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A significant portion of the stock-options backdating cases have reached preliminary settlements in recent months, with plaintiffs’ firms Labaton Sucharow and Coughlin Stoia Geller Rudman & Robbins serving as lead counsel in some of the most noteworthy agreements. Of those made public, few settlements have reached proportions that lawyers anticipated at the start of the backdating scandal. In the past two years, more than 120 lawsuits have been filed alleging that stock-option grants were backdated so that executives or senior officers could benefit from the higher price of those shares at an earlier time. In recent months, more than 30 of the backdating suits have reached settlements in principle or preliminary settlement agreements. Some have yet to be announced or are confidential. Labaton Sucharow, a New York securities firm that is lead counsel in 14 stock-options cases, obtained some of the priciest settlements in class actions in recent months. In October, the firm struck a $117.5 million deal with Mercury Interactive Corp., the largest settlement in a backdating class action. In December, the firm obtained a $14 million settlement with American Tower Corp. Coughlin Stoia of San Diego has settled 13 backdating cases, making up a large share of the derivative actions that have been resolved in recent months. And Karl Cambronne, a partner at Minneapolis-based Chestnut & Cambronne who served as lead counsel in the derivative case against UnitedHealth Group Inc., is touting a December 2007 agreement worth more than $900 million. No ‘huge bonanza?’ But defense attorneys note that few of the cases have settled for significant sums. “The options-backdating litigation has not been a huge bonanza for the plaintiffs’ lawyers,” said Edward Fuhr, a partner at Richmond, Va.-based Hunton & Williams. “They have obtained some settlements, and there will be more settlements. But they’re not dramatic settlements, for the most part.” Regardless, plaintiffs’ lawyers are declaring victory. “When you look at defense costs, the costs to settle derivative suits and securities fraud suits, the costs to investigate � the costs are enormous,” said Christopher Keller, a partner at Labaton Sucharow. The backdating cases are split into two categories, each requiring an entirely different set of calculations to reach settlement agreements. Most of the cases are derivative actions filed on behalf of a company against its former executives and senior officers who were involved in the backdating. The values of those settlements often are less than $10 million and are based on a certain number of returned or canceled stock options, and the settlement terms include corporate governance measures. A smaller group of cases are class actions filed on behalf of shareholders whose stock dropped in value once the backdating was revealed. Those settlement values typically rely on how much the stock fell. Some of the recent settlements have been tied to agreements with the U.S. Securities and Exchange Commission (SEC) or criminal probes brought by federal prosecutors. The Reyes effect Several settlements have followed the August conviction of Gregory Reyes, the former chief executive of Brocade Communications Systems Inc., in the government’s criminal backdating case, said Darren Robbins, a founding partner at Coughlin Stoia. “They are justifiably fearful of liability for this misconduct,” he said of the defendants. Patrick Conroy, vice president of NERA Economic Consulting, who has been tracking stock-options backdating settlements, agreed. “Now, people really go to jail,” he said. “People are highly motivated to settle.” But he added that some of the settlements might have been driven by individual defendants with tax implications during the latter part of the year. Other settlements have emerged as federal prosecutors or the SEC have dropped their related investigations, or as special litigation committees assigned to probe potential backdating have issued their final reports. “What you’re seeing is the natural progression of the cases, where investigations lead to conclusions that there were reasonable potential for claims, and those claims are resolved,” said Stacey Friedman, a partner at New York’s Sullivan & Cromwell who represents the special litigation committee at Monster Worldwide Inc. in preliminary settlement announced last month with its former chief executive. “You’ll continue to see them over the next six months or so,” Friedman said. The largest proposed settlement of the derivative actions has been with former executives of UnitedHealth Group Inc. In December, several pension funds crafted an agreement after a special litigation committee issued a report revealing backdating at the company. In re UnitedHealth Group Inc. Shareholder Derivative Litigation, No. 0:06-cv-01216 (D. Minn.). “This is the largest pending settlement in a derivative case in history, backdating aside,” said Cambronne, who is handling the case with four other plaintiffs’ firms. “In this particular case, it was an obvious, stark case of blatant backdating. The numbers are huge in this case because of the number of options involved.” Among other things, the agreement would require several former officers, primarily William McGuire, the former chief executive of UnitedHealth, to give up the equivalent of hundreds of millions of dollars in stock options and benefits. Cambronne said some estimates value the settlement at $900 million. In recent weeks, however, a federal judge overseeing the UnitedHealth case has