1 TABLE OF CONTENTS I. INTRODUCTION ...................................................................................................... 2 2 II. JURISDICTION AND VENUE ................................................................................. 8 3 III. PARTIES .................................................................................................................... 9 4 A. Plaintiffs .......................................................................................................... 9 5 B. Defendants ....................................................................................................... 9 6 IV. FACTUAL ALLEGATIONS ................................................................................... 17 7 A. Alphabet’s Reputation as a “Good” Company is Key to Recruiting 8 Valuable Employees and Collecting the User Data that Powers Its Products ......................................................................................................... 17 9 B. Defendants Breached their Fiduciary Duties by Protecting and 10 Rewarding Male Harassers ............................................................................ 19 11 1. The Board Has Allowed a Culture Hostile to Women to Fester for Years ............................................................................................. 19 12 a) Sex Discrimination in Pay and Promotions: ........................... 20 13 b) Sex Stereotyping and Sexual Harassment: .............................. 23 14 2. The New York Times Reveals the Board’s Pattern of Shielding 15 Male Executives Accused of Sexual Harassment .............................. 27 16 3. Alphabet Employees Express Outrage at the Board’s Conduct ......... 30 17 C. Defendants Breached their Fiduciary Duties by Hiding the Google+ Breach From the Public ................................................................................. 33 18 1. Alphabet’s History of Concealing Data Privacy Issues Had 19 Already Resulted in Heightened Legal Scrutiny and Penalties ......... 34 20 2. The WSJ reveals Defendants breached their fiduciary duties to the Company and their legal obligations by knowingly 21 concealing the Google+ breach to avoid regulatory scrutiny ............. 35 22 3. Lawmakers Investigate Whether Alphabet’s Concealment Violates the FTC Consent Decree or Other Data Protection 23 Laws ................................................................................................... 38 24 V. THE INDIVIDUAL DEFENDANTS BREACHED THEIR FIDUCIARY DUTIES .................................................................................................................... 40 25 A. The Individual Defendants Breached Their Fiduciary Duties to the 26 Company ........................................................................................................ 40 27 B. The Individual Defendants Breached their Duties of Reasonable and Prudent Supervision ....................................................................................... 41 28 -i- VERIFIED STOCKHOLDER DERIVATIVE COMPLAINT 2441704 v3 1 C. The Individual Defendants Violated Google’s Corporate Governance Guidelines ...................................................................................................... 42 2 D. The Individual Defendants Violated Google’s Code of Conduct by 3 Permitting the Company to Engage in Unlawful Acts .................................. 43 4 E. The Audit Committee Defendants Breached the Duties Imposed by the Audit Committee Charter by Permitting Alphabet to Engage in 5 Conduct in Violation of the Law ................................................................... 44 6 F. The Leadership Development and Compensation Committee Defendants Breached the Duties Imposed by the Leadership 7 Development and Compensation Committee Charter by Approving Severance Payouts to Executives Who Should Have Been Terminated 8 for Cause ........................................................................................................ 45 9 G. The Governance Committee Defendant Breached the Duties Imposed by the Governance Committee Charter ......................................................... 46 10 VI. DAMAGES TO THE COMPANY .......................................................................... 48 11 A. Legal and Regulatory Penalties ..................................................................... 48 12 1. Sexual Harassment and Discrimination ............................................. 48 13 2. Data Privacy ....................................................................................... 49 14 B. Reputation, Goodwill, and Workplace Harm ................................................ 50 15 VII. DERIVATIVE ALLEGATIONS ............................................................................. 