Defense against class action in World Sarbox

In April 1998, Cendant announced a restatement of 1997 results, including a reduction in net income of $ 100 million because of several accounting irregularities. Then, on 07/14/1998 Cendant announced a further adjustment of the financial results for 1995, 1996 and 1997, including all quarters following the recording of fictitious revenues and mismanagement of the cookie cutter parts. At the end of August Cendant SEC filed a report showing a decline in operating income of $ 500,000,000, areduction of net income before taxes of $ 297,000,000 and the effect on earnings per share. Consequently, the market price of the share has fallen from a peak of $ 35. in April for $ 11. for action in August. Normally a 10% decline in the share price after a negative ad is enough to trigger a class action suit within 72 hours. Here is the rapid decline was 69%.

fifty cases were filed in U.S. District Court, the court consolidated with numerous institutionalinvestors as lead plaintiffs. Hundreds of thousands of documents produced by Cendant, Ernst & Young and several suspects. An investment bank and a forensic team are kept as an expert. Cendant settled for $ 2.8 billion. Ernst & Young settled for $ 335 million. The program was followed by an assessment even greater in the case of WorldCom ($ 6,200,000,000) and Enron (7.1 billion U.S. dollars, pending final court approval).

Enron directors agreed to settleclass action against them for $ 168 million as a proportional share of the transaction. Make sure that a majority of the costs, but left their state that managers must personally pay $ 13 million. WorldCom directors had a solution that requires them to pay their proportionate share, $ 54 million, making them $ 18,000,000 due on the basis of personal responsibility. Administrators admitted no irregularities in the liquidation.

backdating of stock options

The scandal of backdating arereading about it in the Wall Street Journal, according to the academic impact, to 3,000 listed companies. defense attorneys, lawyers and actor began to mobilize. This arena potentially huge litigation and research experts has followed the practice over the last decade of listed companies, the granting of options to directors werden belangrijke in-the-money, but not recorded as salary costs, which violated the principles Accountingdoes not pray and tax obligations, and every quarter since the practice began. In other words, were assigned to the data using options that was a previous post on the effective date of grant. The SEC has just begun a study of eighty companies, and expanded the list daily. The Justice Department and the U. S. Attorney offices are logistical decisions about how to allocate projected workload. Several criminal charges have been filed. At a minimum, companiesinvolved will face civil charges by the SEC, a huge adjustment, and then virtually guaranteed of class actions and derivative suits. The clothes have a base that companies and their executives and boards of directors are guilty of breach of fiduciary duty, mismanagement, unjust enrichment and violations of the SEC Act of 1934. options back-dating the defendants have helped raise millions of dollars in windfall profits at the expense of illegalsociety. A law firm only recently filed 34 suits derivatives. It 's the largest area of civil litigation in history that begins to unfold before our eyes.

Dresses shareholders derivative

shareholder derivative suits are still filed in connection with class actions. A main concern is that directors and officers may find themselves without coverage for defense costs, prices for the fees of plaintiff lawyers and a monetary agreement. Director andOfficer may exclude the payment of insurance for non-civil cases, such as certain types of fraud related SCIENTER exist. Even so, coverage usually begins an indictment is pending. Another area that contains elements of risk that often payments are made on a first come, first serve basis. In other words, in the order that applications are submitted. This can often lead to a shortage in case of a solution.

There is an increasing trendfiling derivative suits, first stored in state courts, unlike the class action filed in federal courts. state courts as often as possible to non-unanimous decisions actors (mandatory in the federal system) and some state laws to allow the results of the low standard utilities. This stand alone derivative suits are generally for breach of fiduciary duties, violations of proxy, on compensation and breach of duty of care or duty toloyalty.

The Business Judgement Rule supports the decisions of the board on, but does not deal with these abuses. For example, breach of duty of care does not cover acts stupid, reckless actions, or the illegal breach of federal laws. Non-management representation question is another example of this type of violation.

A solution for sufficient funds for R & D is a policy-only side that directors and officers can not protect against lossesnormally reimbursed. These policies generally provide coverage, even under adverse conditions, including bankruptcy, corporate, they have exhausted the limits of traditional policies and where the normal policy excludes payments. Some states do not allow reimbursement of defense against bankruptcy and corporate derivative suits in such cases, a single A-Side policy will provide coverage.

The Private Securities Litigation Reform Act of 1995, providedchanges and a safe haven for companies in a matter of clothes derived - in the forward-looking statement. Tenuous conclusions are not admitted in the pleadings actor. The allegations must be specific to the falsity or because the statements of the company were misleading. Under the safe harbor provisions of the Reform Act, a company is not responsible for the bad weather, if such claims are properly identified and accompanied by a cautionary statementindicates that actual results may differ from expected results, and there is no liability if the plaintiff did not prove the statement of forecast-looking WAS made with knowledge that it was misleading. These statements are often made orally to meeting analysts' then this gives a degree of certainty in corporate public relations department. However, as the option backdating practices, lack of a safe harbor.

Trading Models

The economic baseof these settlements is an area of contradictory evidence. In a monograph in the early 1990s, the authors criticized the use of trading models to estimate the total loss in the class action, claiming that the results are unreliable and often overestimated by as much as 74% damage. Daubert grounds challenged on a variety of proposed models. In Daubert, the Supreme Court directed federal courts to consider four factors in evaluating the testimony of experts under federal rule of evidence702: (1) the general acceptance of the economic model, (2) the potential rate of error of precision, (3) peer review or publication, (4) whether the theory is tested. Noting that trade in various models proposed do not meet these standards, the judge if the model is tested if the model is accepted by professional economists.

The Journal of Legal Economics is a good starting point for obtaining a fixed assessment. This is a doublerefereed journal. Each manuscript is reviewed by at least three qualified persons, in addition to the Director. It 'was intended as a forum for the participating authors, both lawyers and the profession of quantitative professions of accounting, economics and finance, understanding, constructive to offer to colleagues. It is designed to be a useful tool for the application of research as well as theory.