sought guidance from the Minnesota Supreme Court regarding the extent of his authority under state law in approving the deal. David Brodsky, a partner in the New York office of Latham & Watkins who represents McGuire in the UnitedHealth case, did not return a call for comment. Coughlin Stoia is pursuing a separate class action against UnitedHealth on behalf of the California Public Employees’ Retirement System. In re UnitedHealth Group Inc. PSLRA Litigation, No. 0:06-cv-01691 (D. Minn.). The case is one of the largest class actions involving stock options backdating, but Coughlin Stoia has focused primarily on derivative claims in other cases. So far, the firm has resolved nearly 20% of its backdating cases, said Robbins. Those cases include proposed settlements with Vitesse Semiconductor Corp., Activision Inc., Family Dollar Stores Inc. and the former chief executive of Monster Worldwide. Robbins said the cases have achieved a “fundamental change in the option granting process, and accounting process, so that these kinds of abuses do not occur again,” Robbins said. But most of them have settled for less than $10 million, including attorney fees. Robbins, while acknowledging that the overall amounts have been fairly low, emphasized that the benefits for the company come from specific corporate governance changes outlined in the agreements. For the firm, the benefits are more indistinct. “In the long term, it puts us in good stead with the investor community who seek these remedies and corporate governance changes,” he said. Another firm focused heavily on derivative cases is Schiffrin Barroway Topaz & Kessler. The firm, based in Radnor, Pa., has reached tentative settlements in more than a dozen backdating lawsuits in state and federal court in which it serves as lead counsel, said Lee Rudy, a partner at the firm. Rudy declined to comment specifically about the cases, which include a state case against Barnes & Noble Inc. Joseph Floren, a partner in the San Francisco office of Morgan, Lewis & Bockius, said derivative cases don’t lend themselves to higher damages because the company, as the beneficiary, doesn’t fund the settlement. But in the backdating derivative cases, plaintiffs’ lawyers have had the additional challenge of proving that many of the defendants engaged in backdating on purpose. As a result, most of the proposed settlements in the derivative actions have cost about $1 million, including attorney fees, he said. “Some certainly have proved to be worthwhile for the plaintiffs to pursue, but a large number of them are settling for what amounts to a nuisance value, given the amount of work that needs to go into these cases,” said Floren, whose firm has reached proposed settlements in four of its 10 derivative cases. Shareholder cases In general, about 30 of the backdating cases are class actions, said Keller of Labaton Sucharow. In October, Labaton Sucharow obtained a preliminary agreement on behalf of a pension fund with Mercury Interactive, now owned by Hewlett-Packard Co., in the largest proposed settlement in backdating class actions. He said the cash settlement would likely be approved. In re Mercury Interactive Corp. Securities Litigation, No. 5:05-cv-3395 (N.D. Calif.). But he cautioned that most settlements wouldn’t mimic the Mercury agreement. “That was one of the first backdating cases that came to light,” Keller said. “It’s also one of the most egregious, and it was shocking as these developments were revealed in the market. Later on, the market became less sensitive to these issues.” Even the more recent settlement obtained by the firm, against American Tower, is unlikely to be the norm as more settlements are announced in the coming months. But he noted that “there are some big ones out there,” including pending cases against UnitedHealth, Broadcom Corp. and Comverse Technology Inc. In general, he said, “the total payments made to shareholders are going to be somewhere in the middle. They’re not going to be the major dire predictions. But they won’t be just a blip.” Mercury’s main lawyer, Sara Brody, a partner in the San Francisco office of Heller Ehrman, did not return calls Floren, who represents Mercury Interactive, declined to comment on that case specifically. But he agreed that none of the settlements in the backdating class actions has been a “blockbuster” deal. “The settlement value of these cases appears to be probably not quite as high as the plaintiffs’ bar thought it would be,” he said. Many of the class actions have had trouble tying a specific stock drop to the backdating discoveries, he said. In addition to Mercury Interactive, Floren represents KLA-Tencor Corp. in a proposed cash settlement reached last month worth $65 million, the third-highest amount among all backdating settlements. Garber v. KLA-Tencor, No. 06-04065 (N.D. Calif.). He declined to comment about that case. Joseph Tabacco, a partner in the San Francisco office of Berman DeValerio Pease Tabacco Burt & Pucillo, lead counsel in the case, said the defendants pointed to recent backdating settlements, many of which have been for less than $20 million, in arguing for a smaller monetary agreement. But this suit, Tabacco said, involved a “strong case of culpability” and a significant stock drop attributable to the backdating. “Obviously, these companies are different sizes,” Tabacco said of backdating cases in general. “When you couple that with the complexities of lost causation and damages, that’s why some of those cases didn’t settle for as much,” he said.

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