Louisiana Municipal Police Employees' Retirement System v. Countrywide Financial Corp.

2007 Del. Ch. LEXIS 138 (2007)

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Louisiana Municipal Police Employees’ Retirement System v. Countrywide Financial Corp.

Delaware Chancery Court
2007 Del. Ch. LEXIS 138 (2007)

CS

Facts

The Louisiana Municipal Police Employees’ Retirement System (LAMPERS) (plaintiff) was a stockholder of Countrywide Financial Corporation (Countrywide) (defendant), a Delaware corporation. In August 2006, after an article appeared in the Los Angeles Times suggesting that several companies, including Countrywide, were manipulating the timing of stock-option grants to their executives, LAMPERS hired an expert, Richard Goldberg, Ph.D., to statistically analyze the timing of Countrywide’s option grants to see if a more thorough investigation was warranted. Dr. Goldberg concluded that his analysis showed a statistically significant correlation between Countrywide’s option-grant dates and subsequent short-term increases in its stock price. Dr. Goldberg said this suggested Countrywide might have backdated or spring-loaded the options—meaning it improperly used an earlier grant date or granted the options before the public release of material, positive information expected to increase Countrywide’s stock price—to ensure the options were granted with lower exercise prices to benefit the executives. Based on the Los Angeles Times article and Dr. Goldberg’s analysis, LAMPERS suspected misconduct in connection with Countrywide’s option grants and demanded to inspect Countrywide’s books and records pursuant to 8 Del. C. § 220. Countrywide rejected LAMPERS’s demand, maintaining that LAMPERS had failed to state a proper purpose for the inspection because LAMPERS did not provide a credible basis for inferring possible misconduct. LAMPERS then sued Countrywide to enforce LAMPERS’s § 220 inspection rights. Countrywide presented testimony from its own expert, Frederick Dunbar, Ph.D., who disagreed with Dr. Goldberg’s analysis and conclusions. Based on his analysis, Dr. Dunbar said there was no statistically significant evidence that Countrywide’s option grants were backdated or spring loaded.

Rule of Law

Issue

Holding and Reasoning (Noble, J.)

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