SEC v. Shanahan: A Backdating Case Survives Summary Judgment

by Richard Jasik, for The Race to the Bottom, March 23, 2010.

In Securities Exchange Commission v. Shanahan et al., 2010 WL 148440 (E.D.Mo. Jan. 12, 2010), the Commission brought charges against Michael F. Shanahan, Sr. for options backdating.  The United States District Court for the Eastern District of Missouri granted in part and denied in part defendant’s Motion for Summary Judgment.  Specifically, the court granted defendant’s motion because it found that the SEC failed to present any evidence that defendant provided substantial assistance to the corporation in its alleged failure to keep accurate records.  On five other counts, however, the court denied the motion for summary judgment because the SEC presented both evidence that option pricing and alleged option backdating were in fact material to investors and evidence to create an issue of fact regarding defendant’s involvement and knowledge of wrongfulness of the alleged conduct.

Engineered Support Systems, Inc. functioned as a holding company for a number of wholly-owned subsidiaries that design and manufacture military support equipment and electronics for the U.S. Department of Defense.  Defendant Michael F. Shanahan, Jr. served on the corporation’s Board of Directors between 1994 and 2006 and on the Board’s Compensation Committee between 1995 and 2002.  The Compensation Committee was charged with managing the company’s compensation plan, which it did in part by administering the company Stock Option Plan (“Plan”).  The Committee had exclusive power to grant options subject to the approval of the Chairman of the Board, Michael F. Shanahan, Sr.  The Plan was maintained for the company’s officers, key employees and consultants.  The company’s non-employee director compensation was handled under a different plan called the Non-Employee Director Plan.  Options under the Stock Option plan vested immediately and were granted with an exercise price equal to the closing market price of ESSI’s common stock on the date the options were granted…(continue reading)

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