Do Options Backdating Class Actions Settle For Less? -- October 2008 Update

Wed Oct 22 16:24:00 EDT 2008
By Robert Patton and Svetlana Starykh et al.

In the previous edition of "Do Options Backdating Class Actions Settle For Less?," published in June 2008, NERA noted that the eight shareholder class action lawsuits then in NERA's database that involved backdating allegations had each settled for less than the amount forecast by NERA's settlement prediction model. In all but one of those cases, the settlement was well below the predicted amount. The authors were unsure of the reasons for the low settlements observed up to that point, and put forward two hypotheses: either suits alleging backdating are generally viewed as weaker on the merits than other class actions (and would therefore be expected to continue to settle for less) or the weakest cases had simply settled most quickly, which would suggest that future settlements in backdating class actions might be as high as or higher than our predictions. In this update, the authors note that three recent settlements -- Brocade Communications, UnitedHealth Group, and Monster Worldwide -- provide some support for the latter hypothesis: that the initial low settlements may have been because the weakest cases settled first.

This is an update to the fourth installment of the NERA Insights: Options Backdating Series, a series of papers dedicated to the analysis of options backdating. All papers in the series include an updated, detailed table summarizing the companies that have been identified for potentially improper option-granting practices. Part I, "Options Backdating: A Primer," provides an introduction to the properties of options as a financial instrument and how these properties relate to the practice of backdating. Part II, "Options Backdating: Accounting, Tax, and Economics," provides an overview of the potential accounting, tax, and economic consequences stemming from the practice of backdating. Part III, "Options Backdating: The Statistics of Luck," sheds light on the limited extent to which academic literature on options timing may be used to draw direct conclusions about specific company practices.