Wednesday, May 16, 2007

More Options Backdating Lawsuit Dismissals and Settlements

In prior posts, I have tracked options backdating lawsuit dismissals (refer here) and settlements (refer here). Over the last few days, a number of additional backdating-related lawsuit dismissals and a settlement have surfaced.

Here are the dismissals:

Computer Sciences Corp.: On March 26, 2007, the United States District Court for the Central District of California dismissed the backdating-related derivative complaint that had been filed against certain of Computer Sciences Corp.'s directors, as well as against CSC as nominal defendant. The Court found that because four of the six director defendants had neither approved nor received the allegedly backdated options, the plaintiffs had failed to allege facts to show that a majority of CSC’s board faced a substantial likelihood of liability. The Court dismissed the plaintiffs’ complaint for failure to establish demand futility. The CSC dismissal is described in a May 8, 2007 memorandum by the Bingham McCutchen law firm, here. (The CNET dismissal that is also described in the linked document was previously discussed in The D & O Diary, here.)

Novellus: As disclosed in Novellus’ May 10, 2007 filing on Form 10-Q (here), on March 23, 2007, the Court dismissed the options backdating shareholders’ derivative lawsuit that had been filed against certain members of the Novellus board, as well as against the company itself as nominal defendant. The dismissal gave the plaintiffs until May 3, 2007 to seek to amend the complaint. On May 2, 2007, according to the 10-Q, “the plaintiffs voluntarily dismissed the case without prejudice.” According to Novellus’ defense counsel (quoted here), the Lerach Coughlin firm dropped the lawsuit because they “had nothing” to build a case on.

Xilinx: According to Xilinx’s February 2, 2007 10-Q (here), on January 8, 2007, the U.S. District Court for the Northern District of California dismissed with prejudice the consolidated shareholder derivative lawsuit that had been filed against members of the company’s board and certain of the company’s officers. The Xilinx dismissal was also a voluntary dismissal.

The Xilinx and Novellus dimissals are discussed in a May 15, 2007 Marketwatch article entitled “Why The Lawsuits Over Options Backdating Are Failing" (here).

The options backdating lawsuit settlement that recently surfaced related to federal and state court shareholders’ derivative lawsuits that had been filed against certain directrors and officers of J2 Global Communications, as well as against the company itself as nominal defendant. According to J2’s May 9, 2007 filing on Form 10-Q (here), on March 19, 2007, the parties to both the federal and state derivative actions “entered into a settlement agreement that provides for dismissal of the four derivative cases and a release of all current and potential claims relating to our stock option granting practices.” The 10-Q does not describe the terms of the settlement, but according to reliable sources, the settlement involved corporate governance changes and the payment of plaintiffs’ attorneys’ fees of $625,000.

UPDATE: In response to this post, readers brought a couple of additional options backdating-related derivative settlements to my attention:

Dean Foods: In its May 10, 2007 filing on Form 10-Q (here), Dean Foods disclosed that it had settled the two options backdating related shareholders derivative lawsuits against certain current and former directors and officers. The company said in its 10-Q that "the derivative actions were settled in the first quarter of 2007. The settlement resolves all claims and includes no finding of wrongdoing on the part of any of the defendants and no cash payment other than attorneys’ fees. The Company has agreed to adoption and implementation of stock option grant procedures that reflect developing best practices. The district court approved the settlement and the actions were dismissed." A newspaper article discussing the Dean Foods settlement can be found here.

Molex: In its April 30, 2007 filing on Form 10-Q (here), Molex disclosed that the settlement of the shareholders derivative lawsuit that had been amended to include allegations of options backdating. In its 10-Q, Molex said that following about the amended lawsuit and the settlement: "In November 2006, plaintiffs filed a further amended complaint that added allegations that stock options were priced and issued improperly. The parties reached a settlement in principle of this action in February 2007. The settlement received final approval by the court on April 20, 2007. The settlement included an award of attorneys’ fees funded by insurance proceeds and the Board’s commitment to maintain certain corporate governance measures."