51 16 VIII. DEMAND FUTILITY ALLEGATIONS ................................................................. 52 17 A. Demand is Excused Because Each of the Individual Defendants Faces 18 a Substantial Likelihood of Liability ............................................................. 52 19 B. Demand is Excused Because a Majority of the Board is Not Independent ................................................................................................... 55 20 C. Demand is Excused Because the Board is Entirely Controlled by 21 Defendants Page, Brin, and Schmidt ............................................................. 57 22 FIRST CAUSE OF ACTION .............................................................................................. 59 23 SECOND CAUSE OF ACTION ......................................................................................... 60 24 THIRD CAUSE OF ACTION ............................................................................................. 61 25 PRAYER FOR RELIEF ...................................................................................................... 61 26 JURY DEMAND ................................................................................................................. 62 27 28 -ii- VERIFIED STOCKHOLDER DERIVATIVE COMPLAINT 2441704 v3 1 Plaintiffs Northern California Pipe Trades Pension Plan (“NCPTPP”) and Teamsters Local 2 272 Labor Management Pension Fund (“Local 272”) bring this shareholder derivative action on 3 behalf of nominal defendant Alphabet, Inc. (“Alphabet,” “Google,” or the “Company”1) against 4 certain current officers and directors of the Company for breaches of fiduciary duty and a “culture 5 of concealment” that led Defendants, in pursuit of their own interests, to participate or acquiesce in 6 the cover-ups of a long-standing pattern of sexual harassment and discrimination by high-powered 7 male executives as well as a serious data breach, both of which were in violation of state and federal 8 law. 9 Plaintiffs make these allegations upon personal knowledge as to their own actions and, as to 10 all other matters, upon the investigation of their undersigned counsel which included, among other 11 things, (1) review and analysis of Alphabet’s public filings with the U.S. Securities and Exchange 12 Commission (“SEC”); (2) a review of press releases, news articles, and other public statements 13 issued by or concerning Alphabet and the Individual Defendants named herein; and (3) a review of 14 court records, including, but not limited to pleadings filed in Ellis v. Google, LLC, No. CGC-17- 15 561299 (Cal. Sup. Ct. San Francisco Cty.); Wicks v. Alphabet, Inc., No. 3:18-cv-6245 (N.D. Cal.); 16 El Mawardy v. Alphabet, Inc., No. 1:18-cv-5704 (E.D.N.Y.); Matic v. Google, LLC, No. 5:18- 17 cv6164 (N.D. Cal.); Patacsil v. Google, LLC, No. 5:18-cv-5062-EJD (N.D. Cal.); Lee v. Google, 18 Inc., Case No. 18-cv-323651 (Cal. Super. Ct. Santa Clara Cty.); and Office of Federal Contract 19 Compliance Programs, U.S. Dep’t of Labor v. Google, Inc., ALJ Case No. 2017-OFC-08004, 20 (“DOL”). On behalf of themselves and the stockholders they seek to represent, Plaintiffs allege as 21 follows: 22 23 24 25 26 1 On August 10, 2015, Google announced plans to restructure its subsidiaries into holding company 27 Alphabet, Inc. Certain of the events discussed herein occurred prior to the name change. Accordingly, Alphabet, Google and the Company are used interchangeably. 28 -1- VERIFIED STOCKHOLDER DERIVATIVE COMPLAINT 2441704 v3 1 I. INTRODUCTION 2 1. This is a stockholder derivative action brought on behalf of Nominal Defendant 3 Alphabet, alleging breaches of fiduciary duty by the Company’s Board2 occurring from at least 2014 4 through the present (the “Relevant Period”), based on a pattern of concealment intended to protect 5 the interests of the Company’s top earning executives and the Board at the expense of its 6 shareholders, employees, and users. It has recently come to light that, in at least two areas of its 7 responsibility—employment policies and data privacy, the Board knowingly participated in or 8 acquiesced to conduct by the Company’s senior executives that caused the Company to violate 9 various laws. In both areas, the Board knew of the implications of its actions, or failure to act because 10 similar conduct had already drawn regulatory scrutiny, lawsuits, and public criticism. As a result of 11 both the underlying misconduct and the cover-ups, stockholders and the Company have been 12 damaged in number of ways. Defendants’ conduct has already cost the Company hundreds of 13 millions of dollars in generous exit packages to wrongdoers and exposed it to further litigation and 14 a loss of federal contracts over its hostile and discriminatory workplace. Further, as studies have 15 shown, such a toxic work environment can impact a Company’s ability to hire and retain top talent. 