Risk & Compliance

Novellus Investors Drop Backdating Suit

The manufacturer has been embroiled in the options-timing controversy for a year because of an analyst report. But it has not been implicated by re...
Sarah JohnsonMay 10, 2007

Plaintiffs in a shareholder derivative lawsuit alleging the improper dating of stock options grants at Novellus Systems have decided to drop their case.

Last week, investors submitted a voluntary dismissal notice to the U.S. District Court for the Northern District of California to close the book on a complaint filed one year ago. Their consolidated claims were partly prompted by a May 2006 Merrill Lynch report that called the timing and pricing of certain stock option grants issued for the CEO and a board member suspicious. The plaintiffs accused CEO Richard Hill, chief business officer Jeffrey Benzing, and 11 current and former board members of breaching their fiduciary duties.

On March 23, Judge Ronald Whyte agreed with the Novellus outside counsel’s motion to dismiss the case and gave the plaintiffs until May 2 to amend the wording of their complaint. The judge agreed with Morrison & Foerster, which represented Novellus, that the plaintiffs’ complaint did not show the directors lacked independence from management. He also noted that one of the shareholders, Alaska Electrical Pension Fund, may not have owned stock during the time the directors were accused of allowing backdating to occur.

Rather than amend their complaint to address those issues, the plaintiffs decided to “walk away” from the case, says Darryl Rains, a partner at Morrison & Foerster, which represented Novellus and the officers and directors named in the suit. “We explained that the SEC did not have an investigation against the company, that the auditor had looked at the problem and didn’t think a restatement was necessary, and there were a lot of reasons for the plaintiff to worry about whether they could ever win,” said Rains.

The plaintiffs decided to dismiss the case after meeting informally with Morrison & Foerster, confirmed Lawrence Kolker, a partner with Wolf Haldenstein Adler Freeman & Herz who represented shareholder Joshua Teitelbaum. The plaintiffs could open another case against Novellus if they find more evidence to support their case, but Kolker said he doesn’t “anticipate that happening.”

Novellus, which manufactures semiconductor equipment, is one of more than 150 businesses that have been associated with the backdating scandal. But unlike the more highly publicized cases that have involved federal subpoenas and the firings of executives, Novellus has not issued any restatements and has not been investigated by the SEC or Justice Department for backdating. The company seems to have been continuously roped into the controversy in articles about backdating because of its inclusion in a Merrill Lynch report that scrutinized the options granting process at several semiconductor companies. The plaintiffs based their claims on several factors, including regulatory filings, the timing of options grants, and the Merrill Lynch report, Kolker said.

Novellus’ protests about that report, which included an acknowledgement that two legal firms, internal and external auditors, and its board had “reviewed its process of granting options and did not find any irregularities” last May prompted the Corporate Library to include Novellus in its report about backdating last fall. Novellus disputed several facts in the report from the corporate-governance watchdog, which claimed that the idea of backdating spread through word of mouth between about 27 companies that shared some of the same directors. The Corporate Library’s report included any company that had admitted undertaking an internal investigation into its options granting process.

As CFO.com reported at the time, the report did not make a distinction between current board members and those who served during the dates where backdating was alleged to have occurred. For example, the report mentioned that Neil Bonke has served as both director of Novellus and Sanmina-SCI, which has admitted finding that some of its option grants were incorrectly dated. However, Bonke did not serve on the Novellus board until 2004, which is at least three years generally acknowledged to be the time when the wave of backdating occurred. Bonke is one of the directors named in the shareholder derivative case dismissed last week.

Xilinx, another company singled out in the Corporate Library report, was recently cleared of wrongdoing by the SEC and by a judge overseeing a shareholder derivative lawsuit. The SEC ended its informal investigation of the company’s stock option granting practices in November, saying there would be no enforcement action. And in January, a consolidated lawsuit against Xilinx directors and officers was dismissed.

Finding no fraud in its own internal investigation of its option granting process, Xilinx did take a $2.2 million charge to its earnings last year to adjust the differences between recorded grant dates and the measurement dates of certain grants between 1997 and 2006. However, it did not restate its financial statements.

To be sure, most shareholder lawsuits related to backdating are still in process and involve companies that have more clear-cut evidence against them. “Most cases, we are not dismissing,” Kolker told CFO.com.

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