Is backdating stock options illegal


(The practice seems to have been particularly popular in the tech sector.) In 2007, New York City's municipal employee pension fund sued Apple over the backdated options.



The basic idea was that many companies seemed to award stock options on days when their stocks were at low-points, which increased the value of the options when the stock increased and made the stock cheaper to buy for the executives.Eventually, Apple settled the case, to the tune of $20.5 million.Here's how Ira Stoll from Future of Capitalism, describes the terms of the settlement: Ted Frank, the president of the Center for Class Action Fairness and a leading tort-reform advocate, is making the case that the settlement is worse than nutty and unfair. Indeed, it seems the center is planning to contest the settlement in court, provided it can find people who invested in Apple between 20 who are willing to be named as plaintiffs. Surely there are plenty of Apple investors who don't want to see Apple pay $20.5 million to settle this kind of nuisance lawsuit.Frank writes: The magnitude of the settlement compared to the original claims demonstrates that it is an extortionate nuisance settlement, being made because it would cost more to defend the suit than to pay the attorneys to go away.

But it should be noted: the settlement is not just outrageous, it is illegal.

Given that the class attorneys are negotiating money for third parties instead of their own putative clients (for their own benefit, no less), there is also a breach of fiduciary duty that raises questions whether the class attorneys meet the Rule 23(a)(4) standard.