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HEADLINE NEWS:
CEO In Backdating Suit Wins Dismissal Of SOX Claim
Christie Smythe
Securities Law 360. December 16, 2008
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EXCERPT: Cutting down on potential damages in the case, a judge has partially granted former Engineered Support Systems Inc. CEO Michael F. Shanahan Sr.'s request for summary judgment, dismissing a Sarbanes-Oxley Act-related claim from a suit filed by the U.S. Securities and Exchange Commission over alleged options backdating. On Friday, Judge Jean C. Hamilton issued a ruling in the U.S. District Court for the Eastern District of Missouri that effectively dismissed the SOX claim from a seven-count complaint filed against Shanahan Sr. The dismissal of the SOX claim bars the SEC from seeking certain types of damages in the suit. The claim related to Section 304 of the Sarbanes-Oxley Act of 2002, under which the SEC sought to recover all bonuses or stock-based profits paid to Shanahan within 12 months of the company’s filing of an improperly stated earnings report in 2002. However, because Engineered Support Systems never restated its earnings in connection with the backdating scheme alleged by the SEC, it is not immediately clear whether Section 304 applies, Judge Hamilton ruled. The SEC alleged that an actual restatement was unnecessary because the company’s 2002 annual earnings report nevertheless contained material errors that should have prompted a restatement, the opinion said. However, Judge Hamilton wrote: “It is the opinion of this court that the ordinary, contemporary, common meaning of Section 304 is that, before penalties may be imposed, an issuer must be compelled or ordered to prepare a financial restatement, and must actually file the restatement.” While the judge allowed the SOX-related claim to be dropped from the suit, she refused to dismiss other claims addressed by Shanahan in his motion for summary judgment. The judge also issued a ruling Friday denying a request to dismiss claims against Shanahan’s son, Michael F. Shanahan Jr., a former board member for Engineered Support Systems. |
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