United States District Court, D. New Jersey
MEMORANDUM AND ORDER
G. SHERIDAN, U.S.D.J.
shareholder derivative complaint arises from allegations that
Commvault Systems, Inc. (hereinafter, "Commvault")
and its former board of directors and executive officers
breached their fiduciary duties by fraudulently
misrepresenting the corporation's financial status and
engaging in a "cookie jar accounting" scheme.
Presently, Defendants N. Robert Hammer, Alan G. Bunte, Brian
Carolan, Frank J. Fanzilli, Jr., Armando Geday, Keith B.
Geeslin, Robert F. Kurimsky, Louis F. Miceli, Gary Merrill,
Ronald L. Miiller, Daniel J. Pulver, Gary B. smith, and David
F. Walker (collectively, "Director Defendants")
seek dismissal of Plaintiff Alexander Murashko's amended
shareholder derivative complaint (ECF No. 20) pursuant
Federal Rule of Civil Procedure 23.1 for failure to plead
particularized facts showing that a demand on the Commvault
Board of Directors would have been futile. (ECF No. 21). For
the reasons discussed below, the motion is granted without
is a publicly traded data protection and information
management software company that is incorporated in Delaware
and headquartered in New Jersey. (Amended Complaint at
¶¶ 3, 25). Commvault has a ten-member board of
directors, of which two, Defendants Hammer and Bunte, are
inside directors. Of the eight outside directors, Defendants
Kurimsky, Pulver and Walker served on the Audit Committee,
and Defendants Kurimsky, Pulver, Smith, and Walker on the
Governance Committee. (Id. at ¶¶ 42-43).
Under the terms of its corporate charter, Commvault exempts
directors from liability for monetary damages, "[t]o the
fullest extent permitted by the General Corporation law of
the State of Delaware." (ECF No. 21-6, "Corporate
December 2003, Commvault entered a business partnership with
Dell, wherein Dell served as Commvault's reseller and
original equipment manufacturing partner. (Amended Complaint
at ¶ 4). After going public in 2006, Commvault's
revenue quadrupled in value from $109, 472, 000 in 2007 to
$406, 639, 000 in 2012. (Id. at ¶ 5). Of this,
Dell accounted for twenty percent of Commvault's total
revenue. (Id.). Over the next few years, Commvault
predicted that its revenue would grow from $500 million in
2013 to over $1 billion. (Id. at ¶ 6). To meet
this goal, analysts predicted that Commvault would "have
to grow by at least 20% year-over-year until fiscal [year]
2017." (Id.). However, in 2012, Dell acquired
certain Commvault competitors and ended its partnership with
Commvault; this termination would severely affect
Commvault's ability to achieve its revenue targets.
(Id. at ¶ 7). Plaintiff claims Defendants
falsely reassured investors that Commvault was replacing Dell
with business partners, and that the lost partnership would
not affect Commvault's revenue target numbers.
(Id. at ¶ 8).
14, 2013, Commvault filed its annual Form 10-K for fiscal
year 2013, as required pursuant Section 13 of the Securities
Exchange Act of 1934. (ECF No. 21-4, "FY 2013
their Form 10-K, Commvault reported deferred software revenue
of $9, 193, 000, which was approximately $6 million more than
the $3, 764, 000 reported in 2012. (Amended Complaint at
¶ 72). Plaintiff claims that the statements in the Form
10-K "were materially false and misleading" because
a material portion of the $9.2 million reported as deferred
software revenue should have been reported as realized
revenue for the fourth quarter, but "was being saved to
mask Commvault's undisclosed declining growth
prospects." (Id. at ¶ 77).
to the Complaint, Defendants created a "cookie jar"
accounting scheme, wherein Defendants concealed
Commvault's declining revenue and manipulated
Commvault's finances, in violation of the Generally
Accepted Accounting Principles (GAAP). (Id. at
¶ 9). Specifically, Plaintiff claims that Defendants did
not recognize revenue earned in prior fiscal periods and,
instead, deferred these earnings to later periods to show
financial growth. For instance, during the second and third
fiscal quarters of 2014, Plaintiff claims that
"[Defendants caused the Company to recognize a material
portion of its artificially inflated deferred software
revenue balance to create the illusion that Commvault was
meeting its 20% year-over-year growth targets."
(Id. at ¶ 10). In both quarters, Commvault
recognized more than $4 million in previously deferred
software revenue, which misrepresented Commvault's true
revenue numbers. (Id. at ¶¶ 11-12).
Commvault's financial struggles became public on April
25, 2014, when it announced that its fourth quarter profits
had declined by 7.8% and that software revenue had dropped to
10% year-over-year, half of the 20% figure that analysts
expected. (Id. at ¶ 16). Once these disclosures
were made public, Commvault experienced a 30% drop in stock
value, falling from $68.58 per share to $47.56.
now brings this present cause of action on behalf of
Commvault, against Director Defendants, alleging two counts
of breach of fiduciary duties, one count of unjust
enrichment, and one count of insider trading. The Complaint
identifies the following individual defendants and their
N. Robert Hammer, President and Chief Executive Officer of
Commvault. (Complaint at ¶ 27);
Alan G. Bunte, Excecutive Vice President and Chief Operating
Officer. (Id. at ¶ 28);
Brian Carolan, Chief Financial Officer. (Id. at
Ronald L. Miiller, senior vice president of worldwide sales.
(Id. at ¶ 30);
Gary Merrill, vice President, finance and chief accounting
officer. (Id. at ¶ 31);
Frank J. Fanzilli, Jr., director. (Id. at ¶
32); Armando Geday, director. (Id. at ¶ 33);
Keith B. Geeslin, director. (Id. at ¶ 34);
Robert F. Kurimsky, director and audit committee member.