Backdating of stock options by Epiq Systems alleged in lawsuit

A lawsuit filed Tuesday accuses officers and directors of Kansas City, Kan.-based Epiq Systems Inc. of backdating stock options going back to 1997 and falsifying filings with regulators.

The complaint, filed in federal court in Kansas City, Kan., was brought by the Alaska Electrical Pension Fund, an Epiq shareholder, on behalf of other company shareholders.

“Plaintiff’s
investigation has revealed that Epiq has secretly backdated millions of
options to its top officers and directors for nearly a decade,
reporting false financial statements and issuing false proxies to
shareholders,” the pension fund alleges.

The pension fund, which
has filed numerous securities actions across the country, said that it
performed a statistical analysis of Epiq’s filings with the Securities and Exchange Commission and
found that stock option grants to officers and directors were
consistently priced at the lowest closing price or intraday trade for
the month, quarter or year “with highly improbable frequency.”

“Indeed,”
it alleged, “the odds that Epiq priced certain of its options by chance
(rather than manipulation) are well over 1 in 1,000,000.”

Epiq’s
chief financial officer, Betsy Braham, said Wednesday that the company
had not seen the complaint but was confident it was without merit.

“Epiq has always followed the highest standards of corporate governance practice.”

Epiq
makes and markets software that enables law firms, corporate legal
departments and bankruptcy trustees to manage documents and casework
for bankruptcy, electronic discovery and class-action proceedings. The
company last week reported second-quarter earnings of $3.2 million, up
78 percent from the $1.8 million it recorded a year earlier. Revenue of
$64.8 million was up nearly 47 percent from $44.2 million.

Stock
options give company officers and employees the right to buy shares at
a fixed price, which is typically the stock’s closing price on the date
of the grant. Backdating is the practice of dating options before the
date they were actually granted. That allows recipients to buy the
stock for less than its fair-market value on the day the grant award
was made.

Although backdating as such isn’t illegal, companies
and recipients must disclose them in SEC filings and follow pertinent
accounting and tax rules.

The complaint against Epiq’s officers
and directors alleges that they enabled Epiq to file false and
misleading statements with the SEC, wreaking “tens of millions of
dollars of damages on Epiq.”

“The company’s senior executives
were incentivized to over-pay themselves, to profit from their
misconduct by cashing in on under-priced stock options and to issue
false financial statements to cover up their misdeeds,” the complaint
states.

Epiq was acquired by a private investor group led by Tom
Olofson, its chairman and chief executive officer, in 1988. It went
public in 1997.

Alaska Electrical Pension Fund’s complaint
alleges that Olofson sold more than 2 million shares of Epiq stock for
$18.5 million since 1997 “based on his knowledge of material and
non-public information regarding the Company.” The suit also alleges
that his son, Epiq President and Chief Operating Officer Christopher
Olofson, sold nearly 900,000 shares for about $10.5 million since 1997
“based on his knowledge of material non-public information” about Epiq.

In
addition to the Olofsons, the suit names as defendants former Chief
Financial Officer Janice E. Katterhenry and Braham, the current CFO. It
also names current or former Epiq board members W. Bryan Satterlee, a
partner in NorthEast Ventures, a business development consulting firm; Edward M. Connolly Jr., a retired Aventis Pharmaceuticals executive; James A. Byrnes, a former Hoechst Marion Roussel executive; Joel Pelofsky, a partner with the Kansas City law firm of Spencer Fane Britt & Browne; and Robert C. Levy, Epiq’s former general counsel and a partner with the Kansas City law firm of Seigfreid Bingham Levy Selzer & Gee.

Since 2006, when The Wall Street Journal did
an analysis using statistical methodology and identified a half-dozen
companies with suspicious grant practices, scores of companies and
individuals nationwide have been accused in civil, criminal and
regulatory complaints of improperly backdating option grants. Epiq
appears to be only the second area company to be the target of such a
complaint.

In Epiq’s case, the pension fund alleges, a
methodology used in uncovering the alleged backdating disclosed that
average management return between 1996 and 2007 was nearly 400 percent
higher than average public investor return.

Epiq shares closed Wednesday at $12.21, down 99 cents, or 7.5 percent.

To reach Dan Margolies, call 816-234-4481 or send e-mail to dmargolies@kcstar.com.