In theory, the out-of-pocket loss is the measure of damages in the class of open marketfits. Therefore, a buyer can be fooled its share of the damages class member to be recovered, less the legal costs of the case and can vary from 15-30%. However, since these are the actual trade data is buried in deposits, the models were chosen to produce tangible results. The Private Securities Litigation Reform Act of 1995 allows the court to open for the most reliable method for damage to select evidence that is available. Two traders are also models that assume, probably correctly, that therepassive investors and traders there. Traders have naturally a greater chance of obtaining and selling Aandelen van, and then this model makes use of parameters for estimates of the damage, with damage estimated using certificaten data storage. A trader models often overestimated by 90-98% damage. Assumptions can lead to prejudice. Three existing models are active investors high-dealers, traders and intraday low activity (not using the night to involvepositions). Often these entrepreneurs can have up to one third of all businesses.

Recommendations

One strategy is sometimes effective is to create a special litigation committee (SLC) that the content and form of independence. The committee has the responsibility of maintaining the forensic teams for thousands of pages of documents and interviewed hundreds of witnesses to be examined. One company alone, two million documents for review and expects to pay $ 70,000,000only to receive a report of results. The purpose of this committee is for the Court to provide the Business Judgement Rule "confidence derivative action as unfounded. However, this procedure is not as simple and straightforward as it seems.

Delaware and other states allow the council to respond by addressing the appointment of an SLC is composed of independent directors. Until the SLC is ongoing, the derivative suit is stayed. However, in the adversarial process, which ismotions continues to run, have closed the issue is often the real objective of the SLC. Delaware courts often slamming the door of the SLC by ruling against them and the suit can proceed. If the SLC members have significant social ties to suspects in terms of past relationships or future, which is a disqualification. Another example is a public statement by the head of an SLC at any time prior to issuance of the report showing bias. It 'hard to believe that this would happen, butin specific cases, and destroyed the defense of society from the beginning.

Directors often share institutional and social relations based on full board. This makes it very difficult to find objective third party. Warren Buffet said this: "Why are intelligent and decent directors failed so miserably? The answer lies in inadequate laws - it was always clear that directors are obliged to protect the interests of shareholders to be - butplace in what we call 'boardroom atmosphere. "membership requests the Board shall be managed in record numbers because of the perceived risk of a director in this area. However, the corporate governance rules are much more serious and warrants Sarbanes-Oxley have become, these recent revelations are almost guaranteed his place in history.

backdating of stock options: CORPORATE REMEDIATION

From 1917-2008, the Wall Street Journal published a study of 87companies that have launched probes, Executive changes announced his resignation and the investigation of the Justice Department in its stock option practices. The SEC filed a civil complaint against directors of listed companies, alleging that they engaged in a fraudulent-year program grant exclusive, in-the-money options to themselves and others by backdating stock option grants to coincide with historically low closing prices of their stocks. These complaints allegedthat the former executives collectively millions of dollars in compensation poorly received by exercising the option grants made retroactively illegal and the subsequent sale of the related common shares.

In a separate case, U.S. Attorney 's Office criminal complaints unsealed charging a conspiracy to managers in violation of federal laws on securities fraud, wire fraud and mail fraud. It is argued that the retroactive option grants and secret funds blacks optionwere "the deception of the highest order" on shareholders. Managers, according to the SEC, often used to analyze later, when the closing price of ordinary shares or was near a quarterly or annually select a level. The complaints further allege that the accounting principles are well settled in force at the time, companies are required in-the-money options granted to charge to register and disclose the costs of such sums in filings with the Commission. TheManagers are also responsible for violations of provisions of Sarbanes-Oxley certification official of the federal securities laws. Coercion, civil penalties, disgorgement, with interest bias, and official and director bars against each of suspicion is required.

HOW The backdating occurred

It is useful to examine testing practices, so that the reorganization of its internal control policies can be effective. Executivesdirected and controlled the process of option grant backdating and open systems. Among other things, retroactively in particular the dates selected interface to the Remuneration Committee. Grant with false documents to grant dates were approved by the Compensation Committee. unscheduled grants were the modus operandi. A spreadsheet containing lists of buyers offered. At one point, the leaders "picked off" by the award date and reflect on their historical stockprices and, with hindsight, to choose the date of grant which corresponded to a time when trading in shares was relatively low. The master list was then submitted to the Compensation Committee for approval.

unanimous written consent forms on the proposed subsidy were sent to members of the Remuneration Committee for the signature. He was known by the managers that these dates were "low-ball" data "look-back that had previously chosen. Remuneration CommitteeMembers are generally unaware of the impending received a grant before the master list. Committee members then signed, but not the date of their copies of the consensus and has given them. On the basis of their participation in the process of granting options, each of the defendants knew or were reckless, not knowing that the unanimous written were wrong because the "how" the appointments were included permits and is reflected in the books of company records and represent the truegrant dates.

The directors knew that there was "corporate action" to approve options grants had actually occurred on the "as of" date. They knew this because they were the ones who had caught the grant date using the table look-back, with hindsight. They studied the historical trading prices and opted for a date with a low rate. backdated options with the facts accelerated the vesting schedule, because the company used the date of retroactivityno fortification purposes, the date of actual damages for approval. Many of the grants or near the lowest price for the fiscal quarter or year. In an article published by The Wall Street Journal, the patterns of share options granted were analyzed and astronomical odds, a few are approaching € 6000000000, were determined to exist That subsidies would have fallen over the data network to sharp gains on company shares by chance.

Thebackdating allowed collusion suspicions that the company was paying higher compensation to executives and employees, making those in-the-money options to hide and avoid the costs of in-the-money ALS opties compensation costs, avoiding so loss of net income and EPS of the company. There are a number of large institutional investors have long opposed the stock option grants of options allowed under the market value ofunderlying shares at the time of grant. This is the basis for tens of billions of dollars in derivative lawsuits in recent weeks against companies associated with law firms on behalf of large institutional investors.

