Do Options Backdating Class Actions Settle For Less?

04 June 2008
By Robert Patton and Svetlana Starykh et al.

Despite the widespread attention given to "options backdating" by investors, regulators, the legal profession, and the news media, the issue has not generated the spate of shareholder class action litigation that some observers anticipated. Of nearly 250 companies identified as being potentially involved in backdating, only 38 have actually been the target of a related federal shareholder class action lawsuit.

In this NERA paper, the authors note that it now appears that backdating class actions may be falling short of expectations in another respect: in the cases that have settled to date, the amounts paid to plaintiffs have been substantially lower than in comparable non-backdating class actions. On average, class actions involving backdating allegations have settled for less than half of the amounts forecast by NERA's settlement prediction model, which forecasts the most likely settlement for a case based on the level of "investor losses" and other lawsuit characteristics. The authors hypothesize that the disparity in settlements between backdating and non-backdating cases is due to either a perceived weakness on the merits of backdating versus non-backdating cases; or the possibility that the weakest backdating cases have settled first, and future settlements may be more in line with those in other types of shareholder class actions.

This is 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, "invalid link: [ioID]F4BE7DD794E542108FB079B89B3A23E9Options 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, "invalid link: [ioID]4065C98B8CD84BFEAF5A2DF793508C2EOptions Backdating: Accounting, Tax, and Economics," provides an overview of the potential accounting, tax, and economic consequences stemming from the practice of backdating. Part III, "invalid link: [ioID]4CD7D6EE0E4B4CD0AEFDCCA48E21BF18Options 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.