Blast from the Past: A New Options Backdating Lawsuit - www.dandodiary.com - Kevin LaCroix, July 9, 2008

Blast from the Past: A New Options Backdating Lawsuit

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Subprime-related
litigation may be all the rage, but the latest securities class action
lawsuit harkens back to the era of the prior scandal-driven event. On
July 8, 2008, plaintiffs’ attorneys filed an options backdating-related
securities class action lawsuit against MRV Communications and certain of its directors and officers.

A copy of the plaintiffs’ attorneys’ July 8 press release can be found here, and a copy of the complaint can be found here.

The lawsuit follows the company’s June 5, 2008 announcement (here)
that it has "established a committee of independent directors to review
the company’s historical stock option practices." During late 2006 and
early 2007, the company had previously conducted "an informal and
voluntary review" of its share practices and found no problems.
However, in the course of reviewing transactions involving two European
subsidiaries, the company identified information suggesting that "the
conclusions reached in the earlier review were incorrect," and the
company is now undertaking a comprehensive review, not just limited
solely to the European subsidiaries.

The
company also indicated that financial reports issued during the period
2002 to 2008 may be affected and "the company expects to restate its
financial statements for the impacted period." The company indicated
that investors should not rely on the company’s financial statements
issued during those periods. The company’s share price dropped 24% on
the news.

According to the plaintiffs’ counsel’s press release,

during
the Class Period, defendants made false and misleading statements
concerning the Company's employee stock option grant practices and
financial results. Defendants allegedly caused or allowed MRV to issue
statements that failed to disclose or misstated the following: (i) that
the Company had problems with its internal controls that prevented it
from issuing accurate financial reports and projections; (ii) that
because of improperly recorded stock-based compensation expenses the
Company's financial results violated GAAP; and (iii) that the Company's
public disclosures covering a seven-year period presented an inflated
view of MRV's earnings and earnings per share, which would later have
to be restated.

Even though the options backdating scandal may
now seem like ancient history, new options backdating lawsuits have
continued to filter in during 2008. Indeed, the MRV Communications
lawsuit is the third new options backdating related securities class
action lawsuit to be filed during 2008. (The prior two involved
TeleTech Holdings, about which refer here, and Maxim Integrated Products, refer here.)

The
one thing that is clear is that we still have a very long way to go
before we have seen the end of the options backdating scandal. This may
be an important thing to keep in mind when assessing the current
subprime and credit crisis mess, which is in my view an infinitely
bigger deal than the options backdating scandal. It undoubtedly will be
many, many years before we reach the end of the subprime mess.

In
any event, I have added the MRV Communications lawsuit to my running
tally of options backdating-related securities class action lawsuits,
which can be found here.
With the addition of the MRV Communications lawsuit, the current tally
of options backdating related securities class action lawsuits now
stands at 39.

Finally, I have
substantial grounds on which to suspect that MRV Communications was
also named as nominal defendant in a shareholders’ derivative lawsuit
filed in the Los Angeles County Superior Court. I have not yet been
able to verify this filing, so I have not yet added MRV Communications
to my list of options backdating related derivative lawsuits. I would
be grateful if any reader out there who can verify the filing of the
MRV Communications options backdating-related derivative complaint
would please let me know.

Special thanks to Adam Savett of the Securities Litigation Watch blog (here) for the link to the MRV Communications complaint.

Updated Options Backdating Settlement Analysis:  And speaking of the Securities Litigation Watch, Savett has posted on the blog (here)
an updated version of his analysis of the value and timing of the
options backdating-related class action settlements. The updated
analysis accounts for the recent UnitedHealth option backdating class
action settlement.

And Finally:
Readers interested in the blogosphere’s internal dynamics of will be
interested to follow the sequence events that ensued after I added The D&O Diary’s post last night about mid-year FCPA enforcement and litigation activity.

The post was quickly picked up by Dick Cassin’s excellent FCPA Blog (here). The FCPA Blog
clearly (and deservedly) enjoys a strong and influential readership,
which apparently includes, among others, Dan Slater at the WSJ.com Law Blog, who added his own post (here) referencing back to my item. The Law Blog’s inclusion of a picture of The D&O Diary’s author made this sequence perfect and complete.

This blogging stuff never ceases to amaze me.