California Public Employees' Retirement System (CalPERS) is the largest U.S. public pension fund with over $ 200 billion of total assets. Recently wrote an open letter to the chairmen of the boards of a number of portfolio companies on compensationregarding questions about stock option backdating practices of employees. Their letter contains implications of the allegations, such as lack of control by the board of directors, weak internal controls, weak internal and external audit practices, accounts Slechte, substantial tax consequences for the parties in ante-dating options and problems with executive compensation plan administrator.

Senator Chuck Grassley of Iowa, chairman of the Senate Committee on Finance,publicly stated: "It 's one thing for one of the options to make big profits because it has improved its business, but it is something completely different for a large profit, because he is playing fast and loose with the dating of stock options. business outside Suite Americans Don t 'is to capture and share their dream to choose. The market determines the price. "

The CFA Institute recently published an open letter to the SEC stating "In the case of post-dating, senior executives (and perhapsdrivers) used for science or post-closing market prices to determine whether a retroactive effective date of share-based awards for the refund of premiums that will improve. option grants This appears to be involved falsified accounts, the financial reporting requirements for the bypass 'variable', may be contrary to the demands of governance in the pricing of stock options, and ultimately could result in criminal and tax penalties against the companies involvedthese activities, damaging even more value for shareholders. "

RECLAMATION

In the real world, the best approach is a proactive remedies before a review begins by third parties. Thresholds of significance thresholds should be considered by the ESA Bulletin No. 99 and Sarbanes-Oxley thresholds. If the threshold is not exceeded, no change will occur. If an adjustment, almost guarantees a SEC investigation and determination of a materialWeakness "by the external auditors. Findings material weakness, loss of blocks significant cause of market capitalization after publication.

The problems are not restricted to IT companies. Their excess returns in the studies conducted by scientists at the University of Iowa and others were first caught the attention to the problem, but its scope of IT companies. An estimated 3,000 companies involved. In many of these casesundoubtedly the management of integrity has been preserved, and the element of SCIENTER there. The rest of the public, business and research Sarbanes adequate procedures to ensure that they are not interested in the future. Early studies of proxy statements for statistics on options for the implementation of Sarbanes Oxley reporting requirements changed in two trading days of August 2002 indicated the problem existed in 1996, with most businesses.Grant excess returns models after evaluation of options largely began in the mid-1990. One company alone almost two million documents must be examined for the extent of backdating problems fixed. I understand the research, forensic and related expenses, in this case and one purpose only budgeted for $ 70 million dollars. This does not include the defense or settlement costs class action lawsuits and derivative.

Without going into specific detailswhat is called the tone at the top should be restored in compensation committees around the world today. Directors and Audit Committee, in particular, and Compensation Committee members should be re-educated regarding the governance requirements that meet both the spirit and letter of the law. compensation programs should not be driven by competition, but for superior performance in the long run. full disclosure required proxy statements. Independent Directorshave a great need. The experts should be added to compensation committees. If there are third parties must be engaged consultants who are experts. Incentive Compensation issues, dilution, Performance Options and structures, repricing, and a variety of fiscal and governance issues must be addressed. Must be taken to ensure That the Board of Directors and the Committee reviews the fair compensation and would be advised to refrain from the use of assets to meetlegal and fiscal requirements for managers involved in wrongdoing. This can lead to a further derivative suits. Independent research in depth, case by case basis, with strong support from a board of director should be undertaken. The effects of the Sarbanes must be fully understood and addressed. Lying to the auditors is a federal crime. Insider manipulation is not tolerated by the market nor the supervisory review. Justice officials havemade clear that executives can face possible prison time for backdating stock options. serious changes and corporate governance must now follow.

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The defense against the class action in the world of Sarbox Suits

In April 1998, Cendant announced a repeat of 1997 results, including a reduction in net income of $ 100 million because of several accounting irregularities. Then, July 14, 1998 Cendant announced a further adjustment of the financial results for 1995, 1996 and 1997, including all quarters following the recognition of revenue and mismanagement fictitious cookie cutter parts. At the end of August Cendant SEC filed a report showing a reduction in operating income of $ 500 million, areduction of net income before taxes of 297 million U.S. dollars and the impact on earnings per share. As a result, the market price of the share declined from a peak of $ 35. in April for $ 11. for action in August. Normally, a decline of 10% of the share price after a negative notice is enough to trigger a class action suit within 72 hours. Here, the decline was stronger: 69%.

Fifty complaints were filed in U.S. District Court, which were consolidated by the court with different levels of governmentinvestors as lead plaintiffs. Hundreds of thousands of documents produced by Cendant, Ernst & Young and several suspects. An investment bank and a team of lawyers have been retained as expert witnesses. Cendant settled for $ 2.8 billion. Ernst & Young settled for $ 335 million. This settlement was followed by even bigger ratings in the case of WorldCom ($ 6.2 billion) and Enron (7.1 billion U.S. dollars, pending final approval of the court).

Enron directors agreed to settleclass action against them for 168 million U.S. dollars as their share of the settlement. Make sure that a majority of the costs, but left their conditions which required the directors personally pay $ 13 million. WorldCom directors had a settlement that require their proportionate share, $ 54,000,000 of which she had to pay 18 million U.S. dollars on the basis of individual responsibility. The directors did not admit illegal in the liquidation.

Backdating stock options

The scandal of backdating Uscurrently reading The Wall Street Journal could, according to scientists from more than 3,000 listed companies. Lawyers, lawyers and actor began to mobilize. This potentially vast arena of litigation and expert testimony occurred due to the practice in the last ten years of listed companies granting stock options to key management personnel in-the-money, but not recorded as compensation costs, in violation thus accounting principles,false statements and tax obligations, and every quarter since the practice began. In other words, the data assigned to the options with the benefit of hindsight that a date prior to the effective date of the grant have been. The SEC has just begun a study of eighty companies, and the list is expanded daily. The DOJ and U.S. Attorney offices of logistical decisions about how to foretold the event of load distribution. Several cases were filed. At least, companiesinvolved will face civil charges by the SEC, a huge adjustment, and then virtually guaranteed class action and derivative suits. The clothes have a base that the companies concerned and their managers and administrators are guilty of breach of fiduciary duty, negligence, unjust enrichment and violations of the SEC Act of 1934. back-dated options have allowed the defendants to millions of dollars in illegal profits reap exceptional costssociety. A company only recently filed 34 suits derivatives. It 's the biggest area of civil litigation in history that begins to unfold before our eyes.