16 Defendants’ misconduct in the data privacy arena has also led to a loss of user trust and goodwill 17 that is essential to any data-driven company, and exposed the Company to potential loss of business, 18 political repercussions, and the related costs of defending claims and investigations by a rising 19 number of government agencies. 20 2. Alphabet was incorporated in 2015 and is the parent company of its leading 21 subsidiary Google Inc., among others. Google was founded in 1998. Alphabet and Google are 22 23 24 2 The current directors are: Chairman John L. Hennessey (“Hennessey”); L. John Doerr (“Doerr”); Alan R. Mulally (“Mulally”); Kavitark Ram Shriram (“Shriram”); Lawrence E. Page (“Page”); 25 Sergey Brin (“Brin”); Ann Mather (“Mather”); Diane B. Greene (“Greene”); Roger W. Ferguson, Jr. (“Ferguson”); Sundar Pichai (“Pichai”); and Eric Emerson Schmidt (“Schmidt”). Page is 26 Alphabet’s Chief Executive Officer (“CEO”) and a co-founder of the Company. Brin is Alphabet’s President and the other co-founder of the Company. Pichai, Greene, and Schmidt serve as Google 27 CEO, Google Cloud CEO, and Technical Advisor, respectively. These individuals are collectively referred to as the “Board” or the “Individual Defendants,” and, together with the Company, referred 28 to as “Defendants.” -2- VERIFIED STOCKHOLDER DERIVATIVE COMPLAINT 2441704 v3 1 headquartered in Mountain View, California. The Company’s common stock trades on the 2 NASDAQ Global Select Market (“NASDAQ”) under the ticker symbol “GOOGL,” which 3 represents Class A shares, and “GOOG,” which represents non-voting Class C shares. The Company 4 also offers Class B shares with 10:1 voting power, which do not trade. 5 3. Alphabet is a male-dominated company with a male-dominated culture, like the tech 6 industry at large. Numerous critics have argued over the years that the gender imbalance in the tech 7 industry is not just the result of a “pipeline” problem: persistent sexism and discrimination have 8 kept women out, held them back and, ultimately, forced them to leave the industry altogether.3 9 4. Alphabet’s leadership in the tech industry regrettably also includes leadership in a 10 culture that limits opportunities for women. Recent complaints about the Company demonstrate 11 that, for years, Alphabet’s management has fostered a “brogrammer” culture, where women are 12 sexually harassed and valued less than their male counterparts. Reports indicate that the Company’s 13 procedures for investigating complaints about sexual harassment and discrimination were grossly 14 inadequate. For instance, current and former employees told The New York Times (the “Times” or 15 the “NYT”) that “complainants are often not told about the details of subsequent investigations.”4 16 And, Alphabet’s former policy of forcing sexual harassment claims against the Company into 17 arbitration, helped to keep formal challenges to those policies out of the public eye. 18 5. Alphabet has also struggled with other indicators of sex discrimination in its 19 workplace. A class action filed in the Superior Court of San Francisco on behalf of female Google 20 employees employed in California, where the Company has its headquarters, asserts that the 21 Company persistently discriminates against women by, among other things, assigning them to jobs 22 23 3 David Goldman, Few Female Engineers and Execs at Google, CNN Business, May 30, 2014, 24 https://money.cnn.com/2014/05/29/technology/google-women/index.html. See also Liza Mundy, Why is Silicon Valley So Awful to Women?, The Atlantic, Apr. 2017, 25 https://www.theatlantic.com/magazine/archive/2017/04/why-is-silicon-valley-so-awful-to- women/517788/. 26 4 Kate Conger & Daisuke Wakabayashi, Google Overhauls Sexual Misconduct Policy After 27 Employee Walkout, The New York Times, Nov. 8, 2018, https://www.nytimes.com/2018/11/08/technology/google-arbitration-sexual-harassment.html. 28 -3- VERIFIED STOCKHOLDER DERIVATIVE COMPLAINT 2441704 v3 1 in lower compensation “bands” than similarly situated men, promoting women more slowly and at 2 lower rates than similarly situated men, and simply paying women less. On March 27, 2018, the 3 Court found that the plaintiffs alleged sufficient facts to state a claim for intentional discrimination.5 4 6. The Ellis class action lawsuit was filed following news of a 2015 audit of Google’s 5 headquarters by the Department of Labor, which similarly revealed “systemic compensation 6 disparities against women pretty much across the entire workforce.”6 While the investigation is still 7 ongoing, Alphabet has been aggressive in resisting some of the agency’s requests for information 8 and has also sought to restrict