X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
A federal judge has dismissed most of a shareholder derivative complaint against CNET in a decision that, observers say, shows how difficult it may be for plaintiffs to succeed in numerous similar claims related to stock-option backdating. San Francisco Federal Judge William Alsup found that the plaintiffs, suing on behalf of the company, hadn’t proven CNET’s board of directors were too personally involved in the scandal to deal with the company’s backdating problems on their own. “If a shareholder wishes to bring a lawsuit on the corporation’s behalf, the shareholder should have to plead that the board could not have made a disinterested and independent decision to do so itself before proceeding,” Alsup wrote. Merely stating that backdating occurred doesn’t necessarily mean that fraud has also occurred, Alsup also found. A special committee of the board found no wrongdoing by current and recently resigned directors or executives, the judge noted. “The inference that fraud still occurred . . . is improper absent other facts indicating fraud,” Alsup wrote. “Had plaintiffs pled other facts in support of this theory, perhaps such an inference would have been proper. Here, it is not.” Attorneys for the plaintiff investors, from San Diego’s Lerach Coughlin Stoia Geller Rudman & Robbins, didn’t respond to a call and e-mails seeking comment. Attorneys for Latham & Watkins, who worked on the case for CNET, declined to comment because the case is still active. The decision is a positive signal for other companies dealing with shareholder derivative suits, said Fenwick & West partner Kevin Muck, whose firm represents several corporate clients in such matters. “The courts are going to analyze the facts of each case individually and are not going to fall into a trap of assuming that merely because option dates are moving that that means there must’ve been some sort of misconduct,” Muck said. “I think that a lot of times plaintiffs’ lawyers want to infer the worst from particular fact patterns, and it’s not always warranted. Sometimes there are more innocuous and less interesting explanations for what happened.” Plaintiffs in the CNET case alleged a broad scheme of backdating over several years to benefit directors and executives. CNET has argued that any backdating wasn’t intentional. Alsup didn’t completely dismiss the suit but gave the plaintiffs an opportunity to request more evidence about two CNET board members whom they believe may be biased. Alsup will decide that request once both sides have filed their briefs this month. CNET, based in San Francisco, acknowledged in public securities filings that it had backdated some of its stock-option grants from 1996 to 2003. The company’s chief executive, Shelby Bonnie, and its general counsel, Sharon Le Duy, both stepped down in October after these admissions came out. At the time The Recorder, a publication of ALM , found Le Duy had received four stock-option grants between 2000 and 2003 that were pegged to dates when the stock prices were at quarterly lows. Le Duy’s attorney, Orrick Herrington & Sutcliffe’s Melinda Haag, said her client didn’t participate in or know about any intentional backdating of options. Now that Alsup has decided that CNET’s board isn’t too biased to make a decision, if plaintiffs still want action, they must demand the board do something specific to remedy the backdating. Boards usually reject such demands and choose to resolve it informally, perhaps asking those who received extra money from backdated options to give the money back to the company, said Peter Henning a professor at Wayne State University Law School. In egregious cases, the board may decide to file a lawsuit against a current or former employee, but that’s highly unlikely because the company would be required to pay attorneys fees for the board as well as the accused employee, Henning said. “The SEC is paying attention to this closely,” he said. “This is one of those areas where you may not need shareholder policing.” This article originally appeared in The Recorder, a publiaction of ALM.

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.