Quest Shareholders Drop Backdating Suit For $29M

By Samuel Howard

Law360, New York (November 20, 2009) -- After more than three years of litigation and failed mediation efforts, Quest Software Inc. has agreed to pay a class of investors $29.4 million to settle allegations that the company’s stock options backdating artificially inflated stock prices.

On Thursday, the lead plaintiff asked Judge David O. Carter of the U.S. District Court for the Central District of California to preliminarily approve the settlement and put to rest claims that Quest concealed backdated stock option grants and issued overblown financial reports.

The proposed settlement provides almost $30 million for a class of investors who purchased Quest Software stock between Nov. 9, 2001, and July 3, 2006, according to the motion.

In a declaration in support of the settlement, Marian P. Rosner, an attorney for the plaintiff and partner at Wolf Popper LLP, deemed the settlement a victory for the shareholders.

“The proposed settlement is an excellent recovery for the class. The proposed settlement was reached after three years of extensive and aggressive litigation,” Rosner said. “It is the result of arm’s-length negotiations conducted by experienced counsel and represents a very substantial recovery of the class’ estimated damages.”

Despite the strength of the shareholder claims, the proposed settlement is preferable to running the inherent risks of bringing a case to trial, Rosner said.

In July 2008, Quest came up short in an attempt to dismiss the second amended complaint, and Judge Carter granted class certification to plaintiff Middlesex Retirement System in September 2009.

A spokeswoman for Quest declined to comment.

The case dates back to October 2006, when Middlesex accused Quest of knowingly backdating its stock options for all employees, leading to overstated financial filings and inflated stock prices.

Under the company’s "bucket and best price” methodology system, Quest would identify the date when the company's stock was at its lowest and then issue options for that month or quarter on that date, according to the complaint.

After the options were issued, the compensation committee of Quest's board of directors would sign off on the options by issuing uniform written consents. Quest issued options through the “bucket and best price” system for every level of employee, the complaint said.

Quest acknowledged the practice and reissued previous earnings reports to reflect an additional $150 million in compensation for employees, according to the complaint.

The U.S. Securities and Exchange Commission issued a Wells notice initiating an investigation into Quest's options backdating in March 2008.

The agency ended its investigation in March when Quest agreed to an entry of a judgment enjoining it from future violations of federal securities laws.

The plaintiff seeks a hearing on the settlement Dec. 7.

The plaintiffs are represented in the current matter by Wolf Popper LLP and Hulett Harper Stewart LLP.

Quest is represented by Cooley Godward Kronish LLP, Latham & Watkins LLP and Sheppard Mullin Richter & Hampton LLP, among others.

The case is Middlesex Retirement System et al. v. Quest Software Inc. et al., case number 06-cv-06863, in the U.S. District Court for the Central District of California.

-- Additional reporting by Jocelyn Allison