Lehman Bros. "Striking Pattern" of Favorable Grant Dates Draws Suit

April 16, 2007 (PLANSPONSOR.com) - Lehman Brothers Holdings Inc. has been sued by a shareholder for allegedly manipulating stock option grants from 1998 to 2001 to secure a "huge financial windfall" for Chief Executive Richard Fuld and other top officials.

The complaint, filed Friday with the U.S. district court in Manhattan by Scott & Scott LLP on behalf of shareholder Robert Garber, accused 22 current and former executives and directors of allowing the backdating of stock options.   The suit says this allowed the improper generation of “hundreds of millions of dollars” at shareholders’ expense, and affected Lehman’s financial results through at least 2005, according to Reuters.

The complaint alleged that a “great number” of options awarded to Lehman executives and directors were dated just after a big drop or before a big rise in Lehman’s stock price.   Citing statistical analyses, it said the odds against the grant dates occurring by chance were more than 800 million to one.   “Grant dates follow a striking pattern that is so advantageous to the grantees that it could not have been the result of chance,” the 47-page complaint said, according to Reuters.

Garber is seeking the recovery of improper profits, the voiding of unexercised stock options, and the forfeiting of incentive- and equity-based awards while wrongdoing took place.

Backdating involves a change in the date from the date the option is awarded to a date when the stock is selling at a low price.   Backdating is not, per se, illegal – but it is when it is not disclosed and expensed properly.  

To date, some 200 companies have disclosed internal investigations or probes by the U.S. Department of Justice, the Securities and Exchange Commission and the Internal Revenue Service into stock option grant practices. Lehman is not one of these companies.