A Win For Corporate Honesty

We cheer the decision of the Washington Supreme Court in the F5 Networks case, which was about procedural rights in a case about backdated stock options

May 22, 2009
Seattle Times editorial
© 2009 The Seattle Times Company

THE Washington Supreme Court's ruling in the F5 Networks Inc. case is a welcome step in ensuring ethical corporate behavior.

The underlying case is about backdating of stock options for company executives. A stock option is a right, which can be held for several years, to buy a certain number of shares at a fixed price. That price is set by the market on the day the option is granted.

To backdate an option is to falsify the date in order to set a lower buy price, to the wrongful benefit of the option holder.

In this case, the eventual value of the options were reported at more than $160 million.

A union pension fund owning shares in F5 sued when it learned that over several years, nine out of 26 option grants were on lowest-price days of the respective month, and that three more were on the second-lowest-price days. The odds that such a result had come about by chance were less than one in 2 million.

The question before the Washington Supreme Court, which issued its decision Thursday, was not what executives had done or who owed what to whom. That is yet to come from a different court. The question here was whether, under the corporation law of Washington state, the pension fund had to first petition the company's board of directors to file the lawsuit itself.

When the accused wrongdoers "are directors themselves," says professor Dan Morrissey of Gonzaga University's School of Law, having to ask their opinion before suing them is ridiculous. Once their opinion was solicited, it might have to be deferred to, which "could be a death sentence for the lawsuit," Morrissey says.

The bottom line here is corporate ethics. Officers and directors have a fine enough life in America without having to cheat.

All shareholders owe thanks to the Washington Supreme Court for a unanimous decision, Justice Tom Chambers for a strongly worded opinion, and for the pension fund of Locals 302 and 612 of the International Union Operating Engineers for going to court.

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