Saturday, September 08, 2007

More Options Backdating Settlements and Other Web Notes

Rambus Settles Securities Lawsuit: In a September 7, 2007 press release (here), Rambus announced that it had settled the July 2006 options backdating-related securities class action lawsuit that had been filed against the company and certain of its directors and officers. Rambus has agreed to pay $18 million in exchange for a dismissal with prejudice of all claims against all defendants. The press release also stated that the settlement is subject to court approval and that the company "has been and will continue to be in discussions with its insurers concerning their contribution of a portion of the settlement amount."

A September 7, 2007 San Jose Mercury News blog article entitled "Here’s $18 Million, Now Go Away" (here) provides further background regarding Rambus’s options backdating woes and related litigation.

The Rambus settlement represents the second options-backdating related securities class action settlement of which I am aware. But, as discussed here, the first settlement, related to Newpark Resources, involved a securities lawsuit that pertained only peripherally to options backdating. The Rambus securities class action settlement appears to represent the first settlement that involve a case related solely to options backdating-related allegations.

As discussed here, Rambus previously announced that its special litigation committee had reached a settlement of the options backdating-related shareholders’ derivative lawsuit that had been filed against the company as nominal defendant as well as against certain of its past and current officers and directors.

Barnes & Noble Settles Derivative Suit: On September 6, 2007, Barnes & Noble announced (here) that it had "agreed to settle all pending shareholder derivative actions filed in state and federal court alleging that certain stock option grants had been improperly dated." As part of the settlement, the company agreed to adopt certain (unspecified) corporate governance and internal control measures, and agreed to pay plaintiff’s counsel’s fees and expenses of $2.75 million. The company’s press release is silent regarding the availability of insurance to cover the settlement payment.

The Barnes & Noble derivative settlement is, based on my experience, fairly typical of the way many of the options backdating derivative lawsuits are being resolved. That is, for the cases that are settling, companies are agreeing to adopt some mild corporate therapeutics, and paying some negotiated amount supposedly corresponding to the amount of the plaintiffs’ attorneys’ fees. The sole benefit to the shareholders on whose behalf the plaintiffs’ ostensibly proceeded is the ostensible benefit of the corporate therapeutics. I am sure there are skilled advocates who have persuaded themselves, at least, that this process represents something more than a highly stylized form of larceny.

Though the Barnes & Noble press release is silent about insurance issues, I know from my own experience with the backdating claims that the insurance issues surrounding similar options backdating related derivative settlements are gradually being worked out on a case by case basis. There are usually several interrelated questions at the point of settlement: Will the carrier consent to the settlement? Will the carrier fund the settlement? Will the carrier dispute coverage (usually either on the ground that the settlement amount is not covered "loss" or that one or more of the policy’s conduct exclusions applies) for any portion of the settlement? And how will the question of the carrier’s ultimate responsibility be resolved?

Responsible carriers are consenting to and funding the settlements, and agreeing to an alternative dispute resolution mechanism to quickly resolve remaining coverage questions and determine the carrier’s ultimate responsibility. Given the number of the options cases that remain pending, it would be in everyone's interests if the carriers were to actively facilitate the expeditious resolution of these claims.

A Final Options Backdating Note: At least one commentator has observed that the options backdating civil cases are in many instances proving challenging for the plaintiffs to pursue successfully. In a September 3, 2007 article in BNA Securities Regulation & Law Report entitled "Private Civil Litigation: The Other Side of Stock Option Backdating," (here), Lee Dunst of the Gibson, Dunn & Crutcher law firm notes that as the civil options backdating cases "have made their way through motion practice, many of them have been unable to survive dismissal due to many of the defects spotted at the outset, as well as due to some unforeseen obstacles, which have made these cases difficult for the private bar to successfully prosecute."

Dunst notes in particular the challenges that securities lawsuit plaintiffs have had established scienter, and the barriers the plaintiffs have faced due to statute of limitations constraints. Dunst does note that there have been some successes, "many of the private class actions involving allegations of improper stock option backdating have been dismissed or failed to gain much traction in the courts."

