Monday, May 28, 2007

Backdating Case Last Rites Prove Premature

Photo Sharing and Video Hosting at Photobucket In an earlier post (here), I reported on the voluntary dismissal of the options backdating related derivative lawsuit that had been filed against Novellus Systems (as nominal defendant) and certain of its directors and offices. The May 7, 2007 press release (here) issued by Novellus’ defense firm, Morrison Foerster, referring to the voluntary dismissal, announced "there goes one case you can strike from the options backdating scorecard." Referring to the case as "one of the few outright wins by a company accused of backdating stock options," the press release quotes MoFo partner Daryl Rains as saying that "it’s not often you get a plaintiff to give up and walk away. I’m pleased that Lerach Coughlin was willing to take a hard look at the facts and see the case had no merit."

It appears that plaintiffs’ lawyers willingness to "give up and walk away" is even less common that Mr. Rains thought. According to a May 25, 2007 San Jose Mercury News article (here), "less than three weeks after its attorney declared victory in a stock-option case, Novellus Systems was hit with harsher allegations…in a lawsuit filed by the same plaintiff." The new lawsuit, filed on May 24, 2007 in San Jose federal court, accuses 14 past and present Novellus officers and directors of enriching themselves through stock option manipulations, including backdating, springloading, and bullet dodging. The new lawsuit alleges that the defendants received more than $125 million as a result of options manipulations and seeks the return of the gains and additional damages. A copy of the new complaint can be found here.

The plaintiffs’ counsel, Darren Robbins of the Lerach Coughlin firm, is quoted in the Mercury News article as saying that he was "baffled" by earlier press release, which he said was "false and misleading." Robbins cited the fact that the March 23, 2007 lawsuit dismissal had been without prejudice and allowed the plaintiffs the opportunity to amend their complaint, which the plaintiffs apparently intended to do even though their counsel voluntarily withdrew the lawsuit on May 2nd.

I can’t help but wonder whether the Lerach Coughlin firm would have refiled the lawsuit if the defense firm had not issued the press release, or issued one that was a little more, well, restrained.

Hat tip to the WSJ.com Law Blog (here) for the link to the press release and the new complaint.
Another Insufficient Demand Futility Allegations Dismissal: On May 17, 2007, U.S. District Judge Susan Illston granted the defendants’ motion to dismiss the options backdating derivative lawsuit that had been filed against Openwave Systems as nominal defendant and 18 of its current and former directors and officers. The court found that he plaintiffs’ allegations did not satisfy the requirements under Delaware law (applicable to Openwave, a Delaware corporation, under Federal Rule of Civil Procedure 23.1) to show that a demand on the company’s board to pursue the lawsuit directly would have been futile. A copy of the opinion can be found here. (Special thanks to Adam Savett at the Securities Litigation Watch (here) for the link to the Openwave opinion.)

Significantly, the court distinguished the Ryan v. Gifford case (involving Maxim Integrated Products, discussed here), which it said was "analogous." The court found that the Openwave plaintiffs’ allegations did not "allege facts sufficient to support an inference of backdating" and in fact the pattern alleged was "consistent with a random selection of stock option grant dates, as with a pattern of backdating." The court found that "plaintiffs complaint fails to plead sufficient facts to avoid Rule 23.1 demand requirements," but allowed granted leave to amend "to allow plaintiffs the opportunity to conduct and present a more comprehensive statistical analysis, or other allegations supporting an inference of backdating."

It will of course remain to be seen whether plaintiffs can amend their complaints sufficiently to overcome the pleading deficiency. In the meantime, it is worth noting that the Openwave dismissal joins a growing line of cases that have been dismissed on the ground of insufficient demand futility allegations, including CNET (here), CSC (here) and Bed Bath and Beyond (here). In addition, the Openwave decision also cited a prior dismissal in the Linear Technology Corp. case, a decision of which I was not previously aware.

Early on in the whole options backdating scandal, I asked (here) the rhetorical question, with respect to growing number of options backdating related derivative lawsuits, "Yes, but WHY are they filing derivative lawsuits," based on the observation that derivative lawsuits face many defenses including in particular the demand futility requirement. When the Maxim Integrated Products decision came down in February 2007, it appeared that my concerns might have been misplaced, since the Delaware Chancery Court’s rejected the defenses so enthusiastically in that case. But as time has gone by, the evidence is starting to mount that, at least in jurisdictions other than Delaware (even in cases to which Delaware law otherwise applies), the substantial hurdles that derivative action plaintiffs face may make many of these cases far less rewarding than the plaintiffs’ lawyers may have hoped.

Meade Instruments Settles Options Backdating Cases: According to a May 24, 2007 remark by Meade Instruments President and CEO Steve Muellner in the company’s quarterly earnings conference call (here), the company has reached a settlement in principle in the class action and shareholder derivative suits" that had been filed against he company with respect to options backdating. Muellner noted that both settlements are contingent upon court approval. Neither Muellner or the company released the details of the settlement.

Special thanks to Adam Savett of the Securities Litigation Watch blog (here) for links to the Openwave decision and the Meade Instruments conference call statement.

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