Shareholder Suits derivatives

shareholder derivative suits are still filed in connection with class action. A main concern is that directors and managers will find themselves without coverage for defense costs, premiums for legal fees and a monetary agreement actor. Director andOfficer may exclude insurance payments for non-civil disputes, as if some types of fraud involve SCIENTER exist. Even if he does, usually does not begin coverage until an indictment is brought. Another area that contains elements of risk that the payments are often made on a first come, first served basis. In other words, the claims of order. This can often lead to a shortfall in the event of a solution.

There is an increasing trendfiling of suits derivatives, which are recorded in the first place, before the national courts, as opposed to class action, filed in federal courts. State courts often as plaintiffs to recover non-unanimous decisions (mandatory in the federal system) and some state laws allow lower standards for the utility of the results. This stand-alone derivative suits are normally in the event of breach of fiduciary duty, violations of proxy, on compensation and breach of duty or obligationloyalty.

The Business Judgement Rule supports the decisions of the board on, but does not address these violations. For example, it is a violation of agency decisions include unintelligent, thoughtless actions, illegal or a violation of federal laws. The lack of representation of demand management is another example of this type of violation.

A solution to the appropriate D & O coverage is only one side policies that protect directors and officers against losses notnormally be reimbursed. These policies generally provide coverage, even in adverse conditions, including business failure, where the boundaries of traditional policies are exhausted and where the normal policy excludes payments. Some states do not protect the unsuccessful defense against corporate derivative suits in such cases is not increasing, and the policy of one side only provide coverage.

The Private Securities Litigation Reform Act of 1995, providedchanges and a haven for the company in a matter of clothes derivatives - in forward-looking statements. Tenuous conclusions are not allowed in the plaintiff advanced. Complaints must specify the reason for which the false or misleading statements of the company were. Under the safe harbor provisions of the Reform Act, a company is not responsible for inaccurate forecasts if such claims are properly identified and accompanied by a cautionary statementindicates that actual results may differ from expected results, and there is no liability if the plaintiff does not prove the forward-looking statement was made with knowledge that it was misleading. These statements are often made orally to the meeting analysts' , so this gives a degree of certainty in corporate public relations department. However, as the option backdating practices, lack of a safe harbor.

Trading Models

The economic baseof these settlements is a test area in an adversarial process. In a monograph in the early 1990s, several authors have criticized the use of business models to estimate aggregate damages in class action, claiming that the results were not reliable and often overestimated by as much damage as 74%. Daubert grounds have been contested in a variety of proposed models. In Daubert, the Supreme Court directed federal courts to consider four factors in evaluating the evidence of experts under Federal Rule of Evidence702: (1) the widespread adoption of the economic model, (2) potential rate of error in precision, (3) peer review or publication, (4) whether the theory is tested. To recognize that trade models proposed do not meet these standards, the Court is concerned if the model is tested if the model is accepted by professional economists.

The Journal of Legal Economics is a good starting point for obtaining a fixed assessment. This is a doublerefereed journal. Each manuscript is reviewed by at least three qualified persons, in addition to the editor. It was designed as a forum for authors to contribute, both lawyers by profession and professions quantitative accounting, economics and finance, in order to provide constructive ideas to colleagues. It is designed to be a useful tool for the application of research and theory.

In theory, the out-of-pocket loss is the amount of damage in the class of open marketfits. Therefore, a buyer defrauded the member of the class to recover damages, attorney's fees apply unless it can vary from 15-30%. However, since this is the actual trade data is buried in archives, the models were chosen to produce tangible results. The Private Securities Litigation Reform Act of 1995 leaves the door open for the court to the most reliable method of proof of damages available to choose. There are also two-trader model, which assumed, probably rightly, thatthere are passive investors and traders. Retailers, of course, have a greater chance of obtaining and selling shares, and then uses this model to estimate the parameters of the damage, with damage estimated by using certificates of registration data. A trader models often significantly overestimated damage 90-98%. Assumptions can lead to bias. models with three traders also active investors high current, low activity of investors and intraday traders (who do not use at night to engagepositions). Often these operators can amount to one third of all trading one.

Recommendations

A successful strategy sometimes is to create a special litigation committee (SLC) that the content and form of independence. The committee has the responsibility of preserving the forensic teams for thousands of pages of documents and interviewed hundreds of witnesses to be examined. A company has only 2 million documents review and expects to pay $ 70,000,000only a report of its findings. The purpose of this committee is for the Court to provide business-judgment rule "derived confidence to dismiss the appeal. However, this procedure is not as simple and easy as it sounds.

Delaware and other states allow the Council to respond to a suit for appointment of a SLC should be independent directors. While the SLC is in progress, the seed has been derived. However, in the adversarial process, which iscontinues to operate, the motions presented, which is often in question the true objectivity of the SLC. Delaware courts often slamming the door to the SLC, finding the case against them and let go. If the SLC members have significant social ties to suspects in terms of relations between past and future that is a disqualification. Another example is a public declaration by the head of an SLC at any time prior to the release of the report that shows bias. It 'hard to believe that this would happen, butin specific cases and that has destroyed the defense of society from the beginning.

