August 16, 2006
Another Options Backdating Criminal Action
Last Thursday, the US Attorney General and the SEC brought criminal and civil charges against three former senior Comverse Technology executives for alleged option backdating manipulation. Here is the SEC’s press release – and here is the SEC’s complaint. Courtesy of the “WSJ Law Blog,” here is the Criminal Complaint, which includes quite a bit of detail about the alleged fraud.
My favorite part of the complaints are when they reveal that the former Comverse executives secretly inserted fictitious names amid the names of actual employees on proposed option grantee lists, which then were submitted to Comverse’s compensation committee for approval. This is what Jimmy Rockford would have done in the corporate world (if Jimmy ever went to the “dark side”)! And it gets better – the former Comverse CEO is AWOL and on the lam! Some pretty crazy stuff – movie material perhaps? Read more about the Comverse allegations on Bruce Carton’s “Securities Litigation Blog.”
Unanimous Written Consents: Analysis of Proper Effective Dates
Alan Dye points out that the Attorney General’s and SEC’s case against the former Comverse executives confirms what we wrote in the March-April 2006 issue of The Corporate Counsel – about it being improper to treat a unanimous written consent as being effective “as of” an earlier date than the date the last signature was obtained. In e-mails to us, we had a few members question our view, but we stood our ground – and now it’s apparent that the government is taking the position that the grant date is the date on which the directors sign the consent and can’t be some earlier date specified in an “as of” sentence in the consent.
The government also appears to be questioning the practice of not including a date line next to each signature line – it’s perceived as a practice that is intended to facilitate backdating. So here’s today’s practice tip: start using datelines!
FCPA, Options Backdating, and D&O Exposure
Kevin LaCroix’s “D&O Diary Blog” contains some excellent analysis of how the Foreign Corrupt Practices Act figures into the option backdating scandal, including this prior post about how one of the dangers from an FCPA enforcement proceeding is the possibility of follow-on litigation. Kevin also explains how the recent securities fraud lawsuit settlement below provides a glimpse into the way FCPA violations can spawn follow-on litigation:
“On August 9, 2006, Willbros Group announced that it had settled the 2005 class action lawsuit that had been filed against the Company and several of its directors and officers. The Complaint alleged that the company had been the subject of numerous of numerous investigations “because the Company engaged in a campaign of illegal and illicit bribery of foreign government officials in Bolivia, Nigeria and Ecuador to successfully obtain construction projects.” The Complaint alleged that the company was forced to restate several years of financial statements and to establish a reserve to accrue for possible fines and penalties for FCPA violations. The Complaint alleged that as a result of these violations, the Company had misrepresented its true financial condition. The Complaint alleged that the company’s share price declined 31% when these matters were disclosed.
In its August 9 press release, the Company did not disclose the amount of the securities class action settlement, but the press release did state that the amount of the settlement would be funded by the company’s insurance carrier.
The Willbros settlement illustrates the growing D & O risk that increased FCPA enforcement activity could represent. The threat is not so much from the underlying FCPA enforcement action itself; any FCPA fines and penalties likely would not be covered under most D & O policies. Rather, the threat is from the potential liability that could arise in any follow-on civil action, including any follow-on securities fraud lawsuit like the one filed against Willbros Group. Any settlement or judgments incurred in a follow-on action, as well as defense expenses, would usually be covered under the typical D & O policy.
As FCPA enforcement actions grow in number and magnitude, this exposure could pose an increasingly greater D & O risk.”