As the options backdating cases flooded in a year ago, the standard explanation of the plaintiffs' lawyers preference for shareholders derivative lawsuits over securities class action lawsuits was that stock price declines rarely accompanied companies' options backdating disclosures. (A list showing the predominance of derivative lawsuits among options backdating cases can be found
.) Any doubts about the challenge that the absence of a stock price drop poses for erstwhile options backdating securities class action litigants should be put to rest by the November 14, 2007 opinion (
) dismissing the options backdating-related securities class action lawsuit pending against
and 14 of its current and former directors and officers. Background on the lawsuit can be found
Judge Jeremy Fogel
first addressed the defendants' contention that the plaintiff's claim for "corporate overpayment" properly represented a derivative rather than a direct claim. Judge Fogel noted that
The thrust of the allegation is that the recipients of the backdated options were overpaid, in violation of Apple's stock option plans. Such allegations necessarily involve an injury to the corporation in that overpayment entails a reduction in corporate assets…. Lead Plaintiff has not identified a unique injury independent of any harm done to the corporation….Were Plaintiff to file an amended complaint, their claims would be stated as derivative claims on behalf of Apple. However, any derivative claims on behalf of Apple arising from the facts alleged in the Complaint likely would be subject to consolidation with the pending derivative action.
Judge Fogel then went on to analyze the plaintiff's purported claim for fraudulent proxy solicitation under Section 14(a).
Judge Fogel noted that in order to establish this claim the plaintiff must plead "both economic loss and loss causation." Because Apple's stock price did not decline on the news of options backdating, the plaintiff bases its economic harm argument on the purported dilution to the shareholders' interests from the issuance of backdated options. Judge Fogel noted that dilution is not necessarily accompanied by economic loss, because share prices might rise on the news of retention of a key executive upon issuance of options. Judge Fogel stated that "without a discernable drop in the stock price there is no basis upon which to establish an injury to shareholders. Dura
bars any suit brought solely on the basis that a misrepresentation caused an inflated share price, and Lead Plaintiff alleges no more harm."
Judge Fogel dismissed the case with leave to amend, but also with the further admonition that any amended pleading should be filed as a derivative rather than as a direct complaint.
Special thanks to a loyal reader for forwarding a link to the Apple opinion.
The November 19, 2007 Wall Street Journal
has an article entitled "Firms Settle Backdating Suits" (here
) discussing options backdating lawsuit dispositions. Full disclosure: I am quoted in the article.A Comment on Judge Fogel's Opinion:
Judge Fogel's opinion is seemingly important, particularly his comments with respect to loss causation, given that many of the options backdating cases have been filed in his judicial district – and indeed many backdating cases are pending before Judge Fogel himself. However, in issuing his opinion, Judge Fogel has repeated his unfortunate practice of issuing his opinions as "Not for Citation."
As I discussed at greater length here
with respect to Judge Fogel's prior effort to bar citation of one of his earlier options backdating opinions, the attempt to delimit the precedential authority of a judicial decision is a truly regretable practice. It is as if he is attempting to say that the court's business is strictly a private affair of no concern to anyone except the immediate parties. The sheer number of options backdating cases in Judge Fogel's courthouse belies this notion. Clearly, his conclusions about loss causation are of potentially great significance for other cases and litigants. It is absurd to suppose that litigants with cases presenting loss causation issues of the kind raised in the Apple case cannot refer to the Judge's own determinations on the issue but must reargue them all over again, but that is what his citation bar suggests.
It is as if he is saying, here's my decision, but don't quote me on it. Seriously, what is that all about?
The inferential suggestion that Judge Fogel is deciding cases on other than universally applicable principles ought to be a concern both to the immediate litigants and to litigants everywhere. The practice of issuing opinions, particularly on matters of great interest and obvious significance for similar pending matters, as "not for citation" is inconsistent with our common law traditions and notions of public justice and rightly deserves the strongest disapprobation.
Two Other Options Backdating Cases:
There were two other options backdating case developments in the past week. First, according to the company's November 13, 2007 8-K (here
), the federal court in Oregon has dismissed four consolidated options backdating cases pending against Flir Systems
as nominal defendant due to lack of standing. Reportedly, however, a separate options backdating derivative suit remains pending.
In addition, on November 14, 2007, the federal court in Manhattan denied the motion of Monster Worldwide
founder Andrew J. McKelvey
to dismiss the options backdating-related securities class action lawsuit pending against him. (The decision apparently relates only to McKelvey and not to other defendants in the case, which include the company itself.) According to news reports (here
), the court's opinion explaining the denial. will be forthcoming shortly.
In any event, I have added the Apple, Flir Systems and Monster dispositions to my list of options backdating-related lawsuit dismissals, denials and settlements, which can be accessed here
Thanks to a loyal reader for links regarding the Monster decision.
SEC Drops Backdating Enforcement Actions:
The above litigation developments occurring in the same week in which it was revealed that the SEC will not be pursing options backdating related enforcement actions against a host of companies it had been investigating. According to a November 13, 2007 Law.com
), Electronic Arts, Linear Technology, Nvidia, PMC-Sierra, and Zoran have each recently announced that the SEC has advised them that it had closed its backdating investigations. In addition, Verisign (refer here
) and TriQuint Semiconductor (refer here
) also made recent similar announcements.
It always seemed probable that the SEC would not ultimately pursue all of the companies it was investigating for options backdating. But the collective termination of this group of investigative actions, as well as other recent judicial developments, does reinforce the impression that the options backdating scandal may have been more than a little bit overblown. However, as the White Collar Crime Prof blog
), the SEC may be "clearing out its investigative docket, likely clearing out weaker cases while it prepares stronger ones for some type of enforcement action."
SEC Options Backdating Enforcement Actions: The List:
We here at The D & O Diary
set a lot of store by lists, having gotten such great mileage out of our lists of options backdating lawsuits (here
), options backdating lawsuit dispositions (here
), and subprime lending lawsuits (here
). So we here were very pleased recently to discover the SEC's own list of its options backdating-related enforcement actions (here
The SEC site not only lists the SEC's options backdating-related enforcement actions in reverse chronological order, but includes links to complaints and press releases for each action. The site also indexes SEC statements and speeches on backdating, as well as links to options backdating press releases from the Department of Justice and various U.S. Attorneys' offices. For those tracking backdating generally, this site is a great resource.