Who Can You Trust?: Dating Games in the U.S. Executive Suite

1. Who Can You Trust?: Dating Games in the U.S. Executive Suite Cindy A. Schipani Ross School of Business University of Michigan

2. Introduction: Securities Litigation • Numbers down; costs up • Settlement costs • Tyco: $3 billion • Average: $45 million in 2006 • HealthSouth Corporation: $445 million • Tenet Healthcare: $215 million • i2 Technologies: $84.85 million • Directors are contributing personally • WorldCom & Enron: each director over $1 mill • Just for Feet: 41.5 mill (bnkr) & $24.5 mill (fraud) • Oracle: $100 million charitable donation 2 2

3. 145 companies implicated 57 executives at 31 firms resigned/terminated 23 CEO’s; 16 CFO’s; 10 GC’s & 8 other 1400 outside directors rec’d manipulated grants Criminal indictments 17 executives criminally charged 54 companies subpoenaed by DOJ Introduction: Backdating

4. Introduction: Backdating • Civil enforcement -105 companies contacted • Charges • Securities fraud • Mail fraud • Falsifying books, records and accounts • Aiding and abetting • Shareholder actions 4

5. Overview of backdating Effects on share price Laws implicated Shareholder action Responsibilities of executives Conclusion Agenda

6. Incentive-based compensation Backdating – example Options granted on April 15, stock trading at $40 Report as if granted on March 15, trading at $30 Ahead by $10 Forward dating – example Options granted on April 15, stock trading at $40 Report as if granted on April 25, trading at $30 Ahead by $10 Overview of Backdating

7. Discovery of backdating Gains to executives: $.5 million per year Loss to firm’s stock value: $389 million per year Effects on Share Price

8. False and misleading financial statements Tax law violations Securities fraud Laws Implicated

9. Shareholder Action • Derivative suits • Class actions • Who suffered the alleged harm • the corporation or • stockholder individually and • who would receive the benefit of the recovery? 9

10. Class Actions • 30 class actions -most ongoing • 5 dismissals Apple Inc. example: • No drop in stock price as result of backdating • Leave to amend as derivative claim • 4 settlements • Two largest settlements • Mercury Interactive Corp.: $117.5 million • Rambus Inc.: $18 million 10

11. Derivative Suits • More than 160 derivative suits filed • More popular than class actions • No significant drop in stock prices necessary • Statute of limitation issues • Plaintiff’s lawyers making money • Mixed results • Many dismissals • Settlements – mostly for small amounts • Exception: UnitedHealth settled for $400 million 11

12. Derivative Suits • Multipart settlement arrangements • Money paid back to company • Corporate governance changes • Attorneys’ fees • Example: Barnes & Noble • Repricing options worth $3 million • Repayment of $2 million to company • 15 changes in corporate governance • $2.75 million plaintiff’s attorneys’ fees 12

13. Responsibilities of Executives Duty of Loyalty Corporate interests supersede personal interests Conflicts avoided or approved by disinterested members of the board Duty of Care Reasonable care of a reasonable person acting under similar circumstances 13

14. Responsibilities of Executives • Oversight • Comverse Technologies example • Fictitious options in slush fund • Used names such as I.M. Fantom • Approved by board • No one person compensation committees • Divide options into 12 monthly installments

15. Conclusion • SEC overhaul of compensation rules • Vigilance required