In a December 28, 2009 press release (here), the plaintiffs’ lawyers announced the settlement of the Comverse Technology options backdating-related derivative lawsuit. This derivative lawsuit settlement is separate from, but related to, the previously announced $225 million settlement of the Comverse Technology options backdating-related securities class action lawsuit (about which refer here).The bulk of the derivative lawsuit settlement consists of the previously disclosed agreement of Comverse’s former CEO Kobi Alexander to pay Comverse $60 million to be applied to the class action lawsuit settlement.
The derivative lawsuit stipulation of settlement (which can be found here), is dated December 17, 2009, the same day as the class action lawsuit settlement was announced. The settlement consists of a number of different components, the most significant of which is Alexander’s agreement to pay the $60 million to Comverse. As reflected in the company’s December 18, 2009 filing of Form 8-K (here), Alexander is to pay the $60 million into the derivative settlement fund and then the amounts are to be transferred to the class action settlement fund.
Alexander, as readers will no doubt recall fled to Namibia to evade options backdating charges, where he remains a fugitive. Due to his absence in Namibia, the arrangements for his payment of the $60 million are complicated, and are set out in a separate agreement (here). Among other things, Alexander has agreed to transfer certain investment accounts, real estate assets, insurance policies and other assets. Among other things, Alexander also agreed to relinquish his counterclaims against the company.
The company’s former General Counsel, William Sorin (who previously pled guilty to options backdating related criminal charges), also agreed to make two payments for the benefit of Comverse totaling $1 million, in addition to the more than $3 million he previously paid to the SEC. He also agreed to relinquish his counterclaims against Comverse seeking $2.2 million in damages relating to deferred compensation, lost wages and cancelled or revoked options and restricted stock.
The company’s former CFO, David Kreinberg, agreed to pay $75,000 for the benefit of Comverse, in addition to the $2.39 million he previously paid to the SEC. Kreinberg also agreed to relinquish his counterclaims for $4.3 million in damages relating to deferred compensation, lost wages, and cancelled or revoked options or restricted stock, as well as an additional $1 million in attorneys’ fees for which he had been seeking indemnification.
Comverse’s auditor during the time of the backdating scheme, Deloitte & Touche, agreed to pay the company $275,000.
Several individual defendants who had served on Comverse’s compensation committee will also collectively forfeit 155,000 in unexercised stock options.
The derivative lawsuit settlement stipulation also provides that "Comverse shall cause Comverse’s insurance carrier, on behalf of the Individual Defendants except for Mr. Alexander, Mr. Sorin, and Mr. Kreinberg, to pay to Comverse $1 million" by the later of either August 30, 2010 or thirty days after the derivative lawsuits and class action lawsuits are finally dismissed.
Finally, Comverse agreed to adopt or to keep in place certain corporate governance reforms.
Neither the company’s 8-K nor the plaintiffs’ lawyers’ press release mentions it, but the derivative suit’s stipulation of settlement also provides that Comverse will pay the plaintiffs’ attorneys’ fees of $9.35 million. Neither the settlement documents nor the company’s 8-K specify whether this amount will be offset in whole or in part by the payment of insurance.
Given the fact that insurance is expressly mentioned in the stipulation in connection with the $1 million payment, the inference is that, other than with respect to the $1 million payment, insurance funds are making no other contributions to the settlement. (There is also nothing in the documents expressly confirming that the carrier has agreed to pay the $1 million amount.)
In the absence of insurance payments (other than with respect to the $1 million payment), the $9.35 million in plaintiffs’ attorneys’ fees seems like a heavy burden to impose on the company, which may explain why neither the plaintiffs’ lawyers’ press release nor the company’s 8-K mentioned this amount.
It is complicated to calculate the relation between the burdens the derivative lawsuit imposed on the company compared to the benefit to company from the lawsuit. On the one hand, the plaintiffs in the derivative suit would cite Alexander’s agreement to pay the $60 million as benefit the derivative suit produced. I hope some of us can be forgiven for being confused about which lawsuit produced the $60 million payment.
Setting the $60 million aside, the other benefits to the company from the derivative settlement appear, at least relative to the size of the derivative plaintiffs’ $9.35 million attorneys’ fees, relatively modest.
That said, the plaintiffs’ lawyers’ undoubtedly would argue that the $60 million settlement contribution should not be set aside but rather represents a very significant benefit to the company from the derivative lawsuit, and that benefit is the context within which the $9.35 million attorneys’ fees should be assessed. The size of Alexander's $60 million settlement contribution is noteworthy, but Alexander's fugitive status and location in Namibia, as well as the complex state of his financial affairs given his fugitive status, unquestionably add an extraordinary degree of difficulty to the negotiation of his contribution.
Another insurance question arises from the settlement’s requirement that Kreinberg relinquish his claim for indemnification of $1 million in attorneys’ fees. The agreement appears to be silent on the question whether Kreinberg can, notwithstanding his indemnification relinquishment, still seek payment of his attorney’s fees from the company’s D&O insurance carrier.
Kreinberg might contend (assuming for the sake of argument that policy funds remain) that he is entitled to have his fees paid under Side A of the policy, relating to amounts for which indemnification is unavailable. An interesting question is the extent to which the policy’s presumptive indemnification clause would presume indemnification notwithstanding Kreinberg’s indemnification relinquishment, which the carrier might assert as a basis to assert that Side A has not been triggered. (I suspect the carrier might well assert other defenses to coverage as well.)
I have in any event added the Comverse derivative settlement to my register of options backdating-related lawsuit resolutions, which can be accessed here.