STATES UNTIED DISTRICT COUR T FOR THE DISTRICT OF MASSACHUSETT S
' i s
f~'C
MARK COLLINS, Derivatively on Behalf ) Civil Action No . of Nominal Defendant BROOKS ) AUTOMATION, INC ., )
__~ t} j
A Plaintiff,
v.
I
)
)
R
ROBERT J . THERRIEN, A . CLINTON ) ALLEN, ROGER D . EMERICK, ) EDWARD C. GRADY, AMIN J . ) KHOURY, JOSEPH R. MARTIN, a Q18,' }ff9 , JOHN K. MCGILLICUDDY, ) ) Defendants, )
.. . .: .... . .:... . .
ANA, OUNT$.... SUM r10 S aSS U LOCAL RULE 4 .1. WAIVER FORM r'1CF SSLUED BY OPTY CE_K ,
I
and
BROOKS AUTOMATION, INC ., a Delaware corporation, Nominal Defendant.
JURY TRIAL DEMANDED
VERIFIED SHAREHOLDER'S DERIVATIVE COMPLAINT
Plaintiff, by his attorneys, submits this Verified Shareholder's Derivative Complaint (th e
"Complaint") against the defendants named herein. NATURE OF THE ACTIO N This is a shareholder's derivative action brought for the benefit ofnoniinal defendan t
Brooks Automation, Inc . (`Brooks" or the "Company") against certain current and former member s
of its Board of Directors (the "Board") seeking to remedy defendants' breaches of fiduciary dutie s and unjust enrichment.
JURISDICTION AND VENU E
2. This Court also has jurisdiction over all claims asserted herein pursuant to 28 U .S.C.
1332(a)(2), because complete diversity exists between Plaintiff and each defendant, and the
amount in controversy exceeds $75,000 . This action is not collusive . 3 . Venue is proper in this jurisdiction pursuant to 2 8 U.S .G. 1391(b) insofar as a substantial part of the events or omissions giving rise to the claim occurred within this judicia l district .
PARTIES
4. Plaintiff Mark Collins ("Plaintiff') is, and was at all relevant times, a shareholder o f nominal defendant Brooks . Plaintiff is a Ohio citizen. 5. Nominal defendant Brooks is a Delaware corporation with its principal executiv e offices located at 15 Elizabeth Drive, Chelmsford, Massachusetts 01824 . According to its public filings, Brooks is a supplier of automation products and solutions primarily serving the worldwid e
semiconductor market ,
6 . Defendant Robert J . Therrien ("Therrien") served as a director of Brooks at all time s relevant hereto until his resignation in 2006 and as President and Chief Executive Officer of the Company at all times relevant hereto until his resignation in 2004 . Upon information and belief, Therrien i s a Massachusetts citizen .
7. Defendant Edward C . Grady ("Grady") has served as a director of Brooks since 2003 ,
President of the Company since 2003, and Chief Executive Officer of the Company since 2004 . Upon information and belief, Grady is a Massachusetts citizen . 8. Defendant Roger D . Emerick ("Em .erick") served as a director of Brooks and as a member ofthe Compensation Committee oftheBoard (the "Compensation Committee") at all times
relevant hereto . Emerick served as a member of the Audit Committee of the Board (the "Audi t Committee"} from 1996 to 2002 . Upon information and belief, Emerick is a California citizen . 9. Defendant Amin J . Khoury ("Khoury') served as a director of Brooks and as a member of the Compensation Committee at all times relevant hereto . Khoury served as a member of the Audit Committee from 1996 to 2004 . Upon information and belief ; Khoury is a Florida citizen . 10. Defendant Joseph R. Martin ("Martin") has served as a director of Brooks and as a member of both the Compensation Committee and the Audit Committee since 2001 . Upon
information and belief, Martin is a Maine citizen. 11 . Defendant A. Clinton Allen ("Allen') has served as a director of Brooks and as a
member of the Compensation Committee since 2003 . Upon information and belief; Allen is a Massachusetts citizen. 12. Defendant John K. McGillicuddy ("McGillicuddy") has sewed as a director o f Brooks and as a member of the Audit Committee since 2003. Upon information and belief, McGillicuddy is a Massachusetts citizen. 13. Collectively, defendants Emerick, Khoury, Martin, Allen, and McGillicuddy ar e referred to herein as the "Committee Defendants ." 14. Collectively, Therrien, Grady, and the Committee Defendants are referred to herei n as the "Individual Defendants."
