Thursday, June 15, 2006

"Dozens" of Options Backdating Lawsuits Coming?

Earlier this week several publications carried reports that pension funds in the United States, Europe and Australia had retained the Lerach Coughlin law firm to sue “dozens of companies” over the timing of stock options grants to their top executives. A June 13, 2006 article in the San Jose Mercury quoted Lerach Coughlin partner Darren Robbins as stating that the pension funds are “completely beside themselves and outraged over the self-dealing that has gone on.” A June 14, 2006 article in Red Herring quotes Robbins as saying that the pension funds seek to terminate jobs of executives who diverted assets to their own pockets; the replacement of boards who permitted backdating; and the substitution of shareholder-nominated directors. The pension funds will also seek to “recover funds that were diverted from the corporate till.” In addition, he also said that the pension funds will seek recovery of damages, which, he estimates, “total in the billions of dollars.” The Red Herring article states that Robbins “has been directed to take action in 34 cases from 350 to 400 pension funds.” Five companies are identified by name in the article: American Tower, Mercury Interactive, McAfee, Juniper Networks, and United Health Group. The article is unclear whether the actions that Robbins has or will file are or will be in the form of shareholders' derivative actions (which would be consistent with the stated goal of seeking management and board reform) or of a securities fraud action for damages (which would be consistent with the stated goal of recovery alleged shareholder losses).

The D & O Diary will update this post as further information about these alleged pension fund lawsuit becomes available.

Statutes of Limitations Defenses?: One interesting question that any actions for damages under the federal securities laws will present is whether the statute of limitations bars some or all of plaintiffs’ claims. In many instances, the alleged options backdating goes back into the 1990s. For example, according to the April 17, 2006 Wall Street Journal article (subscription required) discussing questions surrounding options grants at United Health Group, the specifc grants that are under investigation took place between 1994 and 2002. Section 804 of the Sarbanes-Oxley Act of 2002 extended the statute of limitations for federal securities fraud actions at the earlier of two years after discovery of “facts constituting the violation” or “five years after such violation.” (Previously, the limitations periods had been one year and three years, respectively). The Sarbanes-Oxley Act's statute of limitations period raises a number of interesting questions: does it apply retroactively to options grants that took place before it was enacted in 2002, or does the shorter limitations period apply? Even if the longer period does apply, does the longer limitations period bar claims based on grants that took place more that five years ago? Or are the options backdating practices (and the alleged misreporting of the practices and accompanying accounting and tax mispresentations) part of a continuing course of conduct that brings the “violation” within the five year period? What is the “violation” that triggers the running of the statute? None of these questions are clear, but if plaintiffs’ lawyers are as committed to pursuing these actions as they claim, we will be hearing more on these issues as the cases go forward.

The D & O Diary is interested hearing readers’ comments on these statute of limitations questions.

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