Calif. Fed. Judge Green-Lights Most of Maxim Option Backdating Suit

A California federal judge has compounded the stock-option-backdating woes of Maxim Integrated Products by allowing investors to proceed with most of their suit against officers and directors of the beleaguered company for illegal options manipulation.

Judge James Ware of the U.S. District Court for the Northern District of California said most of the plaintiffs' securities fraud and breach-of-duty claims in the consolidated suit contained enough specifics to survive a motion to dismiss.

The ruling is significant because few shareholder stock-option-backdating actions have cleared a threshold test required of all suits brought in the name of the company and because closely watched actions filed against Maxim in several courts have generated numerous important decisions.

The Sunnyvale, Calif., integrated circuit maker was one of the first and most prominent companies to face charges and investigations by shareholders and government regulators after a 2006 study indicated it was one of many corporations that practiced backdating.

Options backdating uses hindsight to date the award for stock-option grants for officers and directors to a low point in a company's stock price history, thereby allowing the recipient to acquire the stock cheaper and sell it at a greater profit.

If this windfall of extra compensation at the stockholders' expense is not disclosed and accounted for, the practice becomes illegal.

After an internal investigation Maxim's board reported that a significant amount of stock options had been awarded with improperly manipulated dates. The company said it would restate its financials from 2000 to 2008 to reflect an unknown amount of extra expenses for the compensation.

In one of the shareholder suits that followed that announcement, a group of investors brought breach-of-fiduciary-duty charges in the Delaware Chancery Court since Maxim is incorporated in the state.

In one seminal ruling in that action the court said directors who had direct responsibility for granting the stock options were not objective enough to review the charges and take over the suit.

Delaware law requires shareholders to first bring their allegations to the board before filing suit.

In another significant decision the Delaware court allowed the plaintiff shareholders to access Maxim's internal investigation report after it was shared with the directors.

The court also held that although this parallel action in the California federal court was filed first and asserted a more expansive list of charges, the Delaware suit should not be stayed in its favor because the Maxim litigation involved new and important issues of Delaware law.

Judge Ware's decision in the instant suit mirrored the Chancery Court's reasoning in several respects.

He agreed that a majority of the Maxim directors were too involved in the backdating to objectively review the charges, so the plaintiffs were excused from making a pre-suit demand on the board to take up their banner.

The judge refused to dismiss breach-of-duty charges against most of the top-ranking Maxim officers because the suit adequately alleged that they were intimately involved in decision-making on stock options.

Regarding the proof necessary to go forward with federal securities fraud charges, Judge Ware said the plaintiffs adequately alleged scienter, or intent to deceive, against CEO John Gifford and other top officers and directors who served on finance and compensation committees.

However, he dismissed other directors who were not actively involved in preparing and reviewing financial and employment documents.

The judge similarly found sufficient specifics to back up charges that the shareholders' losses were directly caused by the actions of the top officers and directors who served on the board finance committee, but not enough to sue other board members who were less involved in financial reports and compensation decisions.

Finally, Judge Ware said the suit was timely. Before Maxim announced that it would restate its financials, an average investor could not have been expected to put together bits of information to conclude that improper accounting and reporting were widespread, he said.

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