DUTIES OF THE INDIVIDUAL DEFENDANT S 15 . By reason of their positions as officers and/or directors ofthe Company and becaus e
of their ability to control the business and corporate affairs of the Company, the Individua l Defendants owed the Company and its shareholders the fiduciary obligations of good faith, trust,
loyalty, and due care, and were and are required to use their utmost ability to control and manag e
the Company in a fair, just, honest, and equitable manner_ The Individual Defendants were and are required to act in furtherance of the best interests of the Company and its shareholders so as t o benefit all shareholders equally and not in furtherance of their personal interest or benefit . Each director and officer of the Company owes to the Company and its shareholders the fiduciary duty
to exercise good faith and diligence in the administration of the affairs of the Company and in th e
use and preservation of its property and assets, and the highest obligations of fair dealing .
16. The Individual Defendants, because of their positions of control and authority a s
directors and/or officers of the Company, were able to and did, directly and/or indirectly, exercise control over the wrongful acts complained of herein. 17 . To discharge their duties, the officers and directors of the Company were required
to exercise reasonable and prudent supervision over the management, policies, practices and control s
of the Company . By virtue of such duties, the officers and directors of the Company were required to, among other things : a. exercise good faith in ensuring that the affairs of the Company were conducted in an efficient, business-like manner so as to make it possible to provide the highest quality performance of their business ; b. exercise good faith in ensuring that the Company was operated in a diligent, honest and prudent manner and complied with all applicable federal and state laws, rules, regulations and requirements, including acting only within the scope of its legal authority ; c. exercise good faith in supervising the preparation, filing and/or dissemination of financial statements, press releases, audits, reports or other information required by law, and in examining and evaluating any reports or examinations, audits, or other financial information concerning the financial condition of the Company ; and d. exercise good faith in ensuring that the Company 's financial statements were prepared in accordance with Generally Accepted Accounting Principles ("GAAP") ; and
e . refrain from unduly benefitting themselves and other Company insiders at the expense of the Company . is. The Individual Defendants, particularly Therrien, Grady, and the members of the
Audit Committee, were responsible for maintaining and establishing adequate internal accountin g controls for the Company and to ensure that the Company's financial statements were based o n accurate financial information . According to GAAP, to accomplish the objectives of accuratel y recording, processing, summarizing, and reporting financial data, a corporation must establish an internal accounting control structure. Among other things, the Individual Defendants were require d
to:
(1) make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; and (2) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that -(a) transactions are executed in accordance with management' s general or specific authorization;
(b) transactions are recorded as necessary to permit preparation of financial statements in conformity with [GAAP] .
19. Brooks' Audit Committee Charter provides that the Audit Committee shall, amon g other things, a. Review and discuss with management and the registered public accounting firm the Company's quarterly financial statements ; and b. Review and discuss with management and the registered public accounting firm, the Company's annual audited financial statements and the report of the registered public accounting firm thereon . 20. As set forth herein, the Individual Defendants knowingly and/or extremely recklessl y disregard these above-listed duties which has caused Brooks to suffer damages, and to expos e Brooks to future damages.
BACKGROUND ALLEGATION S
21 . Stock options give recipients the chance to purchase a Company's common stock a t
a certain price, which is sometimes referred to as the "strike price ." Generally, option strike price s
are set on the date of the grant and they are established based on the corporation's closing stock price on the date of the grant . 22 . Generally, the theory is that the recipient of any option grant is assuming the risk i n receiving the grant ; that is, if the corporation's stock price declines after the date of the grant, thos e options are not "in the money" and thus, there is no rationale economic reason to exercise the option . 23 . Conversely, if a corporations's stock price increases after the date of a grant, the recipient of the grant has received a valuable economic benefit - the recipient can then exercise the option, which allows him/her to purchase stock below marketprice which he/she can then sell into the market .
