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Second Shareholder Suit Accuses 12 Affy Officials Of Profiting From Backdated Stock Option Grants

A second shareholder has sued Affymetrix and certain company officials for allegedly improperly backdating stock option grants, according to court documents obtained by BioArray News.
The suit, filed Sept. 13 in the US District Court for the Northern District of California, accuses 12 Affy officials of diverting “hundreds of millions of dollars of corporate assets to themselves via the manipulation of grant dates associated with hundreds of thousands of stock options granted to Affymetrix insiders.”
According to the suit, filed derivatively by Affymetrix shareholder Samuel Powers, Affy officials took advantage of the backdated option grants to sell more than $115.3 million worth of Affymetrix stock “at artificially inflated prices” between 1997 and 2006.
The suit named as defendants CEO and Chairman Stephen Fodor; President Emeritus Sue Siegel; Chief Financial Officer Greg Schiffman; and General Counsel Barbara Caulfield.
Also implicated are Thane Kreiner, Affy’s senior vice president of sales and marketing; Susan Desmond-Hellman, a director and member of the firm’s compensation committee; and Robert Trice, a director and member of the company’s audit committee.
The case follows a similar suit filed in the same court on Aug. 30 by shareholder Irwin Berkowitz that alleges a similar scheme by Affy officials to backdate grants in order to sell stock at artificially inflated prices (see BAN 9/12/2006).
The Berkowitz suit said 14 officials took part in the activities, including Fodor; Siegel; Caulfield; Schiffman; Head of Product Development Richard Rava; and Company Fellow Kenneth Nussbacher.
Also named in the Berkowitz suit were current board members John Young, David Singer, Vernon Loucks, John Diekman, and Paul Berg, as well as Ronald Verdoon, a former senior transition team member; Edward Hurwitz, a senior advisor until 2002; and Vernon Norviel, general counsel until 2001.
Though the suits allege similar illegal activities, they are not connected, according to an attorney associated with the Berkowitz suit. Eric Zagar, an attorney with Schiffrin and Barroway, which is representing Berkowitz, told BioArray News last week that he is “in contact with the attorneys who filed the Powers action, but so far we are not working together.”
Dollars and Cents
Both the Berkowitz and Powers suits list alleged instances of backdating grants. However, the Powerssuit for the first time alleges that the defendants pocketed proceeds resulting from the backdating.
Specifically, Powers alleges that the officials sold more than $115 million worth of shares through this illegal practice between 1997 and 2006, with Fodor leading the pack by selling nearly 790,000 shares in a period from that resulted in proceeds of nearly $31 million.
In the given period, Siegel sold $22 million worth of shares, Singer sold $14 million, Caulfield sold $11 million worth of shares, while Schiffman and Diekman sold $9 million apiece, and Young and Loucks each sold approximately $7 million. Berg and Kreiner allegedly used this process to sell $3 million and $2 million worth of shares, respectively.
Affymetrix has yet to comment publicly on the Powers suit. In response to the Berkowitz suit, Affymetrix said in an SEC filing this month that it “expects to contest vigorously the backdating allegations in the complaint.”

Affymetrix 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.

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.
The cases arose after 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.
Affy 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 Aug. 30 Affymetrix said it had restated its financial results and filed them with the Securities and Exchange Commission. “The company is now current in its SEC reporting obligations and, as a result, expects that the previously disclosed Nasdaq delisting action will be terminated and believes that the previously disclosed notice of default under the company's indenture has been cured,” Affy said in a statement at the time. 

Affy said the adjustments increased previously reported basic and diluted net income per common share by $.13 and $.12, respectively, for the year ended Dec. 31, 2005, and decreased basic and diluted net income per common share by $.03 for the year ended Dec. 31, 2003.

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