Firms Settle Backdating Suits
Some Private CasesEnd in Agreements;More Deals Ahead?
By ASHBY JONESNovember 19, 2007; Page A15
Settlements have been reached in recent months on some private lawsuits arising from the stock-options backdating scandal, with several rendering relatively modest payouts compared with some class-action suits.
Several so-called derivative suits, the most common type of suit in the wake of the backdating revelations, have been settled under multipart arrangements in which executives pay back money to the company and companies make some changes to corporate governance and pay the fees of the plaintiffs' lawyers.
In September, executives and board members at
Barnes & Noble Inc. agreed to a repricing of options worth $3 million and to a repayment of $2 million to the company, while the company consented to some 15 "therapeutics," or changes in governance, including an audit-committee review of stock-option internal controls at least once a year. The company agreed to pay plaintiffs' lawyers a $2.75 million fee. Recent settlements involving
Sepracor Inc. and
Family Dollar Stores Inc. involved similar three-tiered approaches.
Lawyers on both sides predict the settlements so far will pave the way for more. "The cases are likely going to start to fall," said Lee Rudy of Schiffrin, Barroway, Topaz & Kessler LLP, a plaintiffs' firm handling several dozen backdating cases.
Stock options allow recipients to buy stock at a preset exercise price, generally set at the market price on the day the options were granted. Backdating involves pretending that an option was granted on an earlier date when the market price was lower. The practice can lead to accounting irregularities and tax problems for the companies and executives involved.
The backdating scandal has led to more than 80 financial restatements, dozens of executive dismissals, and civil and criminal government investigations. In August, Gregory Reyes, the former head of
Brocade Communications Systems Inc., was found guilty on criminal charges related to backdating. Recently, however, the Securities and Exchange Commission has ended several investigations without filing formal charges.
So far, plaintiffs' efforts involving backdating have met with mixed results. In typical securities-fraud class-action lawsuits, shareholders allege company executives misled investors; shareholders as a group sue after bad news triggers a drop in the share price. But because word of options backdating typically didn't lead to significant drops in share prices, only about 30 class-action lawsuits have been filed.
At least two suits have been dismissed partly for failure to properly allege that fraud led to a stock drop, including one this month involving Apple Inc. Still, a handful of class-action suits have been settled; one, involving Mercury Interactive Corp., settled for $117.5 million.
Mostly, plaintiffs' lawyers have filed "derivative suits," somewhat awkward creations in which shareholders sue a company (and others) on behalf of the company itself, alleging not personal but corporate losses. To date, more than 160 derivative cases have been filed, many brought by two firms, Schiffrin Barroway and Coughlin Stoia Geller Rudman & Robbins LLP.
More than a dozen derivative cases have been dismissed by courts. In those that have settled, the amounts paid out, both to the company and to the plaintiffs' lawyers, are relatively small. "In many cases, plaintiffs' lawyers are really just aiming to secure corporate therapeutics and, beyond that, just make a living," says Kevin LaCroix, a lawyer who focuses on issues of directors' and officers' liability and has had a limited role in some backdating cases.
In the Sepracor settlement, more than 2.2 million unexercised options were repriced and 500,000 were canceled. And in a settlement reached earlier this year between plaintiffs and Family Dollar, three executives and a director agreed to give up 210,000 options.
Write to Ashby Jones at
ashby.jones@wsj.com
