According to news reports (here), on September 8, 2008, Judge Jeremy Fogel of the Northern District of California preliminarily approved the settlement of the Apple options backdating derivative litigation.


As reflected in the parties’ Stipulation of Agreement of Settlement (here), the plaintiffs in the consolidated Apple derivative action agreed to dismiss the action subject to the defendants agreement to pay $14 million to the company; the defendants’ agreement to pay the plaintiffs’ counsel’s various attorneys’ fees and costs totaling $8.85 million; and the company’s agreement to adopt certain corporate governance reforms. According to the Stipulation, the various derivative lawsuits "were a material factor in obtaining the $14 million payment from Apple’s liability insurers." The total cash value of the various payments is $22.85 million.


UPDATE: An alert reader has raised an important question about my statement that the total cash value of this settlement is $22.85 million. The reader said the following in an e-mail to me: "You describe the settlement as involving a cash payment of $22.85 million based on the $14 million D&O settlement paid to Apple and the $8.85 million fee award expense payment made by Apple to the plaintiffs. However, as a practical matter aren’t you ‘double counting’ since, presumably, the plaintiff fee awared was paid by Apple from the D&O proceedsit received from its carriers?"


Assuming this reader’s analysis is correct, this is a very important distinction. The Stipulation of settlement is consistent with the reader’s hypothesis, but not definitive. The Stipulation is clear that the $14 million payment is coming from Apple’s D&O carriers. It also says that the $8.85 million is to be paid by Apple. It is not clear whether or not the D&O insurers will be reimbursing Apple for the $8.85 million or if the $14 million is the only payment that the D&O insurers will be making in connection with the settlement. It would be helpful if any reader with more specific knowledge of the insurance arrangements pertaining to this settlement would let me know.

This reader’s question also suggests another component that is relevant to these insurance issues but that is not addressed in the Stipulation, and that is the question of defense expense. In a case like this where there are regulatory proceedings and special litigation committee activities as well as civil litigation, there frequently are disputes about which defense fees are covered and which are not. In a case like this one, the aggregate amount of all fees could well exceed $10 million. To the extent the insurer’s $14 mllion payment is the total amount of insurance remitted to Apple, leaving the company to absorb both the $8.85 million of plaintiffs’ attorneys’ fees and expenses as well as all of the related defense expense, the $14 million payment could even be less than the amounts for which the company itself is reponsible.


The settling defendants include the Company; its Chairman, Steven Jobs; and certain other present and former directors and officers of the company. Judge Fogel set a final settlement hearing for October 31, 2008.


I have already received inquiries from persons questioning the size of the Apple options backdating derivative lawsuit settlement. The questioners are concerned that the settlement amount is seemingly small, especially in light of who the company is and the nature of the allegations.


There is no doubt that the Apple options backdating allegations have been very high profile. In addition, parallel SEC enforcement proceedings did result in the payment of some significant fines. On August 14, 2008 former Apple general counsel Nancy Heinen agreed to pay $2.2 million to settle options backdating charges (about which refer here), and last year former Apple CFO Fred D. Anderson agreed to pay $3.5 million to settle SEC claims against him (about which refer here).


The consolidated amended complaint also contains some apparently serious allegations. As discussed here, the amended complaint raised certain options springloading allegations, including the allegation that three Apple executives received a windfall when they were granted options to buy over 2 million shares the day before the announcement of a significant technology investment and other developments sent Apple’s shares up 48 percent. The amended complaint also alleges that Jobs himself received backdated options that were later cancelled in exchange for restricted stock.


Despite these allegations and notwithstanding the SEC settlements, the plaintiffs’ case faced certain potentially significant challenges. First, in a December 19, 2007 opinion (here), Judge Fogel had dismissed the plaintiffs’ initial pleadings, with leave to amend. In issuing this ruling, Judge Fogel did not even reach the demand futility issue, deferring that to a later date.


The plaintiffs filed their consolidated amended complaint on December 18, 2006 (refer here), seeking to overcome the deficiencies in the original pleadings. However, just days later, on December 29, 2006, Apple announced the completion of the special investigative committee’s investigation of the company’s stock option practices.