Drivers often share institutional and social relations on the basis of onboard service. This makes it particularly difficult to find an objective third party. Warren Buffett explained this way: "Why directors intelligent and dignified, not so unfortunately the answer lies in the inadequate legal - has always been clear that the directors are required to protect the interests of shareholders to be - but?I had a place for meeting atmosphere 'call. "Council of applications for membership will be rejected by a record number because of the perception of a risk manager in this environment. However, the provisions on corporate governance are much more serious and warrants Sarbanes-Oxley them, these recent revelations almost guarantee his place in history.

backdating of options: corporate restructuring

Since August 17 the Wall Street Journal has included a study of 87companies that have launched probes, announced changes to the dismissal of management or the Justice Department investigation had in their stock options practices. The SEC filed a civil complaint against employees of public companies, namely that they are working on a ten-year fraudulent grant exclusive, in-the-money options to themselves and others by backdating stock option grants to coincide with prices closing of their historically low inventories. Those complaintsthat the former directors collectively millions of dollars in ill-designed compensation received through the exercise of illegally backdated option grants and the subsequent sale of its common stock.

In a separate case, U.S. Attorney 's offices are sealed criminal complaint charging conspiracy to violate the leaders anti-fraud provisions of federal securities laws, wire fraud and mail fraud. It 'been argued that the retroactive option grants and secret funds blacks optionwere "the deception of the highest order" to shareholders. Managers, according to the SEC have repeatedly used to analyze below to select when the closing price of its common stock was equal to or near a quarterly or annual low. The complaints further allege that well-regulated accounting principles in effect at the time, companies that have granted in-the-money options are required to charge an expense to record and report these amounts in the documents with the Commission. L 'Managers are also responsible for violations of the provisions of Sarbanes-Oxley certification officer of the federal securities laws. Coercive measures, civil penalties, disgorgement with interest prejudice, and an officer and director bars against each of the suspects is requested.

HOW TO LIGHT The backdating

It is useful to examine how the practice originated in that the reorganization of its internal control policies can be effective. Executivesmanaged and controlled the process of option grant backdating and start schemes. Among other things, have chosen in particular the data retrospectively, by interfacing with the Remuneration Committee. forgivable loan documents with false dates, approved by the Compensation Committee. unscheduled grants were the modus operandi. A spreadsheet containing the lists of proposed purchaser. At one point, the leaders "collected" from the date of grant to look back to their historical stockprices and, with hindsight, the choice of the date of grant which amounted to a date when the shares were trading at a relatively low. The master list was then submitted to the Compensation Committee for approval.

unanimous written consent forms on grant proposals were sent to members of the Compensation Committee for the signature. He was known among those managers who were given the "low-ball" look-before dates you have chosen. Remuneration CommitteeMembers are generally unaware of the impending grant of a first to receive the master list. The committee members then signed, but not the date of their copies of the consensus and has given them. On the basis of their involvement in the process of option grant, each defendant knew or were reckless in not knowing that the unanimous written was false, because "as" data that have been introduced permits and is reflected in the books of business documents and not the truegrant dates.

The leaders knew that any corporate action to approve options grants actually happened in the "as of" date. They knew they were those who had given the award by the look-back tables, with the benefit of hindsight. He had studied the historical citations and chose a date with a low price. Options back data that the program of accelerated aging, as the company has used the retroactive dateFor the purposes of ripeness, not the date of actual damages for approval. Many of the subsidies are at or near the lowest price for the fiscal quarter or year. In an article published by The Wall Street Journal, the patterns of stock option grants have been analyzed and astronomical units, some approaches is six billion, have been determined by such aid would fall on the data network for the earnings net of a business warehouse for the event.

L 'Secret backdating schemes have been suspicions that the company a higher compensation to executives and employees against granting them in-the-money options, and to avoid the cost of in-the-money options as a compensation expense in order to mask and then prevent the reduction of the Company's net income and EPS. In addition, some large institutional investors have long been compared to stock option plans that grant options allowed under the fair market valueunderlying stock at the time of grant. This is the basis for tens of billions of dollars in derivative lawsuits in recent weeks against associates from law firms on behalf of large institutional investors.

California Public Employees' Retirement System (CalPERS) is the largest U.S. public pension fund with over $ 200 billion of total assets. Have recently in an open letter to the chairmen of the compensation committees of several portfolio companiesissues relating to employee stock option backdating practices. The letter contains allegations of implications, such as lack of oversight by the board of directors, weak internal controls, weak internal and external audit practices, poor accounting, significant fiscal impact on the people for the backdating of options, and problems with executive Compensation Plan Administrator.

Senator Chuck Grassley of Iowa, chairman of the Senate Finance Committee,publicly stated: "It 's a great thing for a manager to make a profit, as it has improved its business, but it is quite another thing to great profit, because he plays fast and loose with the dating of stock options outside the corporate suite, t American Gio 'get to choose to share their dream. The market determines the price. "

The CFA Institute recently published an open letter to the SEC stating "In the case of post-dating, senior executives (and perhapsdrivers) used for science or post-closing market prices to determine when a retroactive effective date of share-based awards for the return of these awards to improve. This practice seems to be involved false accounting, the financial reporting requirements in order to circumvent the "variable" subsidies may be in conflict with the governance requirements for the pricing of stock options, and ultimately can lead to penalties and companies engaged in taxthese activities, damaging shareholders, the value even more. "

RECLAMATION

In the real world, the best attitude is one of proactive remediation before they begin a review by a third. Materiality thresholds should be considered according to ESA Bulletin No. Thresholds 99 and Sarbanes-Oxley. If the threshold is not broken, there will be no adjustments made. If an adjustment, this almost guarantees an investigation by the SEC and the creation of a "materialWeakness "from one of the external auditors. Findings material weakness can lead to loss of important blocks of market capitalization after the announcement.

The problems are not restricted to IT companies. Their excess returns in the studies conducted by academics at the University of Iowa and others were what first caught the attention to the problem, but its scope of IT companies. It is estimated that nearly 3,000 companies involved. In many of these casesmanagement did not question his integrity, and the element of SCIENTER does not exist. The rest of the public companies need to review procedures and Sarbanes appropriate research to ensure that they are not interested in the future. Early studies of proxy statements for statistics on options for the implementation of Sarbanes Oxley reporting requirements changed in two trading days of August 2002 indicated the problem existed in 1996, with most companies.Grant patterns in excess returns following option pricing largely began in the mid-1990. One company alone has almost two million documents that must be examined for the extent of the retroactivity problems fixed. I understand the research, forensic and related professional fees, in this case and one purpose only budgeted for 70 million U.S. dollars. This does not include defense spending or regulations on class action and derivative lawsuits.