24. At Brooks, the Compensation Committee were responsible for awarding stoc k
options to Brooks employees, including the Individual Defendants named herein . 25. In. 2005, the SEC began an investigating the stock option granting practices o f numerous companies . As reported by the Wall Street Journal (the "Journal ") on March 18, 2006, the SEC's "look at options timing was largely prompted by academic research that examine d thousands of companies and found odd patterns of stock movement around the dates of the grants ." 26. The premise of the academic researchers was that mere chance could not hav e accounted for many of the fortuitous grant dates that certain executives claimed and a pattern emerged -- at certain companies, executives, consistently, over a multi-year period, received options that were purportedly dated at or near historical low trading prices oftheir companies' stock, but just before material increases in the stock price .
27. At certain corporations, this pattern was repeated so many times over a number o f years that the researchers believed that chance could not account for the pattern . As such, th e researchers constructed sophisticated statistical analyses to determine the likelihood that so man y executives had been so "lucky" over such a long period of time. Based on the results of thes e analyses, the researchers concluded that many option patterns were statistical anomalies and that th e random chance of certain option dates were astronomically high . Accordingly, they concluded tha t executives at certain companies had exercised options which had been backdated . 28. Generally, the researchers' theory is that these improper backdating practices allowe d executives to reap unlawful windfalls profits when options were exercised . ]:t stands to reason - i f an executive was allowed to pick a strike date (instead of sticking with whatever date the option s
were actually awarded), he/she could pick a date when corporation's 's stock price was low, thereb y
earning "extra", but illicit profits .
SUBSTANTIVE ALLEGATIONS
29 . In its March 18' story, the Journal, fo ll owing up on the work of the academic researchers, employed a sophisticated statistical analysis to determine if options were likel y backdated a certain corporations . Brooks was one of the corporations' that the Journal identified. As a result of its analysis, the Journal determined that there was only a 1 in 9f million chance tha t defendants (including defendant Therrien) were actually awarded options on the dates they claimed30. Thus, on March 18, 2006, Journal reported : Brooks Automation, Inc ., a semiconductor-equipment maker in Chelmsford, Mass ., gave 233,000 options to its CEO, Robert Th errien, in 2000. The stated grant date was May 31. That was a great day to have options pricer. Brooks's stock plunged over 20% that day, to $39.75. And the very next day it surged more than 30%. '
' All emphasis is supplied unless otherwise noted .
A June 7 Brooks report to the SEC covering Mr . Therrien's May options activity made no mention of his having gotten a grant on May 31, even though the report -- which Mr . Therrien signed -- did cite other options-related actions he took on May 31 . . Not until August was the May 31 grant reported to the SEC .
It wasn't the only well-timed option grant he got . One in October 2001 cause at Brooks stock's lowest closing price that year, once again at the nadir of a sharp plunge. The Journal analysis puts the odds of such a consistentpattern occurring by chance at about I in nine million.
Mr. Therrien, who stepped down as CEO in 2004 and retired as chairman this month, didn't return messages seeking comment. Chief Financial Officer Robert Woodbury said Brooks is "in the process of revamping" practices so grants come at about the same time each year . Mr . Woodbury, who joined in 2003, said no one at Brooks would be able to explain the timing of Mr. Therrien' s grants.
The h igh lyfavorab le 2000 grant also benefited two others at Brooks -- the compensationcommittee members who oversaw the CEO's grants. Although Brooks directors typically got options only in July, that year a special grant was awarded just to these two directors, Roger Emerick and Amin J . Khoury . Each got 20,000 options at the low $39 .75 price. By the time of their regular July option-grant date, the stock was way up to $61 .75, a price far less favorable to options recipients .