Special thanks to Lee Dunst for providing a copy of the article.
Refco Bankruptcy and Excess Policy Coverage for Defense Fees: In earlier posts (most recently here), I have raised the concern that follow-form excess carriers are taking coverage positions that had not been asserted by the primary carriers. Recent developments in connection with the Refco bankruptcy proceeding appear to present another instance of this phenomenon.

According to September 5, 2007 news reports (here), three former Refco executives are fighting to compel one of Refco’s excess D & O carriers to pay their legal fees. The press reports state that Refco’s D & O insurance program was structured with a $10 million primary layer and five excess layers on top of the primary. The primary layer was exhausted after the primary carrier paid its limit after receiving bankruptcy court approval. The first excess layer carrier also paid out its $7.5 million limit after receiving bankruptcy court approval.

However, the carrier that issued the next excess layer in the program reportedly has taken the position that it has no obligation to advance the three executives’ defense fees. According to news reports (here), on August 30 the bankruptcy judge rejected the carrier’s argument, but the excess carrier reportedly is contending that the bankruptcy court’s ruling did not specifically name the carrier, and that the three executives would have to file a separate motion, and than in any event the carrier would appeal the bankruptcy court’s ruling. The three executives for their part contend that the excess carrier’s position is "straining" their ability to defend themselves and that they "face an imminent risk of irreparable harm, including but not limited to the risk of an adverse outcome in the criminal action or the civil actions caused by their inability to mount an adequate defense."

I do not know the basis on which the excess carrier is resisting its obligation to advance the executives’ defense expense, and I am therefore in no position to judge its position. I have no grounds to question whether the excess carrier’s position is legitimate. But I do note that once again we appear to have a case where the primary carrier and the first level excess carrier have paid their limits yet a coverage dispute has arisen involving an upper level excess carrier. As I have argued before (here), I think the industry has a growing problem when it starts to become routine for excess carriers to contest coverage on grounds not raised by the primary carriers. If different carriers in a "follow form" insurance program are not going to respond to claims in the same way, the intent of the insurance acquisition process is frustrated. Policyholders do not put together a follow form program with the expectation that they are going to have to fight their way through each successive layer of insurance.

Again, I am not questioning the excess carrier’s position in the Refco bankruptcy, because I don’t know the basis for the position, which for all I know is entirely legitimate. But in general, there is a growing problem in the way that excess D & O insurance is responding to claims, and that is an issue the industry needs to address.

Special thanks to alert reader Kelly Reyher for providing a link to the Refco news article.

How Big is the Subprime Lending Mess?: As the subprime mess has unfolded, many commentators, including yours truly, have struggled to assess just how big the subprime mess will be. While only time will tell, it is interesting to note that former SEC Chairman Arthur Levitt, Jr., in a September 7, 2007 Wall Street Journal op-ed column (here), stated:

In terms of market meltdowns and the degree of pain inflicted on the financial system, the subprime mortgage crisis has the potential to rival just about anything in recent financial history from the savings-and-loan crisis of the late 1980s to the post-Enron turndown at the beginning of this decade.

How Often Do You Suppose Something Like This Has Happened in the Current White House?: In her recent fine book entitled Team of Rivals: The Political Genius of Abraham Lincoln, which examined the significant collaboration of Abraham Lincoln and his Presidential cabinet, author Doris Kearns Goodwin recounts the following incident:
Congressman William D. Kelley of Pennsylvania recalled bringing the actor John McDonough to the While House on a stormy night. Lincoln had relished McDonough’s performance as Edgar in King Lear and was delighted to meet him. For his part, McDonough was "an intensely partisan Democrat, and had accepted the theory that Mr. Lincoln was a mere buffoon." His attitude changed after spending four hours discussing Shakespeare with the president. Lincoln was eager to know why certain scenes were left out of productions. He was fascinated by the different ways that classic lines could be delivered. He lifted his "well-thumbed volume" of Shakespeare from the shelf, reading aloud some passages, repeating others from memory. When the clock approached midnight, Kelley stood up to go, chagrined to have kept the president so long. Lincoln swiftly assured his guests that he had "not enjoyed such a season of literary recreation" in many months. The evening had provided an immensely "pleasant interval" from his work.
Lincoln, of course, had little formal education. No Yale Skull and Bones. No graduate degree from Harvard.

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