Co-authored by Jonathan Rotenberg

The U.S. District Court for the Northern District of Texas denied defendants’ motion to dismiss plaintiffs’ claims under Sections 14(a), 10(b) and 29(b) of the Securities Exchange Act, and state law violations for insider trading and misappropriation of information.

Plaintiffs, shareholders of Fossil, Inc., sued derivatively on behalf of the corporation, alleging that defendants, current or former directors or officers of the company, backdated stock option grants to themselves, to other top Fossil executives and to Fossil employees. Plaintiffs further alleged that defendants concealed the backdating scheme, and refused to exercise Fossil’s legal rights to compel disgorgement of the wrongly obtained incentive proceeds.

Defendants argued that plaintiffs’ Sections10(b) and 14(a) claims should be dismissed because the complaint failed to meet the heightened pleading requirements set forth in the Private Securities Litigation Reform Act (PSLRA). Defendants argued that plaintiffs’ complaint failed to give rise to strong inferences that defendants acted with at least severe recklessness by approving the backdated options, and thus plaintiff failed to sufficiently plead scienter under Section 10(b). The court rejected defendants’ arguments and found that the complaint contained specific and particularized allegations that each individual defendant knew of the backdating of options as well as false and inflated reports of earnings, and sold company stock without disclosing the materially adverse information.

Defendants also contended that the complaint failed to plead facts that created a strong inference that any defendant acted with negligence by failing to disclose the backdating scheme in the company’s proxy solicitations, and that the Section 14(a) claim must be dismissed. The court concluded that the PSLRA standard was satisfied because the complaint alleged that (1) each defendant signed and approved proxy statements falsely representing that options were granted in accordance with shareholder approved plans, and (2) each defendant was negligent in not knowing the correct and omitted material facts that the options were in fact backdated, because each defendant had previously approved granting millions of backdated options. (In re Fossil, Inc., Derivative Litigation, No. 06-cv-1672, 2010 WL 2102327 (N.D. Tex. May 19, 2010))