Backdating: Ryan v. Gifford (Continued)

Vaughn Marshall has written a nice post on Chancellor Chandler's decision in Ryan v. Gifford. Let's draw some conclusions that will become more relevant, particularly as we get to the last of the three backdating cases, Desimone v. Barrows. First, Chancellor Chandler shows no patience for backdating. The opinion contains no tone of acceptance. He emphasizes the inherently deceptive nature of the practice.

• "Commonly known as backdating, this practice involves a company issuing stock options to an executive on one date while providing fraudulent documentation asserting that the options were actually issued earlier. These options may provide a windfall for executives because the falsely dated stock option grants often coincide with market lows. Such timing reduces the strike prices and inflates the value of stock options, thereby increasing management compensation."

Second, the court had no problem accepting a fairly Spartan complaint. The complaint is on the DU Corporate Governance web site. The complaint contained no specific information about backdating, no allegation about documents changed or people involved. The complaint relied entirely on statistics produced from a study by Merrill Lynch. As Chancellor Chandler noted:

• "Defendants argue repeatedly that plaintiff's allegations ultimately rest upon nothing more than statistical abstractions. Nevertheless, this Court is required to draw reasonable inferences and need not be blind to probability. True, the Merrill Lynch report does not state conclusively that Gifford's options were actually backdated. Rather, it emphatically suggests that either defendant directors knowingly manipulated the dates on which options were granted, or their timing was extraordinarily lucky. Given the choice between improbable good fortune and knowing manipulation of option grants, the Court may reasonably infer the latter, even when applying the heightened pleading standards of Rule 23.1."

In other words, the statistical data was compelling enough to at least let the case go to discovery. Similarly, the complaint contains no specifics about the role of the compensation committee in the backdating scheme. The complaint noted that the board "could designate a Committee to approve the options" and that the Compensation Committee "approved the option grants". The complaint contained no dates, no references to minutes or meetings, no facts demonstrating actual knowledge on the part of the compensation committee.

In other words, it did not take much to get past a motion to dismiss. It was enough that options were issued, that evidence of backdating existed (even if only statistical), that the board (or relevant committee) approved the options (with a mere assertion enough), and that there had been false disclosure. As we will see, Desimone takes a very different approach.