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Fourteen Current and Former Affy Officials Named In Shareholder Suit for Backdating Stock Option Grants

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Affymetrix and more than a dozen of its current and former officials are being sued by a shareholder for allegedly backdating grants of stock options, taking tax deductions based on those stock options, and making false statements related to the granting of those options.
 
The company disclosed in a filing with the US Securities and Exchange Commission last week that it has been named in the shareholder derivative suit, which is pending in the United States District Court for the Northern District of California.
 
The announcement didn’t seem to trouble investors, though. Shares of the firm’s stock were trading at $20.47 at midday on Tuesday, up 2.7 percent from the closing price of $19.92 on Sept. 6, the day Affy made the SEC filing.
 
The suit, Berkowitz vs. Fodor, was filed by Affymetrix shareholder Irwin Berkowitz on August 30, and accuses several current and former officials at Affymetrix of a “gross breach of fiduciary duties” related to “improperly backdat[ing] dozens of grants of Affymetrix stock options” to Affy CEO Stephen Fodor and other executives in violation of generally accepted accounting principles.
 
According to the court filing, the suit alleges 14 instances of alleged backdating between October 15, 1998, and June 12, 2002, by Affymetrix’s compensation committee.
 
“In a striking pattern that could not have been the result of chance, each and every one of the foregoing stock option grants was dated just after a sharp drop and just before a substantial rise in Affymetrix’s stock price.”
 
The suit also claims that Affy officials improperly took tax deductions based on the backdated stock options and disseminated “false financial statements and other SEC filings that improperly recorded and accounted for the backdated option grants and concealed the improper backdating of stock options.”
 
The suit calls for Affy officials to “disgorge to the company all of the backdated stock options they received, including the proceeds of any such options that have been exercised, sold, pledged, or otherwise monetized,” as well as an award of attorneys’ fees and costs.
 
The officials named in the suit are Affymetrix CEO and chairman Stephen Fodor, President Emeritus Sue Siegel, General Counsel Barbara Caulfield, Chief Financial Officer Greg Schiffman, Head of Product Development Richard Rava, and Company Fellow Kenneth Nussbacher.
 
Current board members John Young, David Singer, Vernon Loucks, John Diekman, and Paul Berg are also named, as are Ronald Verdoon, a former senior transition team member, Edward Hurwitz, a senior advisor until 2002, and
Vernon Norviel, general counsel until 2001.
 

“In a striking pattern that could not have been the result of chance, each and every one of the … stock option grants was dated just after a sharp drop and just before a substantial rise in Affymetrix’s stock price.”

Affymetrix disclosed in early August that it had uncovered “certain documentation lapses” in its stock-option granting practices and would need to restate its financial results dating back to 1997. It said at the time that an internal review performed under the direction of its board of directors’ audit committee had “not found any pattern or practice of inappropriately identifying grant dates with hindsight” (see BAN 8/15/2006).
 
On August 30, the company said that it had completed its financial restatement, noting that due to a “documentation lapse” in July 1999, “an option grant for an aggregate of 1.99 million shares should have been measured for accounting purposes as of a later date.” The restatement included corrections relating to certain other errors and documentation lapses in the fiscal years 1997 and 1998, Affymetrix said (see BAN 9/5/2006).
 
Affymetrix said in last week’s SEC filing that it “expects to contest vigorously the backdating allegations in the complaint.”
 
The company added that it may be subject to other lawsuits from private plaintiffs concerning this subject area, and that it does not expect to disclose any additional lawsuits that are based on similar allegations.
 
Affymetrix declined to comment further on the case. Attorneys for Irwin Berkowitz could not be reached for comment.

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