31 . Following on the heels of the Journal article, on April 26, 2006, the Individual
Defendants caused Brooks to issue a press release wherein they announced an internal investigatio n of the Company's stock option granting practices : Brooks Automation, Inc. (NASDAQ :BRKS ) today announced that its Board ofDDirectors has created a special committee comprised of independent directors to conduct an intern al review ofmatters related to past stock option grants, including the timing of such grants and associated documentation . The special commi ttee is being assisted by independent legal counsel and advisors .
32. On May 11, 2006, the Individual Defendants' shocked the market when they cause d the Company to announce a six (6) year restatement of the Company' s historical financial results .
The Individual Defendants made clear that th e planned restatement was necessary due to the Company's illicit stock option granting practices . In part, the Individual Defendants disclosed: Brooks Automation, Inc. (NASDAQ:BRKS) today announced an update concerning the review into past stock option grants being conducted by a special committee of its board of directors . The review is not complete .
Based on a report on May 10, 2006 from the special committee concerning the work done
to date, the Company will be required to correct certain SEC filings, including particularly its financial statements contained in filings for some or all of the periods commencing in fiscal 1999 and ending in fiscal 2005. In light of the pending restatement, these financial statements, reported in SEC filings and elsewhere, and all earnings press releases and similar communications issued by the Company relating to fiscal years 1999 through 2005, should not be relied upon. The Company believes that it accounted for certain matters concerning stack options incorrectly, and as a result recognized less compensation expense than it should have in periods prior to fiscal 2006 . Based on the work done to date, the Company has not concluded whether there will be any errors that affect financial statements for fiscal 2006 or whether itmadernaterial accounting errors withrespectto stock option grants made after fiscal 2002 . The Company is in the process of determining the impact of the errors and evaluating the impact of this matter on its system of internal controls . The Company has discussed its conclusions with its independent registered public accounting firm . The Company also announced that it filed with the SEC a Form 12b-25 that states that it did not timely file its Form 1 .0-Q for the period ending March 31, 2006 . The Company expects to file the Form I O-Q for the period ending March 31, 2006 as soon as is practical after the special committee's review is complete . 33 . On May 12, 2006, the Individual Defendants caused Brooks to announce that the SEC
had commenced an investigation into the Company's stock option granting practices, and that th e
Company's common stock was subject to de-listing by NASDAQ because it was delinquent in it s financial filings . In part, the Individual Defendants disclosed : Brooks Automation , Inc . (NASDAQ :BRKS) today announced that ithas received notice that the Securiti es and Exchange Commission is conducting an informal inquiry concerning stock option grant practices to determine whether viola tions of the federal securiti es laws have occurred. The Company is cooperating fully with the SEC in this matter. The Company also announced that it received today a staff determination letter from the Nasdaq Stock Market stating that the Company fails to comply with Marketplace Rule 4310(c)(14) as a result of the fact that the Company did not make a timely filing of its quarterly report on Form. l 0-Q for its March 31, 2006 fiscal quarter and did not indicate in its Form 12b-25 Notification of Late Filing that it would file the Form 10-Q on or before the fifth calendar day following the due prescribed date. The letter stated that the Company's securities will be delisted from the Nasdaq Stock Market at the opening ofbusiness on May 23, 2006 unless the Company requests a hearing in accordance with Nasdaq Marketplace Rules . It is the Company's intention to request such a hearing within the period specified in the letter, which will stay the delisting pending the determination of the Nasdaq Listing
Qualifications Panel .
