Apple's Outrageous Settlement

http://www.futureofcapitalism.com/2010/10/apples-outrageous-settlement

Back in January 2007, Mayor Bloomberg issued a report complaining that "the prevalence of meritless securities lawsuits and settlements in the U.S. has driven up the apparent and actual cost of business — and driven away potential investors" — and then his own city law department turned around and sued Apple over the city retirement fund's investment in Apple stock, which was up 600%.

At the time, it prompted a New York Sun editorial, "New York Versus Apple," that commented on the irony of the suit while also reporting that the class action law firm representing New York and its pension fund in the case had, in a classic revolving door situation, earlier hired aboard a city lawyer who had been responsible for managing the city's pension litigation.

In December of 2007, a federal judge, Jeremy Fogel, dismissed the city's case, prompting a second New York Sun editorial on the topic.

Now, nearly four years after the commencement of the original groundless litigation, through sheer persistence the city and its class action lawyers have wrung from Apple a settlement offer that they will seek preliminary approval of from Judge Fogel, according to a New York City press release.

The proposed settlement is a horrible deal for current Apple shareholders and for anyone with an interest in the rule of law. It would take $20.5 million away from current Apple shareholders and distribute the money as follows:

• $14 million would go to people who bought Apple stock between August 24, 2001 and June 29, 2006 at a price of more than $65.71 a share. [As a practical matter, the highest the shares got in this period were around $75 a share in early 2006. Shares were between $12 and $15 for much of 2001 through 2004. (It closed today at $289 a share.)]
• $4 million would go to "administrative and attorneys fees associated with the settlement."
• $2.5 million would go to "corporate governance programs at 12 universities across the country." Each of the 12 programs would receive a donation of $208,333.33. The programs are the Robert Zicklin Center for Corporate Integrity at Baruch College of the City University of New York, the Center on Corporate Governance at Columbia Law School, the Harvard Law School Forum on Corporate Governance and Financial Regulation, the Institute for Corporate Governance at Indiana University's Kelly School of Business, the Corporate Governance Center at Kennesaw State University College of Business, the Corporate Governance Program at Northwestern University's Kellogg School of Management, the Corporate Governance Institute at San Diego State University, the Rock Center for Corporate Governance at Stanford Law School and the Graduate School of Business, the Weinberg Center for Corporate Governance at the University of Delaware, the Institute for Excellence in Corporate Governance at the University of Texas's Dallas School of Management, the Law & Business Program at Vanderbilt University Law School, and the Milstein Center for Corporate Governance and Performance at Yale School of Management.

So the class action lawyers and the universities get enriched at the expense of current Apple shareholders. Apple shareholders who bought in after 2006 will have to give some of their money to other shareholders who either made the foolish decision to sell their shares before they more than tripled in value or who held onto the shares and have already seen tremendous gains.

The university payouts are particularly insidious. Do you expect professors at these programs to denounce Apple for caving in to this legal pressure at the expense of its shareholders when the professors themselves are to be beneficiaries of the payout? It's interesting that NYU, whose Professor David Yermack virtually invented the options backdating issue at the center of the Apple case, gets no money. These corporate governance programs are supposed to be about protecting shareholders from poorly run companies, yet here is a case in which the corporate governance professors themselves are preparing to accept $2.5 million that is being taken away from the shareholders of Apple. It's outrageous.

Apple's management doubtless decided that the settlement, which is puny in the context of Apple's profits or revenues, would be less costly than the legal fees and management time involved in continuing to defend the litigation. Doubtless some shareholders and non-shareholders would have preferred that the company stand on principle and fight, but at least on can understand Apple's position on the matter.

Less easy to understand is that of Mr. Bloomberg's top city lawyer, Michael Cardozo, who, in a press release characterizing the city's law firm as "noted shareholder and corporate governance firm Grant & Eisenhofer" also claimed, "This settlement is an excellent example of shareholder advocacy, and compensates shareholders for systematic options backdating at the company." The shareholders being advocated for are the old ones who sold or bought high at the expense of the newer ones and the ones that bought cheap. It compensates shareholders — but at the expense of other shareholders, who aren't being advocated for at all. Even if the money will come not from shareholders but from some insurance policy purchased by Apple to guard against such judgments, it will cost shareholders in the end, because the premiums on such policies will now increase.

What the settlement really is is a shifting of money around from some Apple shareholders to some others, with the real beneficiaries being the class action lawyers and the corporate governance professors. If there were ever a case to show that "corporate governance" as the professors and class action lawyers understand it has little or nothing to do with business success or investment returns, Apple is it. Here is a company whose corporate governance was supposedly so egregious that it has to pay $2.5 million to a bunch of corporate governance professors as penance — yet the stock went from $12 a share to $289 a share during a decade in which the overall stock market has been basically flat to slightly down. It's a farce. Maybe Michael Cardozo, his "noted" lawyers at Grant & Eisenhofer, and the 12 university-based corporate governance centers they plan to subsidize can identify some other company with corporate governance so bad it is worth suing over and let me know about it so that I can invest now and make 24 times my money before Mr. Cardozo can decide I need a shareholder advocacy lawsuit filed on my behalf.

by Ira Stoll  |  Oct 6, 2010 at 9:11 pm Related Topics:  Corporate Governance, Education, New York, Non-Profits receive the latest by email: subscribe to the free futureofcapitalism.com mailing list