Wednesday, May 31, 2006

Securities Litigation Update on the Options Backdating Probe

On May 30, 2006, American Tower Corporation became the fourth company to be named in a securities class action lawsuit connected with the options backdating probe. (As noted in this prior post on The D & O Diary, the three companies previously named in securities class action lawsuits related to options backdating are Vitesse Semiconductor, Comverse Technology, and United Health Group.) American Tower also reported that it had been named in a shareholders' derivative lawsuit in Massachusetts state court.

In an even more ominous development on the options backdating litigation front, on May 30, 2006, the plaintiffs' firm of Kahn Gauthier Swick LLC issued a press release announcing "the creation of the nation's first privately funded Independent Options Pricing Investigations Division," which reportedly was formed to invesitgate options backdating at U.S. companies. The press release names five companies the firm is currently investigating (Altera Corp., Brocade Communications, Broadcom Corp., Brooks Automation and CNet Networks), and urges shareholders of these companies to contact the firm "to discuss your legal rights." According to Kahn Gauthier's website, the firm was founded by tobacco litigation plaintiffs' attorney Wendall Gauthier.

Thompson Memo Update: In a prior post, the D & O Diary commented on the enormous burden the so-called Thompson Memo places on business organizations facing criminal investigations. Among other things, the firms can find themselves forced to withhold payment of their individual employees' attorneys' fees, or even to waive the attorney client privilege, in a bid for leniency in a criminal prosecution. The May 31, 2006 issue of USA Today carries a lengthy story discussing these issues in greater detail. Accompanying the article is a spiffy chart listing the 21 companies that have been forced to waive their attorney client privilege in connection with criminal investigations. The chart lists the wide variety of types of criminal matters in which the issue has arisen. According the WSJ.com law blog, the government's decision to indict the Milberg Weiss law firm has drawn together a variety of different organizations who object to the prosecutorial action of forcing firms to waive the privilege or cut off employees' attorneys' fees or face the death penalty of corporate criminal indictment. Among the groups joining together to voice their concern are the US Chamber of Commerce, corporate counsel groups and corporate defense lawyers.

Coming Soon to a Courtroom Near You?: You may have missed it over the long holiday weekend, but on Saturday, May 27, 2006, the Wall Street Journal carried an article (subscription required) entitled "Scandals Seem Bad Now? Just Wait," speculating on the corporate scandals to come now that the grandaddy of them all from the last wave of corporate scandals -- the Enron criminal prosecution -- has been to the jury. The article conjectures that the credit boom of the last few years will generate several waves of scandals, including issues arising from: "proprietary trading at investment banks"; "scandalously incompetent lending" -- the prediction is that future blow ups will "expose those in the hedge fund world and elsewhere who've taken on excessive risk in pursuit of quick returns"; securitized loans, such as collateralized debt obligations, which the article comments is "an area rich in conflicts of interests, hazy pricing, excessive leverage and opportunities for self-dealing." Other fruitful areas for "tomorrow's accounting outrages" include excessive executive compensation, hedge funds' excessive management fees, and dual-share stock structures that enable founders or insiders to maintain corporate control to the detriment of other shareholders.

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