A joint statement by the committee’s co-chairs, former Vice President Al Gore and audit committee chair Jerome York, stated that Apple’s board "has complete confidence in the senior management team." The company’s 10-Q issued the same day (here) stated that the committee "found no misconduct by current management." (The 10-Q did go on to say that the investigation had "raised serious concerns about the actions of two former officials"—presumably Heinen and Anderson).


It is no surprise to me that faced with an apparently skeptical court and an unhelpful (if also somewhat controversial at the time) investigative committee report, the plaintiffs’ found it expedient to settle. The questions I have received have not reflected concerns about the fact that the plaintiffs settled; the concerns have had more to do with the amount of the settlement.


If you disregard for a moment that a high-profile company like Apple is involved, there is nothing particularly unusual about the size of this options backdating derivative settlement, at least in the context of other options backdating derivative settlements. Setting to one side the UnitedHealth Group derivative settlement (about which refer here), the options backdating derivative lawsuit settlements to date have been relatively modest, and the total value of the Apple derivative settlement is well within range of the other settlements.


As reflected in my running table of the options backdating lawsuit case resolutions (which can be accessed here), the total value of very few of the options backdating derivative settlements has exceeded seven figures. Indeed, the Apple settlement is actually one of the larger options backdating derivative settlements. The total cash value of only three derivative settlements exceeds the Apple settlement: UnitedHealth Group; Cablevision ($34.4 million, about which refer here); and Electronics for Imaging ($24 million, refer here).


By and large the options backdating derivative settlements (in the cases that have not been dismissed outright) have been relatively modest, consisting in many cases only of a payment of plaintiffs’ attorneys’ fees and the agreement to adopt certain governance reforms. Although there were a truly impressive number of options backdating derivative lawsuits filed (168 by my count, as reflected here), very few of them seem to be resulting in significant payouts.


As the options backdating scandal recedes in the rear view mirror, it definitely has started to seem like less and less of a big deal, particularly in the context of the current daily diet of government bailouts, floundering investment banks, and multibillion dollar securities buybacks – with one big exception, as noted below.


And Speaking of UnitedHealth: The UnitedHealth Group cases have definitely been the most notable big-dollar exception in the options backdating scandal. The company was back in the news again today with the announcement (here) from the options backdating securities lawsuit lead plaintiff, Calpers, that the company’s former CEO William McGuire had agreed to pay $30 million and its former general counsel David Lubben had agreed to pay an additional $500,000 in settlement of the options backdating securities claims pending against them. McGuire’s own press release about the settlement can be found here.


Taken together with the $895 million previously announced settlement (refer here) in the UnitedHealth Group options backdating securities lawsuit, the aggregate value of the options backdating securities settlements in the case now totals $925.5 million, certainly a large number by any measure. This settlement total is also in addition to the UnitedHealth options backdating derivative settlement, which had a total value of over $600 million.


Although the various press releases are not specific in this respect, the implication is that McGuire’s $30 million settlement payment will come out of his own personal assets, rather than insurance or corporate indemnity. If that is the case, this settlement would represent one of the larger individual payments of its kind.


Fifth Circuit Affirms Options Backdating Securities Lawsuit Dismissal: In a September 8, 2008 per curiam opinion (here), the Fifth Circuit affirmed the dismissal of an options backdating related securities lawsuits. (The district court’s October 4, 2007 dismissal can be found here. Background regarding the case can be found here.)


The Fifth Circuit affirmed the district court’s dismissal on loss causation grounds. The holding is interesting because the company’s stock actually did drop on the date of the alleged corrective disclosure.


The Fifth Circuit held that the press release in question was not sufficient to satisfy the requirements to establish loss causation because "although the stock price dropped dramatically on the day of the 1 August 2006 press release, no new facts concerning Cyberonics’ stock-option accounting were disclosed in that release which demonstrated that the ‘truth became known’ about Cyberonics’ challenged financial statements." Therefore the Fifth Circuit concluded, "a causal connection between the material misrepresentations and the loss was not adequately pled."


Special thanks to Neil McCarthy of Lawyer Links for alerting me to the Fifth Circuit’s opinion.