Do Options Backdating Class Actions Settle for Less? -- May 2010 Update

Wed May 12 16:24:00 EDT 2010
By Robert Patton and Svetlana Starykh et al.

This update to the fourth installment of the NERA Insights: Options Backdating Series revisits the issue of whether shareholder class actions involving options backdating allegations settle for less than do other class actions with similar characteristics. Since the last update in October 2008, an additional 16 backdating-related securities class actions have settled, bringing the total number of settlements to 31. Most recently, Maxim Integrated Products settled a class action with backdating claims for $173 million, the third largest backdating class action settlement to date.

The authors note that these 31 settlements averaged about 71% of the amount predicted by NERA’s settlement prediction model. By contrast, the first eight backdating class actions to settle did so, on average, for less than 38% of the predicted amount. For the 31 backdating class actions that have settled to date, the difference between settlements in backdating cases and in other cases with similar characteristics is not statistically significant, whereas the difference was significant for the initial eight cases. These latest findings provide additional support for the hypothesis that the initial settlements were low because some of the weakest cases settled most quickly, rather than because backdating class actions generally settle for less than other, similar cases.

This is the second 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.