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Gibson Dunn Wins Dismissal of ePlus Backdating Suit
The American Lawyer
August 05, 2009
As we noted earlier this week, pleading standards have gotten a lot tougher in product liability cases.
Now, we have news of an options backdating derivative suit dismissed on pleadings grounds. In a July 31 opinion, federal district court Judge Richard Leon of the District of Columbia dismissed with prejudice a derivative suit filed over backdating practices at a company called ePlus, which was represented by Gibson, Dunn & Crutcher.
The plaintiffs had filed their lawsuit in 2007, after ePlus made a $3 million adjustment to its financial statements because of improperly recorded stock option grants. Judge Leon noted that plaintiffs made the fundamental mistake of choosing a named plaintiff who did not own ePlus stock during all the alleged improper backdating incidents. The plaintiffs lawyers had alleged that plaintiff Christopher DiLorenzo was an ePlus stockholder "at relevant times." But when pressed by Gibson Dunn to show exactly when DiLorenzo held ePlus stock, it turns out that he was a stockholder only during one of the nine challenged stock option grants.
More significantly, Leon found that the plaintiffs had failed to show that it would have been futile to make a demand on the company's directors to bring this action. The plaintiffs had argued that this demand would have been futile because at least half of the directors had either received suspicious stock option grants or had been involved in granting them. Two other Delaware courts had recently held that such facts excused a demand on the board. But Leon, applying Delaware law, ruled that in this case it wasn't enough. Because ePlus' certificate of incorporation exempts directors from liability unless they've acted in bad faith, the plaintiffs must plead facts showing they had knowledge of their wrongdoing, the judge reasoned.
Gibson Dunn's team was led by F. Joseph Warin, and included Mike Flanagan, Jason Mendro, Scott Martin and Elizabeth Cannon.
The plaintiffs were represented by Coughlin Stoia Geller Rudman & Robbins and Cuneo Gilbert & LaDuca. We placed calls to lawyers at both firms but haven't heard back.
This article first appeared on The Am Law Litigation Daily blog on AmericanLawyer.com.