Without going into specific detailswhat is called the tone at the top should be fixed compensation committees around the world today. Administration and in particular the Audit Committee and Compensation Committee members should be re-educated to the needs of governance to meet both the spirit and letter of the law. compensation programs should not be driven by competition, but with superior performance over the long term. Full information is required for proxy statements. Independent Directorsare an important need. The experts should be added to the compensation committees. If not, then others should be hired consultants who are experts. Incentive Compensation issues, dilution, options and performance facilities, revision of prices, and a variety of fiscal and governance issues must be addressed. Steps should be taken to ensure that the evaluations of the Board of Directors and Committee of fair compensation and would be advised to abstain from using resources to meetlegal and fiscal requirements for managers involved in the violations. This can lead to a further suitable derivatives. Independent detailed case studies with a strong support structure of the director to be taken. The effects of the Sarbanes must be fully understood and addressed. Lying to the auditors is now a federal crime. Insider manipulation is not tolerated by the market nor the supervisory authority. Justice officials havemade it clear that managers can, possibly in jail for backdating stock options face. serious change and corporate governance should now follow.

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Defending Against Class Action Suits In The World Of Sarbox

In April of 1998 Cendant disclosed a restatement of 1997 results, including a reduction in net income of $ 100 million due to various accounting irregularities. Then on July 14, 1998 Cendant announced a further restatement of financial results for 1995, 1996 and 1997, including all quarters due to recognition of fictitious revenues and cookie cutter reserve mismanagement. At the end of August Cendant filed an SEC report indicating a reduction in operating income of $ 500 million; a reduction in net income before taxes of $ 297 million and the effect on earnings per share. As a result, the market price of the stock decreased from a high of $35. in April to $11. per share in August. Normally a 10% drop in stock price following an adverse announcement is enough to trigger a class action suit within 72 hours. Here the drop was precipitous: 69%.

Fifty lawsuits were filed in the U.S. District Court which were consolidated by the judge with several institutional investors as the Lead Plaintiffs. Hundreds of thousands of documents were produced by Cendant, Ernst & Young and the various defendants. An investment banking firm and a forensic team were retained as expert witnesses. Cendant settled for $2.8 Billion. Ernst & Young settled for $ 335 Million. This settlement was followed by even larger valuations in the cases of WorldCom ($ 6.2 Billion) and Enron ($ 7.1 Billion, pending final court approvals).

Enron directors agreed to settle class action against them for $ 168 million as their proportionate share of the settlement. Insurance covered most of the cost, but left them with terms that required the directors to personally pay $ 13 Million. WorldCom directors had a settlement requiring them to pay their proportionate share, $ 54 Million, leaving them $ 18 million owed on a personal liability basis. The directors in the settlement admitted no wrongdoing.

Backdating Stock Options

The backdating scandal we are currently reading about in the Wall Street Journal may, according to academics, affect up to 3,000 publicly-held companies. Defense attorneys, plaintiff attorneys and expert witness are beginning to mobilize. This potentially massive arena of litigation and expert testimony has occurred because of the practice in the last ten years of publicly-held companies granting stock options to key executives which were in-the-money but not properly recorded as compensation expense, thus violating GAAP, and misstating tax liabilities as well over every quarter since the practice began. In other words, dates were assigned to the options using hindsight that were earlier dates than the actual grant date. The SEC has just begun an investigation into approximately eighty companies, and the list is expanding daily. The DOJ and U.S. Attorney offices are making logistic decisions as to how to allocate predicted case load. Several criminal charges have been filed. At a minimum, companies that are involved will face civil charges by the SEC, massive restatements and therefore the virtual guarantee of class action and derivative suits. The suits have as their basis that the companies in question and their top executives as well as boards of directors have engaged in breaches of fiduciary duty, gross mismanagement, unjust enrichment and violations of the SEC Act of 1934. Back-dated options have allowed the defendants to reap millions of dollars in unlawful windfall profits at the expense of the company. One law firm alone recently filed 34 derivative suits. It's the largest area of civil litigation in history that is beginning to unfold before our very eyes.

Shareholder Derivative Suits

Shareholder derivative suits are increasingly filed in connection with class action suits. A primary concern is that directors and officers will find themselves without coverage for defense costs, awards for plaintiff's attorneys fees and a monetary settlement. Director & Officer insurance policies sometimes exclude payments for non-civil litigation, as where certain types of fraud which involve scienter exist. Even if it does, usually the coverage does not begin until an indictment is brought. Another area that contains elements of peril is that often payments are made on a first-come, first-serve basis. In other words, in the order that claims are filed. This can often lead to a shortage in the case of a settlement.

There is an upward trend in filings of derivative suits, which are filed primarily in state courts, as opposed to class action suits, filed in federal district courts. State courts often permit plaintiffs to recover on non-unanimous verdicts (required in the federal system) and some state laws permit lower standards of findings for recovery purposes. These stand-alone derivative suits are normally for breach of fiduciary duty, proxy violations, excessive compensation and breach of the duty of care or duty of loyalty.

The Business Judgment Rule supports active decisions of the Board of Directors, but it does not cover these breaches. For example, breach of the duty of care does not cover unintelligent decisions, ill-advised actions, or illegal breach of federal laws. Failure to question management representations is another example of this type of breach.

One solution to adequate D & O coverage is a Side A-only policy, which can protect directors and officers from losses not normally indemnified. These policies typically provide coverage even under adverse conditions, including corporate bankruptcy, when the limits of the traditional policy have been exhausted and under cases where the normal policy excludes payments. Some states do not permit corporate indemnification of unsuccessful defense against derivative suits and in these cases as well a Side A-only policy will provide coverage.

