Human Capital & Careers

Investor Sues 20 Eclipsys Execs

Michael L. Hiers says the company's execs engaged in a "secret scheme to grant undisclosed, in-the-money stock option grants to themselves and othe...
Stephen TaubAugust 2, 2007

An investor in Eclipsys Corp. is suing 20 of the company’s past and current officers and directors stemming from the company’s admissions of stock options backdating, according to the Daily Business Review..

Michael L. Hiers alleges that the scheme defrauded the company and its stockholders of millions of dollars, according to the report.

The suit reportedly alleges that “from at least 1999 until 2006, a majority of Eclipsys directors, together with top officers, engaged in a secret scheme to grant undisclosed, in-the-money stock option grants to themselves and others by backdating stock option grants to coincide with historically low closing prices of Eclipsys’s common stock.”

The legal publication reported that Hiers also alleges the defendants issued false financial reports, engaged in illegal insider trading and breached their fiduciary duties to stockholders. He wants the individuals to relinquish their stock options, disgorge their illegal profits and pay an unstated amount of damages, according to the report.

Back in May, Eclipsys said it identified various previous stock option grants that had exercise prices lower than the fair market value of the company’s common stock on the appropriate accounting measurement dates for those grants.

Most of these instances occurred from March 1999 through August 2002.

During that period, there were instances of selecting favorable grant dates and associated exercise prices with hindsight, repricing of previously issued options to lower exercise prices, adding additional stock options after the fact to a previously approved batch of options, and reallocation of previously issued options to different recipients at a later time, as well as administrative errors, according to the company’s announcement. These issues affected options widely distributed to various personnel throughout the organization, and were not focused on grants to officers or other specific option recipients, it added.

As a result of the review, the company said it found it did not properly apply APB 25 in accounting for some past stock option grants, primarily during the period from 1999 to 2002, and that about $8.5 million in additional non-cash stock-based compensation expense should have been recognized from 1999 through 2006.

The company said at the time that the individuals responsible for making decisions about stock option grants from August 1998 to August 2002 all left the company in 2006 or earlier for reasons unrelated to the stock option review, and were no longer associated with the company.

The company did not conclude that any current officers or employees engaged in any knowing or intentional misconduct regarding past stock option grant practices.

According to the law publication, the 70-page complaint from the shareholder lists dozens of stock option awards to individual officers and directors. It asserts: “Each and every one” was “dated just before a significant price increase in Eclipsys stock price, just following a substantial decrease . . . and/or at or near Eclipsys’s lowest closing stock price of the pertinent fiscal year, quarter or month.”

As a result, the defendants realized an average annual return of 196 percent on their options, while Eclipsys shareholders suffered an average loss of almost 29 percent over the same period, according to the report, citing the lawsuit.

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