I found myself talking about options backdating for the first time in months yesterday, and it wasn’t just because of the Ninth Circuit’s blockbuster August 18, 2009 opinion (here) reversing and remanding for retrial the conviction of former Brocade CEO Gregory Reyes – although that certainly is a highly noteworthy development.


What triggered much the discussion was the publication in the yesterday’s Wall Street Journal of an article entitled "Backdating Likely More Widespread" (here), which caused several callers  to ask me whether I thought we might see a new wave of options backdating litigation. But while the academic research on which the Journal article was based is certainly interesting, I am skeptical that the new "revelations" will result in a renewed wave of options backdating lawsuits.


The Journal article is based on the August 16, 2009 study by University of Houston professors Rick Edelson and Scott Whisenant, entitled "A Study of Abnormally Favorable Patterns of Executive Stock Option Grant Timing" (here). The authors conducted the study because previously "no attempt" had been made "to first isolate a sample of specific companies that committed backdating and then to study the characteristics of such sample." The authors claim that their paper "demonstrates" that a "reliable sample of companies, with both disclosed and undisclosed backdating activities, can indeed be constructed," based on publicly available information.


The authors applied a complex probability technique to 4,008 companies with respect to which they had sufficient data, from which they were able to "extract" a sample of 141 companies that had "abnormally favorable patterns of stock option grants at a very stringent confidence level," many more than the two or so companies that would be expected to have this luck by chance.


The authors divided the 141 companies into the 49 companies that disclosed backdating and the 92 that have not. While prior research had shown that companies that disclose backdating suffered negative stock returns, the authors conclude that the companies that failed to disclose backdating suffered a higher rate of unfavorable stock market results, from which the authors further conclude that it was not public disclosure of the backdating that "drove the destruction of wealth associated with options backdating"; to the contrary, they conclude that "vigorous enforcement and disclosure" may "ameliorate backdating related losses."


The authors also conclude that higher market capitalization companies were substantially more likely to have disclosed backdating, which the authors suspect reflects regulators’ or other discovery mechanisms to be biased toward larger companies.


The authors’ conclusions are striking, which explains the Journal’s prominent discussion of the academics research (that and the fact that it is August and the new cycle is a little slow right now). As the Journal put it, the research suggests that "the majority of companies that improperly backdated stock options never were caught by regulators or confessed to the practice." The practice, the Journal observed, "might have been more widespread than thought at the time."


But while the authors’ research may be noteworthy, I strongly doubt that it will result in a wave of new backdating lawsuits. First and foremost, the authors’ report doesn’t name any names. Even though the Journal identified four of the companies, the other companies the authors identified as having undisclosed backdated stock options are not identified.


Second, as the Journal article mentions, the statute of limitations is highly relevant here. Much of the backdating took place before the Sarbanes-Oxley Act was passed, now over seven years ago. This temporal consideration underscores another important point, that this is really old news by now, and even the academics’ spin on the topic can’t change that. (More on this point below.)


Third, I can’t see the plaintiffs’ lawyers getting excited now to file a new round of options backdating cases. While there were some notable exceptions, by and large, many of the plethora of options backdating cases the plaintiffs’ lawyers scrambled to file between 2006 and 2008 didn’t turn out all that great for the plaintiffs.


Fourth, the kind of case that turned out particularly poorly for the plaintiffs was the purely statistically based "must have been backdating" kind of case. The courts proved skeptical of these kinds of allegations, but that is the very kind of case (and the only kind of case) the authors’ research would support. Indeed, the authors themselves are quoted as saying that their analysis is "purely statistical" and that the authors don’t claim "to provide categorical or absolute legal proof that any specific company engaged in backdating."


Would you want to take that case now if you were a plaintiffs’ lawyer – particularly if you knew that the case almost certainly would involve a smaller company and would have to be one other than the nearly 170 companies that were already sued. (Seriously, what would make anyone think the good cases are the ones that haven’t been discovered yet?)


My own view is that the whole backdating story has long since been exhausted, which is a factor that undoubtedly will have to be weighed in the prosecutorial decision of whether or not to retry Gregory Reyes. The backdating scandal had its time, but that time is long past. Indeed, the authors themselves acknowledge that based on their research, "backdating appears to have been substantially eliminated."


What’s the point of continuing to beat on this ancient topic now? In the words of the old Joan Baez song entitled Winds of the Old Days, "the 60s are over now, set him free." (A little anachronism there, but you get my point.)


And so, while I could be proven wrong, I don’t expect to see a bunch of new options backdating cases. Time will tell of course, but basically, the plaintiffs’ bar (and the rest of the world) has moved on to other things. As I have noted recently (here), the recent data strongly suggest that the plaintiffs’ bar already appears to be working off a backlog. I doubt they will rally to rake over the coals of a long dead scandal.