The Private Securities Litigation Reform Act of 1995 provided modifications and a safe harbor for corporations in one aspect of derivative suits - the forward-looking statement. Tenuous inferences are not permitted in plaintiff pleadings. Allegations must include specificity as to falseness or why the statements made by the company were misleading. Under the safe harbor provisions of the Reform Act, a company is not liable for projections which are inaccurate if such statements are properly identified and accompanied by a cautionary statement which indicates that actual results could differ from projected results, and liability also does not exist if the plaintiff does not prove the forward-looking statement was made with knowledge that it was misleading. Forward-looking statements are often made verbally at analyst conferences, so this provides some measure of assurance to the corporate public relations department. However, as regards the option backdating practice, there is no safe harbor.

Trading Models

The economic basis of these settlements is an area of adversarial tests. In a monograph in the early 1990s, several authors criticized the use of trading models to estimate aggregate damages in class action suits, claiming that the results were not reliable and often overstated damages by as much as 74%. Daubert grounds have been challenged on a variety of proposed models. In Daubert the Supreme Court directed federal courts to consider four factors in evaluating expert testimony under Federal Rule of Evidence 702: (1) the general acceptance of the economic model; (2) potential rate of precision error; (3) peer review or publication; (4) whether the theory has been tested. In finding that various proposed trading models do not meet these standards, the court is concerned about whether the model has been tested and whether the model has been accepted by professional economists.

The Journal of Legal Economics is a good starting point for obtaining solid valuation models. It is a double blind refereed journal. Each manuscript is reviewed by at least three qualified individuals, in addition to the Editor. It was conceived as a forum for contributing authors, both from the profession of lawyers as well as the quantitative professions of accounting, economics and finance, to offer constructive insights to colleagues. It is designed to be a useful research tool for application as well as theory.

In theory, the "out-of-pocket" loss is the measure of damages in open-market class suits. Therefore a defrauded buyer can recover his share of class member's damages, less applicable attorney fees, which can range from 15-30%. However, since this actual trading data is buried in repositories, models have been chosen to produce tangible results. The Private Securities Litigation Reform Act of 1995 leaves it open for the court to select the most reliable method of damages proof that is available. Two-trader models also exist, which assume, probably correctly, that there are passive investors and there are traders. Traders of course have a higher probability of acquiring and selling shares, and thus this model utilizes parameters for damage estimates with the damages estimated using depository record data. One-trader models often significantly overstate damages by 90-98%. Assumptions can therefore lead to bias. Three-trader models also exist which involve high-activity investors, low-activity investors and intraday-traders (who do not utilize overnight positions). Often these traders can account for up to one-third of all trading activity.

Recommendations

One strategy that is sometimes effective is the formation of a special litigation committee (SLC) that has the substance and form of independence. The committee has the responsibility of retaining forensic teams to review thousands of pages of documents and interview hundreds of witnesses. One corporation alone has 2 million documents to review and expects to pay $ 70 Million just to receive a Findings Report. The purpose of the committee is to provide the Court with the "business judgment rule" confidence to dismiss the derivative action. However, this procedure is not as simple and straightforward as it sounds.

Delaware and other states permit the board of directors to respond to suits by appointing an SLC comprised of independent directors. As long as the SLC is in process, the derivative suit is stayed. However, in the adversarial process that is underway continues, motions are often filed that question the true objectivity of the SLC. Delaware courts often slam the door to the SLC by ruling against them and letting the suit proceed. If the SLC members have significant social ties to the defendants in terms of past or future relationships that is one disqualification. Another is a public statement by the head of an SLC at any time prior to the issuance of the report that illustrates bias. It is hard to believe this would occur but in specific cases it has and it has destroyed the company's defenses from the beginning.

Directors often share institutional and social connections based on board service. This makes it particularly difficult to find objective third parties. Warren Buffet explained it this way: "Why have intelligent and decent directors failed so miserably? The answer lies not in inadequate laws - it's always been clear that directors are obligated to represent the interests of shareholders - but rather in what I'd call 'boardroom atmosphere.' Board membership requests are being declined in record numbers due to the perception of risk of being a director in this environment. However, corporate governance provisions are being taken much more seriously and since Sarbanes-Oxley mandates them, these recent revelations almost guarantee its place in history.

BACKDATING STOCK OPTIONS: CORPORATE REMEDIATION

As of August 17th the Wall Street Journal posted a study of 87 companies that have initiated probes, announced restatements, had executive resignations or Department of Justice inquiries into their stock options practices. The SEC has filed civil charges against executives of public companies, alleging that they engaged in a decade-long fraudulent scheme to grant undisclosed, in-the-money options to themselves and to others by backdating stock option grants to coincide with historically low closing prices of their stock. These complaints have alleged that former executives collectively realized millions of dollars of ill-gotten compensation through the exercise of illegally backdated option grants and the subsequent sale of related common stock.

In a separate matter, U.S. Attorney's Offices have unsealed criminal complaints charging executives with conspiracy to violate the antifraud provisions of the federal securities laws, wire fraud and mail fraud. It has been alleged that backdated option grants and secret option slush funds were "deceits of the highest order" upon shareholders. Executives, according to the SEC, have repeatedly used hindsight to select dates when the closing price of their common stock was at or near a quarterly or annual low. The complaints further allege that under well-settled accounting principles, in effect at the time, companies that granted in-the-money options were required to record a corresponding compensation expense and disclose such amounts in filings with the Commission. The executives have also been charged with violations of the Sarbanes-Oxley officer certification provisions of the federal securities laws. Injunctive relief, civil penalties, disgorgement, with prejudgment interest, and officer and director bars against each of the defendants has been requested.

