Sunday, March 11, 2007

A New Options Backdating Lawsuit Variation

Photo Sharing and Video Hosting at Photobucket A shareholder of SafeNet has filed a shareholders derivative lawsuit in Delaware Chancery Court, claiming that the SafeNet directors agreed to sell the company to a private equity firm to avoid potential options backdating related liabilities. On March 5, 2007, SafeNet announced (here) that it had agreed to be acquired by Vector Capital for $634 million, which represented a 1.6% premium over the prior trading day's closing price. According to a March 9, 2007 Baltimore Sun article entitled "Suit Claims SafeNet Being Sold to Shield Directors," (here), the lawsuit seeks to stop the sale to Vector, order directors to account for "special benefits" tied to the deal, and award unspecified damages. The news article quotes a spokesperson for the plaintiff as asserting that the buyout is designed to protect the directors from their liability for wrongdoing associated with options backdating; "Why else would the director-defendants cause the company to agree to a low-ball offer with virtually no premium?"

SafeNet announced in July 2006 (here) that it would be revising several years' financial statements. In addition, as a result of the Company's review of its options grant practices, the company's Chairman and CEO and its President and Chief Operating officers resigned (here) It has delayed filing its periodic reports with the SEC (here), struggled to maintain its NASDAQ listing (here), and also had its creditors claim that its delayed SEC filing violated debt covenants (here). Current and former directors and offercers have also been sued (refer here) along with the company as a nominal defendant in a separate shareholders derivative lawsuit alleging breaches of fiduciary duty and unjust enrichment in connection with options grant manipulations.

The D & O Diary has no basis on which to judge the merits of the new lawsuit's claim that the directors are selling the company to avoid liability or as an alternative to trying to tidy up the various problems arising from options backdating issues. The WSJ Deal Journal blog (here) notes that companies that have announced options backdating woes do have a way of getting acquired; the Deal Journal notes that the SafeNet acquisition "swells the ranks of those that have disclosed backdating issues and later gone on to find suitors to at least 10." The Deal Journal also identifies five other companies that are mired in the backdating scandal that it speculates might also be takeover targets. Whether or not that is a coincidence, it it true that, for example, Mercury Interactive, as well as other companies, have successfully had previously filed derivative lawsuits dismissed after the company was acquired (regarding the Mercury Interactive dismissal, refer here).

However, The D & O Diary also notes that in addition to the shareholders derivative lawsuit, SafeNet and its directors and officers have also been sued in a securities class action lawsuit (here). The sale of the company would have no effect on this pending securities fraud lawsuit, which will go forward without respect to the pending acquisition.

Options Backdating Litigation Tally: The filing of a new securities fraud lawsuit against HCC Insurance Holdings and certain of its directors and officers (here) brings the number of options backdating related securities lawsuits to 27, as reflected on The D & O Diary's running tally of options backdating related lawsuits (here). The number of companies named as nominal defendants in options backdating related shareholders derivative lawsuits stands at 152. Readers may also be interested to know that the Securities Litigation Watch is also maintaining a list of options backdating related securities fraud lawsuits, here. Fortunately, the two tallies agree.

Competitiveness of U.S. Capital Markets: According a March 10, 2007 Wall Street Journal article entitled "Business Leaders, Washington Aim to Fix Wall Street's Ailment" (here, subscription required), the U.S. Chamber of Commerce and the U.S. Treasury Department will both be hosting daylong conference this upcoming week to discuss the competitiveness of the U.S. financial markets in the global economy. The Treasury Department will go first on Tuesday March 13, with a meeting that is expected to include Alan Greenspan and Warren Buffett in addition to Treasury Secretary Henry Paulson. (The full list of speakers and schedule can be found here.) The U.S. Chamber of Commerce will follow on Wednesday March 14 with the "First Annual Capital Markets Summit" and will be heavy on politicians, including Senator Chris Dodd and Representative Barney Frank. The agenda for the Chamber's conference can be found here. The Chamber is also releasing a report on Monday. The early signals are that the report will emphasize the things that businesses themselves can do, for example, by eliminating quarterly guidance as a way to reduce the focus on short term results. (The D & O Diary has previously commented on the virtues of eliminating quarterly earning guidance, here.)

Photo Sharing and Video Hosting at Photobucket Campos on Capital Markets Competition: While the upcoming conferences and reports undoubtedly will repeat the conventional wisdom the culprit for the decline in U.S. competitiveness is regulation and litigation, a March 8, 2007 speech (here) by SEC Commissioner Roel C. Campos (pictured above) had a different perspective. Campos commented on the various calls that have arise to adjust the U.S regulatory approach to enable it financial markets to be more competitive. He started by disagreeing that the U.S markets are in fact in decline, citing the recent Thompson Financial study (about which The D & O Diary recently commented, here). He added that, even were it true that U.S markets were declining, "the evidence does not support the claim that regulation is to blame." He cited a recent Goldman Sachs study, which states that "growth of the capital markets outside the U.S. is a natural consequence of economic growth and market maturation elsewhere," and that "regulation is not the problem." (For a more detailed discussion of the Goldman Sachs study, refer to the With Vigor and Zeal blog, here).

Campos went on to note that many of the would-be reformers and their supporters "have a broad ideological agenda," but the bottom line is that "most capital and investment will go to jurisdictions that have a high level of protection" and "if a jurisdiction promotes itself as having lower standards, it risks driving capital away to other markets where capital is perceived to be better protected."

Campos apparently also caused a flap by making a comment comparing the London Stock Exchange's Alternative Investment Market to a "casino" because, he claimed, 30 percent of new listing are "gone within a year." Campos apparently later retracted that statement. (The With Vigor and Zeal blog has a detailed discussion of the Campos casino comment flap, here.)

It may have been impolitic (not to mention bad manners) for Campos to refer to the AIM as a casino. But as The D & O Diary previously noted (here), a recent study did show that 52 percent of the companies that listed on the AIM during the three year period ending December 31, 2006 are "either trading at or below their issue price or have had their shares suspended."

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