Special thanks to a loyal reader for the information about the J2 settlement. Thanks to yet another alert reader for the links to the Molex and Dean Foods settlements.

Tyco Settlement Observations: Tyco’s May 15, 2007 announcement (here) of its massive $2.975 billion securities class action settlement has garnered extensive media attention. The Wall Street Journal’s article about the settlement can be found here (subscription required) and the New York Times’ article about the settlement can be found here.

I was struck by a couple of things that were not mentioned either in Tyco’s announcement or in the press coverage. First, there is no reference in any of the discussion of the settlement to Tyco’s D & O insurance. To the contrary, Tyco’s press release states that “the company will incur a charge of $2.975 billion in the current quarter.” This certainly suggests that the company expects to eat the whole thing. It is entirely possible that the D & O coverage has been exhausted by litigation expense and the resolution of other matters, but it is striking that apparently none of the securities class action settlement will be covered by insurance.

Second, by contrast to the WorldCom and Enron settlements, the Tyco settlement does not, at least according to the publicly available information, seem to involve any payment by Tyco’s outside directors. To be sure, claims against criminally convicted former CEO Dennis Kozlowski and former CFO Mark Swartz will go forward, as will claims against former director Frank Walsh, who received a secret $20 million payment for helping arrange a merger and pleaded guilty to securities fraud. But the other former Tyco directors do not appear to have been required to contribute toward the class action settlement, unlike the Enron and WorldCom outside directors who had to contribute to settlement without recourse to insurance or indemnity.

It will be interesting to see if investors choose to participate in the class settlement or instead choose to opt out of the class and pursue individual claims. After all the publicity attending the improved percentage of investment loss that the opt outs from the Time Warner settlement recovered over what they would have recovered by remaining in the class (refer here), investors may well consider whether to pursue opt out claims rather than participate in the Tyco settlement.

The 10b-5 Daily's post about the Tyco settlement can be found here.

The Cardinal Health Settlement: The Tyco settlement comes close on the heels of another massive settlement, the $600 million Cardinal Health settlement (refer here). According to Cardinal Health's May 8, 2007 filing on Form 10-Q (here), on May 2, 2007, the company's board approved a memorandum of understanding regarding the settlement, subject to approval by the plaintiffs' class representatives and the Court. Cardinal previously established a $600 million reserve to cover the cost of the settlement. But Cardinal's 10-Q also discloses that it is involved in litigation with its insurance carrier, in which the carrier disputes coverage for the securities class action lawsuit as well as for related shareholders' derivative and ERISA lawsuits. Cardinal says in its 10-Q with respect to the insurance coverage litigation that "the Company currently believes that there will be some insurance coverage available under the Company’s insurance policies."

The Cardinal Health settlement stands out, because unlike Tyco, Enron and WorldCom settlements, the underlying case was not really a part of the massive wave of corporate fraud that followed the stock market collapse in the early part of this decade. The Cardinal Health securities lawsuit was not filed until 2004, well after the enactment of the Sarbanes Oxley Act, and relates to accounting allegations specific to that company (refer here for a description of the Cardinal Health securities lawsuit). The Cardinal Health settlement may suggest that the higher level of securities class action severity is not exclusively an attribute of the cases arising out of a narrow set of pre-SOX corporate scandals, but rather may reflect higher overall severity levels. Certainly, the average severity for 2007 settlements will remain at elevated levels as a result of these settlements.

Hat tip to The 10b-Daily (here) for the Cardinal Health settlment links.

2006 PwC Securities Litigation Study: In a prior post (here), I reported on the 2006 PricewaterhouseCoopers 2006 Securities Litigation Study. At the time I created that post there was no link available for the Study, but the Study is now available online (here). I discussed the 2006 PwC Study in my prior post.

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