HOW THE BACKDATING OCCURRED

It is helpful to review how the practices originated in order that remediation of one's own internal control policies can effectively take place. The executives directed and controlled the option grant process and initiated the backdating schemes. Among other things, they specifically selected the backdated grant dates by interfacing with the Compensation Committee. Grant documents with false grant dates were approved by the Compensation Committee. Unscheduled grants were the modus operandi. A spreadsheet contained lists of proposed grantees. At some point, the executives "cherry-picked" the grant date by looking back at their historical stock prices and, with the benefit of hindsight, chose a grant date that corresponded to a date on which the common stock was trading at a relative low. The master list was then submitted to the Compensation Committee for approval.

Unanimous written consent forms pertaining to the proposed grant were sent to Compensation Committee members for signature. It was known among the executives that these dates were the "low-ball" look-back dates they had previously chosen. Compensation Committee members were generally not aware of an impending grant prior to receiving the master list. The Committee members then signed, but did not date their copies of the consents and returned them. Based upon their involvement in the option grant process, each of the defendants knew, or were reckless in not knowing, that the unanimous written consents were false because the "as of" dates that were inserted into the consents and reflected in the company's books and records did not represent the true grant dates.

The executives knew that no corporate action to approve the options grants had actually occurred on the "as of" date. They knew this because they were the ones who had picked the grant dates by use of the look-back tables, with the benefit of hindsight. They had examined historical trading prices and selected a date with a low trading price. Options with backdated dates in effect also accelerated the vesting schedule because the Company used the backdated date for vesting purposes, not the date of the actual Compensation Committee approval. A large number of grants were grants at or near the lowest price for the fiscal quarter or year. In an article published by the Wall Street Journal, the patterns of stock options grants were analyzed and astronomically high odds, some approaching one is six billion, were determined to exist that such grants would have fallen on dates just ahead of sharp gains in the related corporate stock price by chance.

The secret backdating schemes allowed the defendants to disguise the fact that the Company was paying higher compensation to executives and employees by awarding them in-the-money options, and to avoid having to expense the in-the-money options as compensation expense, thus avoiding reductions to the company's net income and EPS. In addition, certain large institutional investors have long been opposed to stock option plans that allowed grants of options at below the fair market value of the underlying stock at the time of the grant. This is the basis for the tens of billions of dollars of derivative suits filed in recent weeks against related corporations by law firms on behalf of large institutional investors.

The California Public Employees' Retirement System (CalPERS) is the largest U.S. public pension fund, with over $ 200 Billion in total assets. They have recently written an open letter to the Chairs of the Compensation Committees of a number of portfolio companies related to inquiries on employee stock option backdating practices. Their letter contains implications of allegations, including lack of oversight by the Board of Directors, weak internal controls, weak internal and external audit practices, poor accounting, significant income tax consequences for persons implicated for backdating options, and problems with the Executive Compensation Plan Administrator.

Senator Chuck Grassley of Iowa, Chairman of the U.S. Senate Committee on Finance, has publicly stated: "It's one thing for an executive to make big profits because he's improved his company, but it's a whole different thing to make big profits because he's playing fast and loose with the dating of stock options. Outside the corporate suite, Americans don't get to pick and choose their dream stock price. The market dictates the price."

The CFA Institute recently published an open letter to the SEC stating "In the case of Post-Dating, senior executives (and possibly directors) used inside information or post-closing market prices to determine when to retroactively set the effective date of share-based awards in order to enhance the return of such awards. This practice also appears to have involved falsified accounting, may circumvent financial reporting requirements for 'variable' option grants, may conflict with governance requirements related to the pricing of stock options, and may ultimately lead to criminal and tax penalties against companies engaged in these activities, thereby harming shareowner value even more."

REMEDIATION

In the real world, the best stance is one of pro-active remediation before any investigation by third parties begins. Materiality thresholds need to be considered according to SEC Bulletin No. 99 and Sarbanes-Oxley thresholds. If the materiality threshold is not breached, then no restatements will occur. If a restatement occurs, it almost guarantees an SEC investigation and also a finding of a "Material Weakness" by one's third-party auditors. Material Weakness findings can cause the loss of significant blocks of market capitalization upon disclosure.

The problems are not restricted to Information Technology companies. Their excess returns in the studies performed by the academics at the University of Iowa and others were what caught initial attention to the issue, but the scope is beyond IT companies. It is estimated that close to 3,000 companies are involved. In many of these cases undoubtedly management has retained its integrity, and the element of scienter does not exist. The rest of the public companies need to study and research adequate Sarbanes procedures to assure they are not affected in the future. The initial studies of proxy statements for statistics on options before the implementation of Sarbanes Oxley changed the reporting requirements to 2 trading days following August of 2002 indicated the problem existed as early as 1996 with the majority of companies. Grant patterns on excess return post-option pricing began largely in the mid-1990s. One company alone has close to two million documents that need to be examined to determine the extent of the backdating issues. I understand investigative, forensic and related professional costs in this one case alone are targeted and budgeted for $70 Million dollars. This does not include defense or settlement costs for related class-action and derivative lawsuits.

Without going into specific detail what is referred to as the Tone at the Top must be re-established at Compensation Committees throughout the world today. Directors and particularly Audit Committee and Compensation Committee members need to be re-educated as to governance requirements that comply with both the spirit and letter of the law. Compensation programs should not be driven by competitive surveys but by superior performance over the long-term. Full disclosure is necessary in proxy statements. Independent directors are a major necessity. Experts have to be added to Compensation Committees. If they are not there, then third parties must be hired who are expert consultants. Issues of Incentive Compensation, Dilution, Performance Options and Structures, Repricing, and a variety of tax and governance issues have to be addressed. Steps have to be taken to ensure that Board and Committee evaluations of compensation are equitable and it would be advised to refrain from using company resources to satisfy legal and tax liabilities for executives who are implicated in wrongdoing. This could lead to further derivative suits. Independent detailed investigations on a case-by-case basis with strong Board of Director backing need to be undertaken. The implications of Sarbanes need to be fully understood and addressed. Lying to auditors is now a federal offense. Insider manipulation is now not being tolerated by the market, nor by enforcement authorities who have oversight. Justice officials have made it clear that executives can face possible prison time for backdating stock options. Serious change and corporate governance must now follow.

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