$65 Million KLA-Tencor Options Backdating Class Action Settlement

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In its January 24, 2008 quarterly earnings release (here), KLA-Tencor also announced that it had entered into an agreement to settle the options backdating-related securities class action lawsuit that had been pending against the company and certain of its directors and officers for $65 million.

KLA-Tencor was among the companies mentioned in a front-page May 22, 2006 Wall Street Journal article entitled "Five More Companies Show Questionable Options Pattern" (here). The article described how the company’s executives received stock option grants in 2001 on "unusually fortunate days." The article also said that the data the Journal reviewed suggested a "highly improbable pattern of option grants." The company’s shares dropped over ten percent on the news, representing a drop in market capitalization of $935 million.

On May 24, 2006, the company announced (here) that its Board of Directors had formed a special committee to investigate the company’s stock option practices between 1995 and 2001. On June 29, 2006, the company announced (here) that its Board "had reached a preliminary conclusion that the actual measurement dates for financial accounting purposes of certain stock option grants issued in prior years likely differ from the recorded grant dates of such awards."

On October 16, 2006, the company announced (here) that the special committee had completed its investigation, and that as a result of the committee’s conclusions "the company will restate its financial statements to correct the accounting for retroactively priced stock options." The company said that it anticipates that the "additional non-cash charges for stock based compensation expenses will not exceed $400 million." The company also announced that it had terminated "all aspects of its employment relationship" with Kenneth Schroeder, who had been President and COO from 1991 to 1999, and CEO and a director from 1999 to 2005.

On June 25, 2007, the SEC announced (here) that it had filed a civil complaint against the company and Schroeder. Among other things, the SEC charged that Schroeder "repeatedly engaged in backdating after becoming CEO in 1999," including "pricing large awards of options to himself" that "were never disclosed to KLA-Tencor’s shareholders." The SEC alleged that he even made one award in 2005, "after he received advice from company counsel that retroactively selecting grant dates without adequate disclosure was improper." KLA-Tencor agreed to the entry of a permanent injunction, without admitting liability.

The plaintiffs first filed a civil securities class action complaint against the company and certain of its officers and directors (including Schoeder) on June 29, 2006, in the United States District Court for the District of California (about which refer here). The company’s $65 million settlement, which secured the release of all defendants (including Schroeder), represents the second-largest options backdating-related securities class action settlement. The only larger settlement so far is the $117.5 million Mercury Interactive settlement, which perhaps may be explained as an effort by Mercury’s acquirer, HP, to put the case in the past.

The magnitude of the KLA-Tencor settlement may be a reflection of the prominence of the case (in light of the Journal article), the magnitude of the stock drop (many other options backdating cases do not involve a significant stock price drop), and the existence and apparent seriousness of the SEC complaint, as well as the company’s public admissions about the backdating and its termination of Schoeder and others. Significantly, perhaps, the KLA-Tencor announcement of the settlement says nothing about insurance.

In any event, I have added the KLA-Tencor settlement to my table of options backdating settlements, dismissals and denials, which may be accessed here.