34. On May 17, 2006, the Individual Defendants caused Brooks to announce that the Company was in technical default of certain of its debt covenants because of its delinquen t regulatory filings . 35. On May 1. S, 2006, the Individual Defendants caused Brooks to announce tha t defendants Khoury and Emerick had resigned from the Board . In part, the Individual Defendants '
disclosed :
"It is with the deepest regret that the Board accepted the voluntary resignations of Amin [Khoury] and Roger [Emerick]," Mr . Martin said. "They have been directors since before Brooks went public in February 1995, and both have been valuable sources of expertise, vision, strategy and judgment during their tenure on the Board . They have helped the Company grow and overcome many roadblocks while achieving some very important milestones, such as our recent merger with Helix . They have willingly served on and led committees of the Board . Most importantly, they were instrumental in transitioning the Company to a robust corporate governance structure from when they were two outside directors on a three-person Board, so that the Company now has filly-independent and functioning Audit, Compensation and Corporate Governance Committees . Also as an indicator of the respect the Board has for Arvin, he has served as our lead independent director since that position was first created ." Mr. Martin continued, "It is because of these qualities that they have chosen to resign from the Board. They are the only current directors who were also directors prior to 2001 . With their resignation, the Company's Board and executive management consists only of individuals who have been with the Company beginning in 2001 or later . They have also told the Company that they will renounce all of their current stock options and restricted stock awards, whether or not vested . They hope, by taking these proactive steps, that Brooks' current officers and directors will be able to manage the Company without being distracted by questions concerning events occurring in this earlier period . " Mr. Martin concluded, "We thank Amin and Roger for the time and effort they have devoted to Brooks and their willingness to put the interests of the Company first . " 36. On May 22, 2006, the Individual Defendants caused Brooks to announce that it ha d been subpoenaed by the US Attorney for the Eastern District of New York . The subpoena relates to the Company's stock option granting practices .
37 . This scandal has damaged the Company, and it has exposed the Company to future
losses; including , but not limited to, damages to the Company' s reputation , the possibility o f increased borrowing costs, and the costs necessary to resolve the SEC and 'U S Attorney inqui ries . Stock Option Grants 38 . From 1996 to 2003, the Compensation Committee granted Therrien and Grady th e following Brooks stock options : Purporte d Date of Name Grant
Exercise Price
Numbe r of Options
Therrien
7/25/96
12/12/97 1/4/99 5/31/00
$12.10
$12 .875 $14.625 $39 .75
10,000
100 115,000 233,000
10/1/01
10/16/03
$25 .22
$24.30 $24.30
90,85 0
120,000 100,000
Grady 10/16/03
39. In addition to the foregoing option grants, Emerick and Khoury each received a gran t of 20,000 options purportedly dated May 31, 2000 and carrying an exercise price of $39 .75 . 40. Pursuant to the terms of the Company's shareholder-approved stock option plans, the exercise price of options must be no less than the closing price of Brooks stock on the date of grant. 41 . Pursuant to APB 25, the applicable GAAP provision at the time of the foregoin g stock option grants, if the market price on the date of grant exceeds the exercise price of the options , the company must recognize the difference as an expense. 42. In a striking pattern that is a statistical anomaly, each and every one of the foregoin g stock option grants was dated just before a material increase in Brooks' common stock price, as demonstrated below : Purported Stock Price 1 0 Date of Exercise Trading Days % Rise in Grant Price After Grant Stock Price 7/25/96 $12.10 $13 .875 14.7%
12/12/97
1/4/99
5/31/00 10/1/01
10/16/03
$12 .875 $14.625 $39 .75 $25 .22 $24.30
$17.125 $17 .9375
$61 .00
33.0% 22.6%
53.5% 37.2% 11 .5%
$34.61
$27 .09
43 . The reason for the ex traordinary patte rn set forth in the preceding paragraph i s that the purported grant dates set forth therein were not the actual dates on Which the stoc k option grants were made . Rather, Therrien and Grady and/or the Committee Defendants ,
improperly backdated the stock option grants to make it appear as though the grants were mad e
on dates when the market price of Brooks common stock was lower than the market price on th e actual grant dates . This improper backdating, which violated the express terms of th e Company's shareholder-approved stock option plans, resulted in option grants with lowe r exercise prices, which improperly increased the value of the options to Therrien and Grady and improperly reduced the amounts they had to pay the Company upon exercise of the options . The Individual Defendants Breach Their FiduciaLry Dutie s
44. Throughout the Relevant Period, the Individual Defendants caused Brooks to
issue unqualified quarterly and yearly financial statements on SEC reports IO-Q and 10-K respectively . In each financial report issued, the Individual Defendants claimed, inter alia, that : (i) the Company's financial reports were prepared and presented in accord w ith GAAP and (ii ) they had designed and implemented a seri es of adequate internal controls . 45. These statements, which were issued over a six (6) year period, wer e demonstrably false when issued . It is clear that each of the Individual Defendants knowingl y
and/or extremely recklessly caused the Company to violate GAAP because they failed t o
recognize compensation expenses incurred when the improperly backdated options were granted . As result of the GAAP violations, Brooks disseminated materially misleading f nancia l
statements to the market .
