is complete diversity among the parties. 28 U.S.C. § 1332;
Strawbridge v. Curtiss,
3 Cranch 267, 2 L.Ed. 435 (1806). Here, these claims are virtually identical to the claims against most of the same defendants now pending before the Delaware Court of Chancery in
Conrad.
Given this serendipitous circumstance, dismissal of the common law claims here would be improvident.
Instead, this Court will administratively close this case. It may be reopened upon the motion of any party upon the entry of final judgment in the Delaware Court of Chancery in
Conrad,
or earlier should ongoing discovery in that case give rise to a motion for reconsideration of the dismissal of the federal claims in this case.
It may seem odd that the full vindication of one of Congress’ proudest achievements — the nation’s securities laws — is today left to the courts (however distinguished) of a single state.
Odd it is, but, in the particular circumstances of this case, it is also just.
III. CONCLUSION
Accordingly, the Defendants’ Motion to Dismiss [Doc. No. 17] is allowed by this
Court as to the federal claims only, without prejudice to revisiting the issue as described above. The case is otherwise administratively closed subject to being reopened, again upon the terms described above.
SO ORDERED.