Siebel Systems Could Face Punitive Damages For Option Fiasco

July 11, 2003 ( - Siebel Systems Inc.'s Chief Executive Tom Siebel and members of the company's board of directors might face punitive damages if they are found liable for overpaying Siebel through unreported stock option grants.

The latest development comes after San Mateo County (California) Superior Court Judge Quentin Kopp cleared the way for the Teachers Retirement System of Louisiana to continue to pursue its lawsuit against the software maker and to seek punitive damages in the event it prevails. Teachers alleged   in their suit the software maker overstated its earnings by obfuscating stock option grants to CEO Siebel – a move that constituted a violation of the company’s own rules for granting options, by both exceeding a cap set on the number of options it was allowed to grant, and, in some cases, issuing options at below market value without expensing the difference in price, according to a Reuters report.

Originally filed September 23, 2002, the lawsuit was amended in November (See  Louisiana Fund Lobs More Allegations at Siebel ).  Following the addendum, the suit further alleged the improperly issued stock options led to improper accounting that Siebel was aware of when he filed financial statements under the Sarbanes-Oxley Act.

‘Eight-Figure’ Total

The attorney representing the pension fund, Stuart Grant, said the finding on punitive damages “puts Tom Siebel and others personally at risk and will likely be the thing that leads to a resolution of the case.”  Grant added that in the event of a win he would likely seek punitive damages in the “eight-figure” range.    The case is scheduled to go to trial November 3, 2003.

Siebel Systems said in a statement that Grant’s law firm is engaged in a “continuing attempt to exact excessive ‘legal fees’ from Siebel Systems in consideration for their dropping this frivolous lawsuit.”   Further, the company said the claims were “completely without merit.”   Instead, Siebel Systems argues that it disclosed the options issued to directors in filings to the US Securities and Exchange Commission (SEC).

In January, Siebel’s chairman voluntarily canceled all of the stock options he received since 1998.    Siebel’s cancellation, covering 25.95 million stock options the company chairman possessed, was approved by the SEC following a review of the company’s accounting for the change.  With the cancellation, Siebel’s ownership stake in the company he founded has been reduced to 10.7% from 13.5% (See  CEO Siebel Cancels Stock Options ).

The move by the chairman was one in a long line of moves the San Mateo, California-based company took to restructure its compensation and options programs. Previous steps included Siebel lowering his salary to $1 in each of the past two years and the company allowing employees to swap approximately 28 million out-of-the-money stock options for cash or restricted stock in September (See     Siebel Offers Rank & File Option Swap).