Civil suits thrive in backdating scandal
Plaintiff attorneys, rather than the government, may prove to be a bigger headache for corporations embroiled in the stock backdating scandal.
NEW YORK (CNNMoney.com) -- Forget the SEC and Department of Justice. For companies ensnared in the widening options-backdating scandal, mounting civil lawsuits may turn out to be the real headache, costing companies millions of dollars and countless hours to defend and settle.
At last count, about 120 companies either are under scrutiny by the government or have launched internal investigations into their options practices. At issue is whether companies adjusted dates on options grants to ensure great profits for executives. But to date, only Brocade Communications (Charts) and Comverse Technologies (Charts) have actually received criminal indictments against their top executives.
Legal experts say that the small number of indictments highlights the difficulties in proving that executives knowingly attempted to enrich themselves at the expense of the company and shareholders.
But that hasn't stopped a host of eager litigation attorneys from filing civil suits, and dealing with them won't be easy.
"It takes an incredible amount of time, money and human capital to defend those type of cases regardless of the outcome," said Michael Koenig, a white-collar-criminal defense attorney at law firm Dewey Ballantine.
And when it comes to a civil lawsuit, the burden of proof on a plaintiff attorney is far less than in criminal proceedings, making it easier for civil complaints to mushroom.
Class action lawsuits, which usually lead the pack when it comes to most civil litigation, have a five-year statute of limitations - and many of the companies involved in the options scandal are looking at practices stemming from the late 1990s or 2000.
As a result, the complaint of choice has become derivative suits, in which shareholders sue the directors and officers of the company.
In a class-action suit, money in a settlement goes to the shareholders. In a derivative suit, a settlement goes to the company - which ultimately should benefit shareholders, though only indirectly.
Currently, attorneys have filed over 80 derivative lawsuits related to options backdating, while there have been only about 20 class-action suits against companies that include United Health Group (Charts) and Apple (Charts).
Lawrence Kolker, partner at Wolf Haldenstein, has filed more than 20 complaints - mostly derivative lawsuits - in recent months against the directors and officers of companies like Comverse, Cablevision (Charts) and Xilinx (Charts).
According to the civil complaints, shareholders are suing the officers and directors of the companies, claiming financial damage from falling stock prices following the announcement that the corporations were under investigation.
"The companies involved and shareholders have already lost billions of dollars in value as well as suffered reputational damage from being involved in this basic corporate malfeasance," Kolker said. "We're seeking recovery for the companies against the officers and directors."
Kolker said that shareholders sought monetary damages, disgorgement of profits executives made from backdating options as well as reform of corporate practices to make sure there will be better oversight in the future.
Critics of the mounting civil lawsuits say the barrage of derivative claims are just a way for ingenious plaintiff lawyers to profit from the scandal. Attorneys that file the derivative lawsuits can count on a solid fee -- sometimes as much as 25 percent of the ultimate settlement.
"Some people would say that these are lawyer-driven lawsuits and the point of filing these is to create fees for the lawyers," said William Sullivan, chair of the national securities litigation and enforcement at law firm Paul Hastings.
"It's a three-pronged attack against corporations with the SEC, DOJ and the derivative suits," said Paul Hodgson, senior research associate at The Corporate Library, a governance research firm. "We don't think we've gotten to the end of the number of companies that are going to be investigated and it's likely that there are going to be even more derivative lawsuits ahead."
With so many cases already under investigation, Hodgson said the SEC is already overwhelmed and the burden may fall more on the Department of Justice to bring criminal indictments.
But Hodgson said government prosecutors need to find tangible documentary evidence to prove that options were backdated knowingly in order to prosecute a company. And that's no easy task.
Plaintiff attorneys, however, just have to prove that stockholders lost money because the officers and directors failed to perform their fiduciary duty - making it more likely that civil lawsuits will be more successful in obtaining damages from any perceived wrongdoing, legal experts said.
"The derivative lawsuits in the long run could become a bigger headache for companies," said Paul Hastings' Sullivan.