media access to the proceedings.7 9 7. Accordingly, Alphabet was already facing scrutiny regarding its treatment of women 10 and its procedures for addressing sex discrimination when, on October 25, 2018, the NYT published 11 an article exposing Alphabet’s concealment of its payouts to high-level male executives who had 12 been credibly accused of sexual harassment. The NYT article focused on the Company’s active 13 concealment of the sexual misconduct of several high-profile executives. Although Alphabet asked 14 two of the executives to leave after finding the allegations against them to be credible, neither was 15 fired for cause: instead, each man received significant and wasteful exit packages worth millions 16 while the Board and management hid the true reasons underlying their departure.8 Following the 17 Times article, the Company disclosed that an additional 48 cases of sexual harassment had been 18 reported over the past two years alone, including thirteen complaints against senior managers or 19 executives.9 20 21 5 Ellis v. Google, LLC, No. CGC-17-561299 (Cal. Sup. Ct. San Francisco Cty.). 22 6 U.S. Department of Labor (“DOL”) Recommended Decision and Order dated Jul. 14, 2017, at p. 9. 23 7 Sam Levin, Revealed: Google Tried to Block Media Coverage of Gender Discrimination Case, The Guardian, May 22, 2017, https://www.theguardian.com/technology/2017/may/22/google- 24 gender-discrimination-case-reporting-restricted. 8 Daisuke Wakabayashi & Katie Benner, How Google Protected Andy Rubin, the ‘Father of 25 Android’, The New York Times, Oct. 25, 2018, https://www.nytimes.com/2018/10/25/technology/google-sexual-harassment-andy-rubin.html. 26 9 Id.; see also Google Reveals 48 Employees Fired for Sexual Harassment, The Associated Press, 27 Oct. 25, 2018, https://www.apnews.com/06bbde4e7ba449089a62d8d351ecbe8c. The Company stated it did not provide an exit package to those individuals, but did not provide additional details. 28 -4- VERIFIED STOCKHOLDER DERIVATIVE COMPLAINT 2441704 v3 1 8. The practices described in the NYT article—which epitomize the Company’s cultural 2 complacency concerning credible accounts of unlawful sex-discrimination—prompted immediate 3 employee outrage. But instead of acting quickly to respond to employees’ concerns, Alphabet 4 management’s “dismissive” response sparked a historic reaction:10 on November 1, 2018, 20,000 5 Alphabet employees around the globe staged a “Google Walkout” to protest the events described in 6 the article as well as the Company’s generally inadequate approach to sexual harassment and 7 discrimination in its workforce. 8 9. Since the Walkout, and under significant public pressure, Defendants have taken 9 small steps to address their previous failures. But, as described below, these belated, reactive 10 actions—which apply only prospectively—are insufficient to remedy the harms that have already 11 been done, or to address the systemic, cultural problems the Board has long permitted to fester at 12 Alphabet. 13 10. And, sexual harassment isn’t the only problem Alphabet’s leaders have actively 14 swept under the rug. Three weeks before the NYT issued its report, an explosive article published 15 on October 8, 2018 in The Wall Street Journal (“WSJ”), revealed a data privacy breach that exposed 16 the personal data of half a million users of Google+, a social networking website operated by the 17 Company, to unauthorized access.11 Although the breach was discovered and remedied by the 18 Company in March 2018, Alphabet chose not to alert Google+ users that their data was exposed to 19 unauthorized app developers. As detailed by the WSJ, an internal Alphabet memo “shared with 20 senior executives,” including Defendant Pichai, “warned that disclosing the incident would likely 21 trigger ‘immediate regulatory interest.’” Thus, in order to avoid regulatory and public scrutiny, 22 Defendants hid the breach from the public and from Alphabet shareholders. 23 24 10 Isobel Asher Hamilton, A Googler Vividly Described the ‘Disastrous’ Leadership Meeting that 25 Sparked a Giant Protest Over Sexual Misconduct, Business Insider, Nov. 21, 2018, https://www.businessinsider.in/a-googler-vividly-described-the-disastrous-leadership-meeting- 26 that-sparked-a-giant-protest-over-sexual-misconduct/articleshow/66738768.cms. 27 11 Douglas MacMillan & Robert MacMillan, Google Exposed User Data, Feared Repercussions of Disclosing to Public, The Wall Street Journal, Oct. 8, 2018, https://www.wsj.com/articles/google- 28 exposed-user-data-feared-repercussions-of-disclosing-to-public-1539017194. -5- VERIFIED STOCKHOLDER DERIVATIVE COMPLAINT 2441704 v3 1 11. The Board was well-aware of the consequences of failing to disclose the Google+ 2 breach—indeed, this was the Company’s fourth major set of misrepresentations