Insurance Will Protect Companies, Officers, and Directors from Options Backdating Claims

On March 18, 2006, the Wall Street Journal published an article indicating that a number of public companies supposedly "backdated" grants of stock options to senior executives to allow those executives to profit. That article set off a firestorm of activity surrounding the practice of options backdating. Around the country, numerous corporations launched internal investigations into the practice of options backdating with special committees of directors convened to review each company's historical stock option practices and related accounting treatment. Several companies issued financial restatements to revise the compensation expense attributable to options granted. Federal and state regulators, including the Securities and Exchange Commission (SEC), the U.S. Attorney and the Internal Revenue Service, have launched regulatory and criminal probes. The SEC probe questions whether companies made false and misleading statements in their filings and wrongfully failed to disclose the practice.

Not surprisingly, this publicity has sparked a spate of derivative and class action lawsuits. Numerous shareholder derivative lawsuits have been filed against directors and officers based on alleged improper stock option backdating. According to the plaintiffs in these lawsuits, the defendants manipulated stock option grant dates so that the options would be valued as of a date when the corporation’s stock price was low, with the expectation that the beneficiaries of the stock options would be able to obtain greater gains when it came time to exercise the options. The complaints allege that the directors and officers breached their fiduciary duties to their companies by allowing this to occur. In addition to the shareholder derivative complaints, other shareholders have filed class action cases alleging violations of the antifraud provisions of the federal securities laws. These shareholders assert that they were misled by alleged false and/or misleading public statements, including press releases and SEC filings that did not accurately describe the stock option programs.

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