one book of secrets is the consulting report mentioned in Laster's comments from the DS hearing...
that would be a good report for clawback time...
From DS transcripts... part of Laster comments... and for the gazee's out there, he doesn't say anything good about the bod...
This is a case where the claims were
strong, at least as pled. The nominal defendant was
Peregrine Pharmaceuticals, a company that developed
drug treatments for cancer patients. It had a
four-member board -- one CEO and three outside
directors. The three outside directors were on the
compensation committee. When they went about setting
the officers' pay, they used the help of an outside
compensation consultant. They looked at peer
companies, they determined the pay that they were
providing, and they pegged the compensation of the
officers to the 50th percentile. That seems like a
reasonable, understandable procedure.
But according to the complaint, what
did they do when they set their own compensation?
They used a different procedure. They simply looked
around and gave themselves what they thought and
deemed appropriate.
There was a 2011 stock incentive plan
that limited officers to 250,000 options per year. On
May 4, 2012, the outside directors granted the CEO
500,000 stock options, double the limit in the stock
incentive plan.
Later in 2012, the company had a
little bit of trouble with its main product, which was
a pharmaceutical prospect. It had poor results. The
stock price fell because there were problems with the
data. In December 2012, the board learned that the
data might be salvageable and could possibly be used.
At a time when the public did not know this
information, on December 27, 2012, the outside
directors granted themselves 250,000 stock options
each. They also granted 3,360,125 options to
Peregrine's officers and employees, including options
for 1 million shares to the six officers named as
defendants in this action.
Eleven days later, Peregrine announced
that the internal review had cleared the results of
the Phase 2 trial and Peregrine planned to move to
Phase 3 trials. Peregrine's stock rose from $1.35 per
share to $2.43 per share, so a little bit less than
double. The options were, therefore, immediately in
the money.
It's reasonably inferable from these
facts that the outside directors knew, at the time
they granted the options, that the market price was
not reflecting the fair market value of the stock,
because there was material nonpublic information that
the public had not received. This is as classic a
spring-loading situation as you can get.
So you've got one questionable
compensation decision, in terms of giving the CEO 2X
the limit in the stock option plan. You then have
what seems to be an extremely clean spring-loading
situation, where you grant, at market price, a lot of
options when you know the market price is undervaluing
the company because you have material nonpublic
information.
You then get to another instance of
the outside directors awarding themselves
compensation. You-all will recall the procedure that
the outside directors went through when setting
officer compensation. You-all also will recall that
they didn't do anything similar when setting their own
compensation. They just picked a number.
So then, in 2012, they decided to hire
a compensation consultant to look at their
compensation. That seems like a good idea: Why not
do for yourself the same thing that you're doing when
you're setting compensation for others. The
consultant came back and recommended that the outside
directors award themselves 20,000 options each. The
outside directors disregarded the consultant and,
instead, awarded themselves 232,000 options each.
That's an order of magnitude higher than what was
recommended.
Although the outside directors
continued to use a compensation consultant to set
officer pay, they never hired another compensation
consultant to set their own pay. It seems that
process was good enough when you were determining what
other people should get, but not when you're
determining what you yourself should get.
