Thursday, September 27, 2007

Court Dismisses Options Backdating Securities Lawsuit

On September 27, 2007, Amkor Technology announced (here) that the United States District Court for the District of Arizona had granted the defendants’ motion to dismiss the securities class action lawsuit pending against the company and several of its directors and officers. As noted in a prior post (here), the initial complaint that the plaintiffs had filed in January 2005 did not contain options backdating allegations. After the company’s revelation during 2006 of options backdating concerns, the plaintiffs amended their complaint to add the backdating allegations. The plaintiffs’ second amended complaint can be found here.

In a September 25, 2007, U.S. District Judge Paul Rosenblatt granted the defendants’ motion to dismiss the second amended complaint. A copy of the September 25 dismissal ruling can be found here. Judge Rosenblatt granted the motion with respect to the options backdating allegations on two grounds: first, that the plaintiffs had failed to adequately plead loss causation as required under the Dura Pharmaceuticals case; and second, that the plaintiffs had failed to adequately plead scienter.

In attempting to establish loss causation, the plaintiffs attempted to rely on the stock price drop following the Company’s July 26, 2006 press release (here) in which the company both announced its second quarter 2006 operating results and also announced that it had voluntarily formed a Special Committee to examine options practices. Judge Rosenblatt, reviewing all of the allegations, considered that the price drop following the July 26 announcement was due to the company's second quarter results and weak third quarter forecast, rather than to the two sentence announcement of the Special Committee. In reaching this decision, Judge Rosenblatt considered the fact that at the time of the company’s August 16, 2006 announcement (here) that it would be restating its prior financials and its October 6, 2006 announcement (here) of the Special Committee's findings, the company’s stock price went up. Judge Rosenblatt said “the Plaintiffs have failed to link their losses to the alleged misrepresentations by showing the Amkor price dropped upon revelation of the true state of the facts. As noted by the Defendants, once a corrective disclosure was issued the stock price actually increased.”

Judge Rosenblatt’s finding that the plaintiffs had failed to adequately plead scienter is based on his conclusion that “other than general assertions about the Individual Defendants’ roles and responsibilities and motivations, the Plaintiffs do not plead specific facts to support their allegations of scienter.” Although Judge Rosenblatt mentions the Supreme Court’s recent Tellabs opinion (about which refer here), the Tellabs decision is basically irrelevant to the scienter ruling.

The Amkor dismissal is interesting in and of itself , as the first dismissal of an options backdating related securities class action lawsuit of which I am aware. (Readers are encouraged to correct me on this point if I missed a prior options backdating securities lawsuit dismissal.)

UPDATE: Alert reader Avi Wagner points out that on July 30, 2007, Judge Fogel dismissed the Mercury Interactive options backdating securities lawsuit without prejudice. Judge Fogel's order may be found here. (I am embarrassed to admit that I actually had an item about this dismissal in an earlier post, here -- I should learn to rely on the blog rather than trusting my memory.)

In addition, alert reader John Orr points out that on September 14, 2007, the Court granted the defendants' motion to dismiss in the Verisign options backdating lawsuit, a case that combined both 10b-5 and derivative allegations. The Verisign dismissal order can be found here. The court granted the motion to dismiss the Section 10b-5 action based on the Tellabs case and the failure to allege sufficient facts to support a scienter finding and also failure to plead sufficient facts to establish loss causation. Similarly to the Amkor derivative case (as discussed below), the court granted to motion to dismiss the derivative allegations based on the platiniffs' failure to allege sufficient facts to establish demand futility and to establish that the plaintiffs had standing.

Another aspect of the dismissal is that it corroborates a view that was widely held at the time the options backdating scandal was unfolding a year ago as an explanation why there were relatively few options backdating securities lawsuits but a relatively large number of shareholder derivative lawsuits – that is, the view at the time is that the backdating revelations were not accompanied by stock price declines of the type necessary to support a securities claim. The plaintiffs in the Amkor lawsuit may have been unable to resist the temptation to try to upgrade their existing securities lawsuit by adding allegations relating to options backdating. But the absence of the ability to show causally related damages ultimately doomed their options backdating allegations. (It should also be noted that Judge Rosenblatt also dismissed the plaintiffs original unrelated allegations as well.)

None of this is to say that the plaintiffs' counsel who elected to file derivative lawsuits necessarily can be expected to fare better. Indeed, on August 28, 2007, Judge Rosenblatt also dismissed the separate options backdating related derivative complaint that had been filed against Amkor as nominal defendant as well as against several of its directors and officers. (Refer here for a copy of Judge Rosenblatt’s dismissal opinion in the Amkor derivative lawsuit.) Judge Rosenblatt granted the dismissal motion on the ground that the plaintiff had failed to plead facts sufficient to establish demand futility. He also found that the plaintiff had failed to plead facts sufficient to show that he had the requisite share ownership for the requisite time period necessary to establish that he had standing to bring the claim.

The timing of the Amkor dismissal is interesting because is follows so closely after the recently announced $16 millions settlement in the Rambus options backdating securities lawsuit (about which refer here). While the Rambus settlement might have been (and may still prove to be) a precursor to further settlements, the Amkor dismissal may embolden some options backdating securities lawsuit defendants to continue to resist in the hopes of securing a dismissal, rather than attempting to reach an early compromise.

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