Wednesday, April 04, 2007

Options Backdating Settlement

As the list of options backdating lawsuits has grown ever longer (refer here), one question has been: where will it all lead? Sooner or later, these cases will all have to be resolved, but so far it has remained unclear what the resolution might look like. A recent settlement in the derivative cases filed against two former executives of SafeNet provides at least a suggestion of where at least some of the cases could be headed.

In an April 3, 2007 filing on SEC Form 8-K, SafeNet announced (here) that it had reached settlements with former Chairman and CEO Anthony Caputo and former President, COO and acting CFO Carole Argo, both of whom had previously resigned following a review of the company’s stock option practices. Caputo agreed to put $1.5 million in escrow, and Argo agreed to put $100,000 in escrow, pending the approval of the courts presiding over the derivative actions against the two individuals. (The 8-K also describes the procedures to be followed in the event of shareholder objections to the settlements, or in the event the court does not approve the settlements.) The settlement agreements also provide that certain of Caputo’s and Argo’s stock option grants will be canceled and the other option grants will be repriced.

The company’s 8-K disclosure does not specify which courts’ approval is required. The disclosure also leaves a number of other questions unanswered. For example, the disclosure is silent about the impact of these settlements on the derivative claims filed against SafeNet’s board. It simply isn’t clear from the disclosure the extent to which the settlements represent something less than complete resolution of the derivative actions.

However, at least some of SafeNet’s backdating related litigation does now seem to have been resolved, beyond the settlements with Caputo and Argo. Regular readers will recall my prior post (here) describing the lawsuit that one of SafeNet’s investors had brought alleging that some SafeNet directors had agreed to a low ball sale of the company in an effort to avoid potential liability for backdating stock options. According to an April 4, 2007 Baltimore Sun article (here), the investor that brought the suit had notified the court in which the case was pending that it had reached an “agreement in principle.”

Brocade Criminal Case Tests Prosecutors: An April 4, 2007 San Jose Mercury article entitled “Brocade to Test Prosecution of Backdated Options” (here) describes the “complexities and challenges of bringing criminal charges against executives implicated in the murky legal landscape of backdated stock options.”

While prosecutors targeted two Brocade executives to demonstrate the government’s resolve to prosecute stock options manipulations, prosecutors could have, according to the article, “picked a more egregious case for the first criminal charges.” Instead, prosecutors must make a case where neither of the defendants benefited personally from the alleged wrongdoing, making the case less intuitively appealing. On the other hand, the government’s case does involve “basic document falsification and false statements.”

The criminal case is scheduled to go to trial in June 2007. The outcome of the case could have an enormous impact on the course and extent of future prosecutions in other options backdating related cases.

My prior post on the question whether backdating is criminal, including specifically a discussion of the criminal case against former Brocade CEO Gregory Reyes, can be found here.

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