on data privacy in 3 the past eight years. In 2011, Alphabet entered into a consent decree (the “Consent Decree”) with 4 the Federal Trade Commission (“FTC”) after Alphabet made misrepresentations concerning the 5 launch of a social networking tool. In 2012, the FTC fined the Company $22.5 million for violating 6 the Consent Decree by misrepresenting its use of cookies. And just a few months before the Google+ 7 revelation, in August 2018, the Associated Press (“AP”) published a report revealing that Google 8 had provided misleading information regarding how and whether users of its mobile devices and 9 apps could turn off location tracking, and when and how the Company deceptively permitted 10 location data to be stored and used, prompting criticism from federal lawmakers and a class action 11 consumer protection suit. See Patacsil v. Google, LLC, No. 5:18-cv-5062-EJD (N.D. Cal.). 12 12. Following the WSJ’s revelation of the Google+ breach, several United States 13 Senators expressed their concerns in a letter to Defendant Pichai and asked the FTC to investigate 14 “whether the Google+ incident constitutes a breach of the company’s consent decree or other 15 commitments, and more broadly whether Google has engaged in deceptive acts and practices with 16 respect to privacy.” International Regulators, including authorities in Germany and Ireland, as well 17 as the Attorneys General for the States of New York and Connecticut are also investigating the 18 breach. And shareholders have filed securities fraud claims, alleging that the Company’s 19 concealment of the Google+ breach violated federal securities laws. See Wicks v. Alphabet, Inc., 20 No. 3:18-cv-6245 (N.D. Cal.); El Mawardy v. Alphabet, Inc., No. 1:18-cv-5704 (E.D.N.Y.). 21 13. In their letter urging the FTC to investigate the circumstances of the Google+ breach, 22 one group of Senators aptly characterized the fundamental problem that created both instances of 23 misconduct described in this complaint: “The awareness and approval by Google management not 24 to disclose represents a culture of concealment and opacity set from the top of the company.”12 25 26 27 12 Letter from Senators Richard Blumenthal, Edward J. Markey & Tom Udall, United States Senate, 28 to The Honorable Joseph Simons, Chairman of the Federal Trade Commission (Oct. 10, 2018). -6- VERIFIED STOCKHOLDER DERIVATIVE COMPLAINT 2441704 v3 1 14. Defendants’ active participation in that culture—which allowed them to prioritize 2 their own interests, and those of the Company’s powerful male executives, over their legal 3 obligations—caused the Company significant harm. Revelations of the Defendants’ misconduct led 4 the Company’s stock price to immediately drop approximately 6% in response to the WSJ article 5 followed by another immediate 7% decline in response to the Times article; prompted lawmaker 6 scrutiny, regulatory investigations, and shareholder, consumer, and employee lawsuits; and has 7 drawn massive outrage from the Company’s valuable employees. The Board’s misconduct will 8 continue to result in the loss of business and goodwill, both as a result of the negative publicity 9 around these incidents, and the increasing loss of trust in the Google brand. 10 15. Demand is excused in this Action for three reasons: 11 a. First, the entire Board, including its controlling stockholders Page and Brin, 12 face a substantial likelihood of liability for breaches of the fiduciary duties owed to the Company 13 as a result of his or her participation or acquiescence in these matters. For instance, each of the 14 eleven Individual Defendants in this action was on the Board in March 2018, when the Company 15 chose to conceal the Google+ breach, and nine were on the Board in October 2014, when Rubin 16 first received his payout. Defendants cannot impartially evaluate a request to sue themselves. 17 b. Second, at least seven Defendants—a majority of the current Board—are not 18 independent because of their extensive financial ties to the Company, its controlling stockholders, 19 and each other. Five directors serve as officers in the Company and are therefore not independent 20 by the Company’s own admission. And Defendants Doerr and Shriram, two of the so-called 21 “independent” directors and the remaining members of the Board committee that approved the 22 severance payments, have both served on the Board for close to twenty years. Moreover, both men 23 are associated with venture capital funds that were early investors in Google and have close, ongoing 24 financial ties with Alphabet and its leadership. Doerr and Shriram have benefitted enormously from 25 transactions the Company has entered into with their firms during the two decades they spent on the 26 27 28 -7- VERIFIED STOCKHOLDER DERIVATIVE COMPLAINT 2441704 v3