46. It is equally clear that, despite their statements to the contrary, the Individua l Defendants did not design and implement a system of adequate internal controls ; nor did they make any true attempt to do so . This inference is supported by several facts, including, but no t limited to, the fact that the option scheme went (purportedly) undetected over a six (6) yea r period and the fact that the option scheme was relatively simple and straight-forward ; it was not complex or esoteric . Indeed, once they had cared to look (after having been prompted by the Journal article) the Individual Defendants were able to discover the scheme very quickly - they announced the planned restatement of the Company' s financial results less than three (3) weeks after they had begun their purported investigation . Certainly, had they chosen to comply with their fiduciary duties, the Individual Defendants could have prevented the option scheme and/o r had discovered it much sooner. 47. The Individual Defendants ' failure to establish adequate internal controls coul d not have been the exercise of valid business judgment . Because the Individual Defendants mad e no true effort in this regard, the Company's financial reporting was inherently unreliabl e throughout the Relevant Period. As a result, at the very least, and to the extent that any of th e
Individual Defendants were not directly involved in the scheme and/or cover-up, all of th e
Individual Defendants (and particularly the Committee Defendants) acted in an extremel y reckless manner .
DERIVATIVE AND DEMAND EXCUSED ALLEGATIONS 48. Plaintiff brings this action derivatively in the right and for the benefit ofthe Compan y to redress defendants' breaches of fiduciary duties and unjust enrichment .
49. Plaintiffis an owner of Brooks common stock and was an owner ofBrooks commo n stock at all times relevant hereto .
50. Plaintiff will adequately and fairly represent the interests of the Company and its shareholders in enforcing and prosecuting its rights, and he has retained counsel experienced in litigating this type of action. 51 . As a result of the facts set forth herein, Plaintiff has not made any demand on th e Board to institute this action against the Individual Defendants . Such demand would be a futile and
useless act because the Board is incapable of making an independent and disinterested decision t o institute and vigorously prosecute this action .
52. The Board currently consists ofeight directors : defendants Grady, Martin, Allen, an d McGillicuddy, and directors Robert 1. Lepofsky, Krishna G . Palepu, Alfred Woollacott, III, and Mark S . Wrighton (the "Demand Directors") . A majority of the Demand Directors are legally incapable of independently and disinterestedly considering a demand to commence and vigorousl y prosecute this action for the following reasons : a. Grady is interested and he lacks independence. Grady is directly interested in the improperly backdated stock option grants complained of herein . Grady also lacks independence because his principal professional occupation is his position as President and Chief Executive Officer of the Company, pursuant to which he receives more than $400,000 per year in, salary and cash bonuses, plus thousands of shares of Brooks restricted stock and stock options . Accordingly, Grady is incapable of independently and disinterestedly considering a demand to commence and vigorously prosecute this action against the other defendants, particularly defendant Allen, who currently chairs the Compensation Conunittee; b . Martin and Allen are interested because they face a substantial likelihood of liability for their conduct on the Board. Martin and Allen both serve as members of the Compensation Committee, and they directly participated in and/or approved the misconduct alleged herein and are substantially likely to be held liable for breaching their fiduciary duties, as alleged herein . Moreover, by colluding with Therrien and Grady, as alleged herein, Martin, and Allen have demonstrated that they are unable or unwilling to act independently of Therrien and Grady ; c. Martin and McGillicuddy are interested because they face a substantial likelihood of liability for their conduct on the Board . Martin and McGillicuddy both serve as members of the ...