Judge tells Countrywide to submit stock options data
Countrywide Financial Corp. has been ordered to provide confidential information about the inner workings of its stock-granting practices to a police pension fund that claims the lender doled out executive stock rights at “unusually suspicious and lucrative times.”
The ruling, issued late Tuesday in Delaware Chancery Court, demands that Calabasas-based Countrywide turn over “minutes, notes, presentations, slides” and other materials regarding stock options granted to Countrywide officers or executives.
The ruling was made in response to a suit from the Louisiana Municipal Police Employees’ Retirement System, an investor in the publicly traded company.
The court also ordered Countrywide to give the retirement plan any information that Countrywide may have produced for the Securities and Exchange Commission, the New York Stock Exchange and the Department of Justice, in connection with any investigation into Countrywide’s stock option grants.
In a statement, Countrywide said the suit “presented no credible evidence of wrongdoing relating to the purported manipulation of option grants.”
“We will continue to defend against the sorts of allegations that appeared in the LAMPERS’ [pension fund] complaint and any other such claims vigorously,” Countrywide said.
The court did not rule on whether the company’s stock practices were improper. It simply demanded that Countrywide provide information to allow the pension fund to investigate.
The ruling is the latest move in a yearlong effort by the pension fund to get information on the timing of stock grants made to Countrywide executives between 1997 and 2002. The group began scrutinizing Countrywide’s stock grants in response to a June 7, 2006, story in The Times.
The story reported on a study by Corporate Library, a corporate governance research group, which said the timing of Countrywide’s stock grants to executives was suspiciously profitable.
The pension fund then commissioned its own study, hiring economist Richard Goldberg to conduct an independent review of stock grants for a set of companies, including Countrywide, to determine whether there was any evidence that something “needed to be investigated.”
Goldberg concluded that there was a “statistically significant result suggesting that some type of option manipulation may have occurred” at Countrywide.
Goldberg said he was not sure exactly how the stock options were manipulated but said there was only a 1 in 978 chance that the 11 stock grants he examined would prove to be as lucrative as they turned out to be merely by chance -- a result “akin to flipping a coin and always seeing heads.”
A Countrywide expert disputed the claims, maintaining that Goldberg’s analysis was flawed. But the judge ruled that the pension fund had met a sufficient standard of proof to at least get access to Countrywide’s documents.
Chancery Court Vice Chancellor John Noble in Wilmington said he was not convinced that any wrongdoing occurred at Countrywide, but he said the pension fund had raised enough of a question that it warranted “further inquiry.”
About 200 companies have disclosed internal or federal investigations into their stock granting practices during the late 1990s and early 2000 period and roughly 100 have restated previously reported financial results because of their findings.
Dozens of executives have resigned in the wake of the scandal and more than 400 lawsuits have been filed by shareholders who claim that companies unjustly enriched their managers by granting stock options at times when they knew they would be most profitable to executives.
Stock options are rights to buy company shares at a set price at some point in the future. Shareholder groups said some companies unjustly enriched managers by lying about when the rights were granted.
They might pretend the rights were granted earlier than they were, when the stock price was cheaper -- a strategy called “backdating.”
Alternatively, companies could increase the value of options by granting the rights immediately before announcing some positive news that was likely to send the company’s stock price soaring -- a practice dubbed “spring loading.”
