California Judge Allows Damages In Fraud Case

The ruling says Siebel Systems directors can be held liable for punitive damages if a shareholder lawsuit can prove that insiders abused stock options.

InformationWeek Staff, Contributor

July 11, 2003

3 Min Read

SAN FRANCISCO (AP) -- A California judge ruled that Siebel Systems Inc.'s directors can be held liable for punitive damages if a shareholder lawsuit can prove allegations that insiders improperly looted stock options from the business software maker.

The order Thursday bolsters a Louisiana pension fund seeking to punish Siebel's board for alleged abuses of the San Mateo-based company's rules governing stock option awards.

The decision represented another setback for Siebel's leaders, who are trying to overcome a painful sales slowdown while also battling recent efforts to portray them as symbols of corporate excess.

Siebel's lawyers had been fighting to prevent the possibility of punitive damages, only to be rebuffed San Mateo Superior Court Judge Quentin Kopp.

The civil complaint, brought by the Teachers' Retirement System of Louisiana, is aimed at Siebel's entire board, a group that includes several prominent business and political leaders.

The list includes two of the country's wealthiest people, Siebel CEO Tom Siebel and stock brokerage pioneer Charles Schwab; a powerful Internet executive, Google CEO Eric Schmidt; and departing Republican National Committee Chairman Marc Racicot, who is poised to lead President Bush's re-election campaign.

The pension fund hasn't estimated the alleged damages, "but we will be looking for a very large number. These guys are all worth a ton of money," said Stuart Grant, a Delaware attorney representing the shareholders. He called the directors' conduct "egregious. They were handing out stock options like candy."

In a prepared statement, Siebel emphasized Kopp's ruling didn't validate the allegations. "We continue to believe the ... claims are completely without merit," the company said.

The case is scheduled for a Nov. 3 trial.

Siebel hoped to rid itself of the suit after Tom Siebel surrendered 26 million stock options valued at $56 million in January.

That sacrifice turned the shareholder allegations into a moot point, Siebel's lawyers argued.

But Kopp concluded Siebel's directors can still be penalized for issuing the stock options if shareholders can prove their case.

The suit alleges the board shirked its duty by doling out millions of stock options in violation of the company's approved compensation plan. The alleged violations included grants that provided extra discounts to executives and directors.

Tom Siebel realized $311 million in gains from exercising his stock options from 1999 through 2001, according to filings with the Securities and Exchange Commission. With his company struggling, Tom Siebel limited his salary and bonus to $1 in each of the last two years.

The suit alleges the directors were too busy enriching themselves to look out for shareholder interests.

Schmidt, a member of Siebel's compensation committee, reaped $13.2 million in gains from Siebel stock options between July 2000 and February 2001, the suit said. The other member of Siebel's compensation committee, Nobel Prize-winning economist A. Michael Spence, realized stock option gains totaling $22.6 million, according to the suit's calculations.

The insiders wouldn't have been able to pocket such huge sums if Siebel's stock hadn't soared like it did during the tech boom of a few years ago.

The shares peaked at $119.88 in 2000. The shares have shriveled during the high-tech drought, closing at $10.03 Thursday on the Nasdaq Stock Market.

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