HCC Accused In Three Suits Of Backdating

HCC Insurance Holdings Inc. is defending three lawsuits, one a class action, in connection with its admission that executives in the company engaged in backdating stock options that led to restatement of earnings.

The actions were all filed in Houston, where the specialty insurance carrier is based, at U.S. District Court Southern District of Texas. HCC had no comment on the litigation.

All three complaints allege that executives illegally profited from backdating stock options (the practice of awarding the stock at a price that is lower than the actual price of the stock on the day it was given to improve its value to the holder) and the practice resulted in a restatement and loss in share price for stockholders.

The case stems from an internal investigation of backdating issues. According to the company's Dec. 12, 2006 Securities and Exchange Commission filing, the investigation found the company's chief executive officer, Stephen L. Way, engaged in backdating stock options in violation of the company's stock option plans and public statements. General counsel Chris L. Martin, the filing continues, knew about these practices and allowed it to happen.

The filing contends Mr. Way's purpose in engaging in this practice was to attract and retain talent by “providing the employees with the best option price.” Neither individual sought to falsify financial statements, it was stated.

Mr. Way and Mr. Martin both resigned from HCC on Nov. 17. Mr. Way remained as a consultant to the new CEO, Frank J. Bramanti, and nonexecutive chairman of the board until March 12 when J. Robert Dickerson was elected the new chairman.

The discovery resulted in HCC restating financials affecting 2003 to 2005. It also said financial statements from 1997 through March 31, 2006 could not be relied upon. The restatement affected compensation charges amounting to approximately $30 million and decreased shareholders equity by $5 million as of Dec. 31, 2005.

For shareholders, the revelation that the company engaged in backdating, which was also announced on Nov. 17, resulted in a 9 percent drop in the stock price from $31.64 to $28.81 a share.

According to the complaints, two of the suits, Bacas derivatively on behalf of HCC Insurance Holdings (07-cv-456) and International Brotherhood of Electrical Workers Local 98 Pension Funds (07-cv-550), were discussed in the company's SEC filings.

The class action suit, Bristol County Retirement System (07-cv-801) filed on March 8, names Edward S. Ellis Jr., chief financial officer, and Walter J. Lack, a director and chairman of the compensation committee, as defendants in addition to Mr. Way and Mr. Martin.

Mr. Ellis remains with the company, and Mr. Lack resigned in November of last year.

The suit seeks a compensatory damage award and payment of expenses and fees.

(Additional reporting from Susanne Sclafane)