FCPA, Options Backdating, and D & O Exposure
On August 9, 2006, the SEC filed a civil enforcement complaint against three former officers of Comverse Technology. (The Affidavit filed in conjunction with the criminal complaint filed against the three individuals can be found here, even though the document says on its face that it is to be filed under seal.) The SEC Complaint alleges “a fraudulent scheme” by the three defendants “to grant undisclosed, in-the-money options to themselves and others by backdating stock option grants from 1991 through 2001 to coincide with historically low closing prices for the Company’s stock.” The SEC Complaint alleges a variety of securities laws violations, including specifically violations of the books and records provisions of the FCPA, which are codified as amendments to the Securities Exchange Act of 1934. The FCPA allegations are that the defendants “knowingly violated …internal controls” and “falsified books, records or accounts.”
These same kinds of allegations are likely to be a recurring part of future enforcement actions arising out of the options backdating investigations. Indeed, according to press reports, the criminal indictment entered on August 10, 2006 against former officials of Brocade Communications also contained "books and records" allegations.
The D & O Diary's prior post about the FCPA noted that one of the dangers from an FCPA enforcement proceeding is the possibility of follow-on litigation. A recent securities fraud lawsuit settlement provides a glimpse of the way FCPA violations can spawn follow-on litigation, including specifically follow-on securities fraud lawsuits.
On August 9, 2006, Willbros Group, Inc. announced that it had settled the 2005 class action lawsuit that had been filed against the Company and several of its directors and officers. The Complaint alleged that the company had been the subject of numerous of numerous investigations “because the Company engaged in a campaign of illegal and illicit bribery of foreign government officials in Bolivia, Nigeria and Ecuador to successfully obtain construction projects.” The Complaint alleged that the company was forced to restate several years of financial statements and to establish a reserve to accrue for possible fines and penalties for FCPA violations. The Complaint alleged that as a result of these violations, the Company had misrepresented its true financial condition. The Complaint alleged that the company’s share price declined 31% when these matters were disclosed.
In its August 9 press release, the Company did not disclose the amount of the securities class action settlement, but the press release did state that the amount of the settlement would be funded by the company’s insurance carrier.
The Willbros settlement illustrates the growing D & O risk that increased FCPA enforcement activity could represent. The threat is not so much from the underlying FCPA enforcement action itself; any FCPA fines and penalties likely would not be covered under most D & O policies. Rather, the threat is from the potential liability that could arise in any follow-on civil action, including any follow-on securities fraud lawsuit like the one filed against Willbros Group. Any settlement or judgments incurred in a follow-on action, as well as defense expenses, would usually be covered under the typical D & O policy.
As FCPA enforcement actions grow in number and magnitude, this exposure could pose an increasingly greater D & O risk.
An August 10, 2006 CFO.com article discussing the Willbros settlement, as well as the simultaneous resignation of the company’s CFO (who had been a defendant in the securities fraud action), may be found here.
Two particularly interesting articles discussing the Comverse Technology criminal complaint may be found at the White Collar Crime Prof blog, and at the Securities Litigation Watch blog.
A particularly provocative contrarian view of the Comverse Technology criminal complaint and of the whole options backdating morass may be found on this post on Professor Ribstein's Ideoblog.
Big Numbers: An August 10, 2006 post on Bloomberg.com reports that
The number of companies with stock options grants under scrutiny passed 100...At least 105 companies have disclosed internal or federal probes, according to data compiled by Bloomberg News. Nineteen people have lost their jobs, five face criminal charges and one of them -- Comverse Inc. founder Jacob Alexander -- didn't show up for his arraignment yesterday.A separate article on Bloomberg.com, also dated August 10, reports that:
UnitedHealth Group Inc. Chairman William McGuire sparked outrage among some stockholders over his $1.8 billion in potential stock-option gains. Turns out, the board of directors that granted those options got a share of the wealth, too. UnitedHealth's 10 non-executive directors held $230 million in stock as of March 21, according to the health insurer's most recent proxy...``You have to ask yourself, are these people paying attention to the mission of the corporation, or are they being distracted by the amount they're getting themselves?'' says Minnesota Attorney General Mike Hatch, who is investigating Minnetonka-based UnitedHealth along with federal authorities...A board committee is reviewing 45,000 separate option grants made to 15,000 people over 13 years, the company said in a statement.
And a Japanese man was arrested this week after making 37,760 silent calls to directory inquiries because he wanted to listen to the "kind" voices of female telephone operators, according to news reports.
Sudden Complications: United Airlines' aviation war risk insurance is up for renewal on August 31, 2006. Read the story here.
Yet Another Globalization Downside: The U.S. economy is trading factory workers for real estate agents. Take a look at this uncanny chart here.