Compliance January 9, 2008

Staples Shareholders Lose in Options Backdating Suit

January 9, 2008 (PLANSPONSOR.com) - Even though some of its stock option grants were made at "suspicious times," shareholders of office supply retailer Staples did not prove officers and directors knowingly and recklessly violated securities laws through options backdating.
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In reaching that conclusion, a federal judge in Massachusetts threw out a lawsuit against 33 Staples directors and officers filed by shareholders, including a union pension fund, over what the plaintiffs’ charged was options wrongdoing.U.S. District Judge William G. Young of the U.S. District Court for the District of Massachusetts asserted that only 11 of the 51 options granted between   1997 and the third quarter of 2006 had questionable timing.

In his ruling, Young contended that a factfinder could conclude backdating of stock options occurred during those 11 option grants when Staples’ share price was low, but the plaintiffs’ case had not shown the defendants knowingly manipulated the options process.

The suit, by shareholder Ann Winters and the Laborer’s International Union of North America National (Industrial) Pension Fund was filed after Staples in late 2006 released the results of its review of stock option granting practices from 1997 to the third quarter of 2006. As a result of the probe, Staples recorded a $10.8 million expense to reflect the cumulative impact of accounting errors from the use of incorrect options measurement dates, according to the court.

The court also noted that Staples concluded the use of the incorrect measurement dates was not the result of intentional wrongdoing and that the company had taken steps to improve the controls over its option granting processes.

Young found that Winters and the pension fund lacked legal standing to challenge any alleged backdating that occurred before February 1999, because neither Winters nor the fund held Staples stock before that time.

“Backdating stock options violates Staples’s internal protocols; moreover, it constitutes blatant fraud,” Young said in the opinion. “The ultimate question is: did it occur here? Upon the record before this Court, a factfinder could reach a conclusion in the affirmative. But while the inference that backdating occurred is reasonable, it is not compelling or even, as required, strong.”

Young’s ruling is here .

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