First Options Backdating Related Securities Class Action Settlement

Newpark Resources has announced (here) a $9.85 million settlement of a securities class action lawsuit that, as amended, was based in part on allegations of stock options backdating.

The lawsuit against Newpark Resources and several of its directors and officers arose following the company’s April 17, 2006 press release (here) in which it disclosed that the company’s board’s audit committee had "commissioned an internal investigation regarding potential irregularities involving the processing and payment of invoices by Soloco Texas, LP, one of the company’s smaller subsidiaries, and other possible violations." The company also announced that it had placed three officials on administrative leave. The company’s share price declined, and plaintiff shareholders initiated a securities class action lawsuit (here).

On June 29, 2006, Newpark Resources announced (here) that it had completed its initial investigation, and that it would be restating its financial statements for fiscal years 2001 through 2005, and for fiscal quarters in 2004 and 2005. The investigation concluded that certain of the Soloco Texas transactions had not been properly accounted for. The company also announced that during the investigation, "the Audit Committee had also requested a review of the company’s past practices regarding stock options." The "preliminary findings" of the stock options investigation were "that a portion of the stock options granted prior to June 2003 were dated on a date other than the date their issuance was approved and the exercise price of such options were determined in advance of their approval by the appropriate board committee, all in contravention of the company’s stock option plan." Newpark Resources also announced that the Board had terminated its former CEO and current Chairman of one if the company’s subsidiaries, as well as the company’s CFO.

On November 9, 2006, the plaintiffs filed their consolidated amended complaint (here) against Newpark Resources and present and former Newpark directors and officers. The amended complaint contains (at paragraphs 53 through 76) detailed options backdating related allegations. A summary regarding the Newpark Resources securities class action lawsuit can be found here.

On April 13, 2007, Newpark Resources announced (here) that it had settled the securities class action lawsuit as well as a related derivative lawsuit. The company announced that it would pay $1,550,000 toward the settlement, and its directors and officers liability insurer would pay an additional $8,300,000. The company announced that it was settling liabilities related to the Soloco Texas transactions as well as "alleged improper granting, recording, and accounting of backdated grants of stock options to executives." The company also announced that it had also been notified by the SEC that it had opened "a formal investigation into Newpark’s restatement of earnings."

The lead plaintiffs in the case are Plumbers and Pipefitters Local 51 Pension Fund and and co-lead plainiffs law firms in the case are the Lerach Coughlin firm and Glancy Binkow and Goldberg.

The D & O Diary notes that while it had duly recorded, in our running tally of options backdating related lawsuits (here), that Newpark Resources had been named as a nominal defendant in an options backdating related derivative lawsuit, we had not picked up that the Newpark Resources securities class action lawsuit had been amended to add options backdating related allegations. The D & O Diary's options backdating related litigation tally will be amended to add the Newpark Resources lawsuit to the securities class action tally, with a link back to this post.

With respect to a prior partial settlement of a derivative options backdating lawsuit involving SafeNet, refer here.

Special thanks to a loyal reader (who prefers anonymity) for the link to the Newpark Resources settlement.

Another Interesting Class Action Settlement: On April 30, 2007, Doral Financial announced (here) the settlement of a pending securities class action lawsuit, as well as a related derivative lawsuit. The lawsuits related to Doral's April 19, 2005 restatement (here) of its financial statements for the period 2000 to 2004. As part of the settlement, the Company and its insurers will pay an aggregate of $129 million, of which the insurers will pay approximately $34 million. A summary of the class action lawsuit may be found here. The Lerach Coughlin firm acted as lead plaintiff firm, on behalf of the West Virginia Investment Management Board.

There are several interesting things about this settlement, the first of which is the significant amount by which the aggregate settlement amount exceeds the amount of available insurance. The company is responsible for a very significant portion of this settlement (but see below about the company's funding for the settlement). It used to be that the available insurance limits defined the outer limits of the potential settlement. There are more occasions now where the settlements exceed the insurance limits.

Second, in addition to the company's and its insurers joint payment, "one or more individual defendants will pay an aggregate of $1 million (in cash or Doral Financial stock)." This statement is odd for its careful imprecision -- one or more individuals? Cash or stock? Doesn't it seem unlikely at this point that they don't know who is going to pay and what form the payment will take? Or is something else going on? In any event, it seems to be a more common occurence for individuals to be called upon to fund a portion of the settlement. The reference to the possibility of payment in the form of company stock also seems to suggest that the individual (or is it individuals?) will be paying the settlement out of their own assets.

Third, the company also announced that its "payment obligations under the settlement agreement are subject to the closing and funding of one or more transactions through which the Company obtains outside financing during 2007 to meet its liquidity and capital needs, including the repayment of the Company's $625 million senior notes due on July 20, 2007, payment of the amounts due under the settlement agreement and certain other working capital and contractual needs." This sentence is hard to parse, but it apears that the company must borrow or otherwise raise the funds to finance the settlement. The company's press release goes on to say "either side may terminate the settlement agreement if the Company has not raised the necessary funding by September 30, 2007 or if the settlement has not been fully funded within 30 days from the receipt of such funding." Certainly seems like the company has to try to come up with the money somehow. I wonder where that leaves the plaintiffs if the company can't come up with the money?

In any event, Doral's other news today is that it is exploring selling itself to a private equity firm, according to news reports (here).

Hat tip to an alert reader (who prefer anonymity) for the link to the Doral Financial settlement.