With Milberg Weiss on the ropes, rivals moving in ~ Silicon Valley companies under siege

MarketWatch ^ | May 20, 2006 7:00 AM ET | JOHN SHINAL'S TECH INVESTOR

[Ernest_at_the_Beach]

With Milberg Weiss on the ropes, rivals moving in

Commentary: Silicon Valley faces class-action blitz over backdating options

E-mail | Print | | Disable live quotes | Discuss

By John Shinal, MarketWatch

Last Update: 7:00 AM ET May 20, 2006

SAN FRANCISCO (MarketWatch) -- This week's federal indictment of the nation's most prominent law firm dedicated to shareholder class-action suits will likely change the landscape for such securities complaints -- but not in a way non-lawyers might think.

Indeed, far from fostering restraint, the government's decision to charge Milberg Weiss Bershad and Schulman with making illegal payments to clients is more likely to heat up "the race to the courthouse," as one attorney put it.

And that's bad news for the growing number of Silicon Valley technology companies that are already under investigation by the Securities and Exchange Commission over backdating option grants made to senior executives.

In recent weeks, Comverse Technology Inc. (CMVT

:

Comverse Technology Inc

News , chart, profile, more

Last: 22.08+0.17+0.78%
4:05pm 05/22/2006
Delayed quote data

Add to portfolio
Analyst
Create alert

Insider
Discuss
Financials

Sponsored by:

Get up to 50 free trades at TD AMERITRADE.

CMVT22.08, +0.17, +0.8%

) , Vitesse Semiconductor Corp. (VTSS :

Vitesse Semiconductor Corp

News , chart, profile, more

Last: 1.75-0.02-1.13%
4:05pm 05/22/2006
Delayed quote data

Add to portfolio
Analyst
Create alert

Insider
Discuss
Financials

Sponsored by:

VTSS1.75, -0.02, -1.1%

) and other tech companies have shown top executives the door after the effective dates of executives' option grants appeared to be set to maximize their cash-in values.

Three attorneys interviewed for this story said they expect a wave of lawsuits as firms specializing in shareholder class-action cases start turning their attention to the widening controversy.

"There's no question backdating is going to trigger a wave of suits," said Joseph Serino Jr., a securities lawyer in the New York office of the law firm Kirkland & Ellis.

To be sure, allegations that Milberg Weiss made payments to individuals who later became lead plaintiffs in shareholder suits will prompt judges to examine more closely the relationships between securities law firms and their clients, several attorneys said.

But the blow to one of the two 800-pound gorillas of securities law will also set off a competitive feeding frenzy as smaller firms seek to get a piece of the business that Milberg Weiss, along with the firm of former Milberg partner William Lerach, has dominated for more than a decade.

"Other firms will step up and fill the void," said Serino, who's been defending corporations, their executives and their directors in such cases for 18 years. "I don't expect it to stem the tide of class-action suits," he added.

Milberg Weiss and Lerach Coughlin both have earned reputations for their speed in filing a shareholder class-action suit within days of a public company restating financial results or admitting to some other mea culpa that triggered a dramatic stock drop.

Now, the demise of the former law firm means "smaller firms will have a chance to win the race to the courthouse," and thus improve their chances of being named lead attorneys in such a case, Serino said.

For firms specializing in class-action cases, capturing the role as the lead law firm on such suits is a lucrative coup, for it often guarantees thousands of billable hours.

Fallout from the Milberg Weiss indictment will resemble what happened when Lerach left Milberg Weiss a few years ago to start his own firm, according to another veteran securities attorney.

That split "diluted the marketing power of Milberg and gave an opportunity for other firms to jump into the breach," said William Prickett, who heads the securities and financial litigation practice at Seyfarth Shaw LLP, which represents Vitesse Semiconductor.

Now, with the SEC investigating the practice of options backdating at more than a half-dozen companies, a new wave of lawsuits is just a matter of time.

The volume of suits could rival that which followed the collapse of Enron Corp. and other firms after the U.S. stock market tumbled in 2000.

"You can expect to have a very rich three to five years of litigation in the wake of this," said one veteran securities attorney at a San Francisco law firm.

This attorney, who spoke on condition of anonymity because he represents an executive at a technology firm being investigated by the SEC, said targets of such suits will include any company that has to restate earnings related to options backdating.

"Any company that restates might as well have a target on their back," the attorney said.

And because option income paid to executives will impact not only corporate income statements but individual tax returns, officers at companies ensnared in the scandal are likely to suffer "IRS consequences," the attorney added.

Another San Francisco attorney said his firm represents three Silicon Valley technology companies that have been informed of options-related inquiries by the SEC. This attorney declined to name the firms or whether the investigations had been made public.

John Shinal is the technology editor of MarketWatch in San Francisco.

[Liz]

Wonder if W/L is in the mix?

[taxcontrol]

[sigh]
Look, there is an easy way to handle all this options as compensation and options reporting. A simple SEC rule that REQUIRES Companies PURCHASE an option from the market or actually HOLD a stock in reserve for each option issued and then report either the cost of that option or the par value / market value of the stock at the time of reservation as income to the person receiving the option.

The cost of the option gets reported as a salary expense on the books and impacts the companies statement right away. Either the option or the share gets held by the same firm that manages 401Ks and there is no back dating or changing of terms once the option contract is agreed to by both parties.

[packrat35]

That is much to sensible, apparently.

[glorgau]

"You can expect to have a very rich three to five years of litigation in the wake of this," said one veteran securities attorney at a San Francisco law firm.

Billable hours and a percentage of the settlement. Cha-ching!