Flir investor files option-backdating suit

Timing - A "fraudulent scheme" to enrich executives is alleged; punitive damages and recovery of losses are sought

Saturday, December 23, 2006

MIKE ROGOWAY The Oregonian

An investor in Flir Systems Inc. filed suit against the Wilsonville company, its board members and two top executives Friday, alleging that they fraudulently backdated stock-option grants to executives.

The suit, by a Pennsylvania trust that owns Flir shares, accuses the company of retroactively selecting option grant dates that would be more profitable for executives, then covering it up. The suit seeks recovery of unspecified financial losses, plus punitive damages.

Flir did not return a call Friday seeking comment on the lawsuit, which is the first legal action that has come to light in Oregon related to backdating.

Stock options give the holder the right to buy company stock in the future at a fixed price, usually the share price on the day the options were granted.

Backdating is the practice of changing those option grant dates after the fact, picking days when share prices were low and options would be most valuable. Backdating shifts company resources to the grant recipients, typically executives, at shareholders' expense.

Exposure of the practice by a University of Iowa researcher last year triggered a nationwide corporate scandal, and more than 100 companies nationwide now face federal backdating inquiries.

The Oregonian reported in October that Flir granted options in 1996, 1997 and 1998 on days when the stock was unusually low. Most of those grants' recipients are no longer with Flir. The company later accused some of them of accounting improprieties unrelated to backdating.

Flir also issued options to members of its current management team for Sept. 10, 2001, which shot up in value after the next day's terrorist attacks as investors anticipated a spike in military demand for Flir's night-vision technology.

Friday's suit was filed in U.S. District Court in Oregon by the Edward J. Goodman Life Income Trust of Pennsylvania on behalf of trustee Myrna Goodman. It's not clear how many shares of Flir the Goodman trust owns, but the trust is not listed among investors owning more than 5 percent of Flir's stock in the company's securities filings.

The suit accuses Flir of a "fraudulent scheme" to backdate stock options "in order to provide the recipients with a more profitable exercise price." Additionally, it charges that Flir "sought to take advantage of the jump in Flir's stock price as a result of the Sept. 11, 2001 attacks by backdating stock options to Sept. 10, 2001."

After The Oregonian's report in October, Flir acknowledged that some 1990s grants "likely" violated accounting rules, resulting in the company underreporting expenses by as much as $4 million. But Flir said the current management team did not backdate options, and said its September 2001 grants were appropriate.

Karin J. Immergut, U.S. attorney for Oregon, said in October that her office would look for evidence of backdating in the state. On Friday, Immergut said the inquiry continues, but she noted that a five-year statute of limitations has precluded criminal prosecutions in backdating cases elsewhere.

Most backdating under investigation nationally took place more than five years ago. In 2003, new laws made it more difficult to retroactively change grant dates.

On Friday, The Oregonian reported that Hollywood Entertainment Corp., former parent company of the Hollywood Video chain, granted a series of fortunately timed stock options to executives between 1996 and 2002. Hollywood founder Mark Wattles acknowledged the good timing, but said he believes all of the grants were legal.

Alabama-based Movie Gallery Inc. bought Hollywood last year.

Oregonian reporter Anne Saker contributed to this report Mike Rogoway: 503-294-7699, mikerogoway@news.oregonian.com; siliconforest.blogs.oregonlive.com