Trials & Errors

As two recent securities lawsuits illustrate, there are no guarantees when you go to court.

Alix Stuart is a senior writer at CFO.

To see a chart showing how other securities lawsuits have played out, click here.

JDS Uniphase vs. Connecticut Retirement Plans


Allegations: Institutional investor Connecticut Retirement Plans and Trust Funds charged that JDS Uniphase executives hid knowledge of the company’s impending collapse in 2001.

Damages Sought: More than $18 billion

The Players:

1. CFO Anthony Muller was grilled by plaintiffs’ attorneys about how he managed inventory and his relationship with auditors. His sale of $35 million in stock was also questioned.

2. Former JDS Uniphase CEO and cofounder Jozef Straus insisted on the witness stand that his 2001 revenue projections were “not pie in the sky.”

3. Company attorney Jordan Eth, a partner with Morrison & Foerster, credits the credibility of the executives for the eventual positive outcome for JDS Uniphase.

Date of Verdict: November 2007

Outcome: Jury found the company not guilty; no damages awarded.

Apollo Group vs. Policemen’s Annuity


Allegations: Institutional investor Policemen’s Annuity and Benefit Fund of Chicago charged that Apollo Group did not disclose regulatory problems in a timely manner.

Damages Sought: $5.55/share

The Players:

1. Apollo Group, parent of the University of Phoenix, found itself in trouble with shareholders when it decided not to reveal a preliminary report from the Department of Education that ultimately led to a $9.8 million settlement.

2. CFO Kenda Gonzales spent hours on the witness stand rehashing a single meeting with the DoE in 2003 and defended the decision not to disclose the report.

3. Company attorney Wayne W. Smith, a partner with Gibson, Dunn & Crutcher, believes the jury took an individual-investor view rather than an institutional-investor view in deciding against the company.

Date of Verdict: January 2008

Outcome: Jury found the firm liable for $5.55 per share. Case could ultimately cost $270 million.

Is There a Target on Your Back?

What makes a company vulnerable to a class-action securities lawsuit in the first place? An analysis of last year’s suits shows that companies in certain industries — financial services, technology, and life sciences — are more likely than others to get hit, according to insurance broker Carpenter Moore.

Across industries, however, CEO compensation is a leading indicator of a company’s vulnerability, according to The Corporate Library’s analysis of four years’ worth of data. What is it exactly that triggers a lawsuit? Paul Hodgson, senior research associate for the shareholder advocacy group, says “it’s the extremes that would probably be the most risky, the all-cash or all-stock kind of approach.” Such simplistic packages may make it easier to cheat, he speculates, while more complex packages make cheating “too complicated to be worthwhile” — or at least too complicated for shareholders to build a case around.

Lack of board independence and a high degree of institutional ownership were the other two key factors in predicting a securities class-action, according to The Corporate Library’s report. However, both together exerted about the same degree of influence as compensation issues alone.

For better or worse, CFO pay is unlikely to have the same predictive value as CEO pay, says Hodgson. While CFOs may face the same “perverse incentives that cause suits,” he says, “it’s just not at the same level.” — A.S.


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