Risk Management

Settling for Less? A Study in Backdating

Economic consulting group finds lawsuits alleging stock-option abuses bring plaintiffs amounts smaller than projected.
Stephen TaubMay 15, 2008

The improper backdating of stock options apparently has not generated the number or size of shareholder class-action suits that some observers expected.

Of nearly 250 companies identified as being potentially involved in backdating, only 37 have actually been the target of related federal shareholder class-action litigation, according to a white paper from NERA Economic Consulting.

What’s more, in the cases settled to date, amounts paid to plaintiffs have been substantially lower than in comparable non-backdating class actions, according to the study. On average, class actions involving backdating allegations have settled for less than half (43 percent) the amounts forecast by NERA’s settlement prediction model, which forecasts the most likely settlement for a case based on the level of “investor losses” and other lawsuit characteristics.

Of course, only six cases have settled so far. So the reasons for the low settlements are not yet clear, NERA cautions.

“It may be that, generally, suits alleging backdating are viewed as weaker on the merits than other class actions,” the consulting firm said in analyzing the report. If that is true, it could indicate that still-pending backdating-related class actions may also yield relatively small settlements.

Alternatively, it could suggest that the weakest cases have settled first. In that case, perhaps, settlements of backdating-related class actions will be more in line with those in other shareholder class actions, NERA asserted. The six firms that have settled are Newpark Resources Inc., Meade Instruments Inc., Rambus Inc., American Tower Corp., KLA-Tencor Corp., and HCC Insurance Holdings.

NERA pointed out that the mere existence of accounting-related allegations, including backdating cases, often tends to increase settlement size, as does an investigation relevant to the allegations by such official bodies as the Securities and Exchange Commission or a state attorney general, and an admission by the defendant company of accounting irregularities related to the allegations.

All six companies that settled were the subject of at least one official investigation, and two — Rambus and KLA-Tencor — admitted to accounting irregularities in connection with options backdating. Yet, they wound up settling for much lower than NERA had forecast.

This is the fourth installment of the series titled NERA Insights: Options Backdating Series, papers dedicated to the analysis of options backdating.

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