Costco 2009 Annual Report Download - page 87

seeks damages, corporate governance reforms, an accounting, rescission of certain stock option
grants, restitution, and certain injunctive and declaratory relief, including the declaration of a
constructive trust for certain stock options and proceeds derived from the exercise of such options. On
April 3, 2009, on the Company’s motion the court dismissed the action, following the plaintiff’s
disclosure that she had ceased to own Costco common stock, a requirement for her to pursue a
derivative action. The second action, Pirelli Armstrong Tire Corp. Retiree Medical Benefits Trust v.
James Sinegal, et al., Case No. 2:08-cv-01450-TSZ (United States District Court for the Western
District of Washington), was filed on or about September 29, 2008, and names as defendants all but
one of the Company’s directors and certain of its senior executives. Plaintiff alleges that defendants
approved the issuance of backdated stock options, concealed the backdating of stock options, and
refused to vindicate the Company’s rights by pursuing those who obtained improper incentive
compensation. The complaint asserts claims under both state law and the federal securities laws and
seeks relief comparable to that sought in the state court action described above. Plaintiff further alleges
that the misconduct occurred from at least 1997, and continued until 2006, and that as a result virtually
all of the Company’s SEC filings and financial and other public statements were false and misleading
throughout this entire period (including, but not limited to, each of the Company’s annual financial
statements for fiscal years 1997 through 2007 inclusive). Plaintiff alleges, among other things, that
defendants caused the Company to falsely represent that options were granted with exercise prices
that were not less than the fair market value of the Company’s stock on the date of grant and issuance
when they were not, to conceal that its internal controls and accounting controls were grossly
inadequate, and to grossly overstate its earnings. In addition, it is further alleged that when the
Company announced in October 2006 that it had investigated its historical option granting practices
and had not found fraud that announcement itself was false and misleading because, among other
reasons, it failed to report that defendants had consistently received options granted at monthly lows
for the grant dates and falsely suggested that backdating did not occur. Plaintiff also alleges that false
and misleading statements inflated the market price of the Company’s common stock and that certain
individual defendants sold, and the Company purchased, shares at inflated prices. The third action,
Daniel Buckfire v. James D. Sinegal, et al., No. 2:09-cv-00893-TSZ (United States District Court for the
Western District of Washington), was filed on or about June 29, 2009, and contains allegations
substantially similar to those in the Pirelli action. On August 12, 2009, the court entered an order
consolidating the Pirelli and Buckfire actions. On October 2, 2009, plaintiffs Pirelli and Buckfire filed a
consolidated amended complaint, to which the defendants have yet to respond. That complaint is
largely similar to previous filings, except that: it challenges additional grants (in 1995, 1996, and 2004)
and alleges that additional federal securities law filings, including proxy statements and SEC
Forms 10-K, Forms 10-Q and related officer certifications (generally from 1996 through and including
2008) were false and misleading for failure to adequately disclose circumstances surrounding grants of
options; and now includes as defendants only the following individuals: James D. Sinegal, Richard A.
Galanti, Jeffrey H. Brotman, Hamilton E. James, John W. Meisenbach, Jill S. Ruckelshaus, Charles T.
Munger, Benjamin S. Carson, Sr., Richard D. DiCerchio, and David S. Petterson.
On October 4, 2006, the Company received a grand jury subpoena from the United States Attorney’s
Office for the Central District of California, seeking records relating to the Company’s receipt and
handling of hazardous merchandise returned by Costco members and other records. The Company is
cooperating with the inquiry and at this time cannot reasonably estimate any loss that may arise from
this matter.
The Environmental Protection Agency (EPA) issued an Information Request to the Company, dated
November 1, 2007, under the Clean Air Act. The EPA is seeking records regarding warehouses in the
states of Arizona, California, Hawaii, and Nevada relating to compliance with regulations concerning
air-conditioning and refrigeration equipment. On March 4, 2009, the Company was advised by the
Department of Justice that the Department was prepared to allege that the Company has committed at
least nineteen violations of the leak-repair requirements of 40 C.F.R. § 82.156(i) and at least seventy-
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