After Delays, KLA Backdating Suit Settles

After Delays, KLA Backdating Suit Settles

It's the not-so-little settlement that could.

Former KLA-Tencor Corp. executives have agreed to settle a lawsuit
over stock option backdating after four years of torturous litigation, according to a court
filing (.pdf) Monday. Around $33 million in cash will be paid by the
executives and the Milpitas, Calif., company's insurer to KLA,
according to lawyers briefed on the settlement, who requested anonymity
because details of the deal haven't been made public.

The deal was a long time coming. U.S. District Judge James Ware rejected
a settlement in late 2008. Then, former CEO Kenneth Schroeder and
KLA couldn't agree to anything -- to the point that all 16 other
defendants were ready to settle the case without him. The stalemate
ended last week, after several mediations with retired Judge Layn
Phillips.

The derivative lawsuit was filed by shareholders on behalf of
KLA-Tencor against executives allegedly responsible for backdating stock
options. The company restated its financial results to take $370
million in extra charges related to the illegal practice. The Securities
and Exchange Commission filed lawsuits against Schroeder and former KLA
general counsel Lisa Berry -- both are still pending. The company
settled a class action for $65 million in 2008.

The $33 million settlement in the derivative case does not include
the value of canceled and repriced stock options usually included in
these deals. Two-thirds of the cash will be footed by the company's
insurers with the rest coming from former KLA executives, said lawyers
familiar with the deal.

The parties will submit the details of the settlement by March 15,
and a hearing on preliminary approval is scheduled for March 22 before
Judge Ware.

The cash payment in the derivative settlement is on the high side.
Backdating poster-child Brocade got a total of $23 million in cash.
Marvell Technology got a cashless
settlement worth $55 million in canceled stock options and the
like.

Former CEO Schroeder, represented by DLA Piper's Shirli Weiss and
Keker & Van Nest's Elliot Peters, was a big sticking point in
settlement negotiations, according to court documents and lawyers
involved in the case. Schroeder sued KLA in Santa Clara County Superior
Court for canceling millions in compensation after the backdating
scandal came to light. An arbitration in that case was set for April.

Schroeder's employment claims are being settled simultaneously with
the derivative lawsuit, said lawyers familiar with the case. Money will
be flowing both ways, with KLA returning a percentage of canceled
compensation to Schroeder and the former CEO paying into the derivative
settlement.

Weiss and Peters said they weren't authorized to comment.

The first attempt to settle the case came in 2008 when the company's
special litigation committee, represented by Skadden, Arps, Slate,
Meagher & Flom, announced that it had reached a deal and would
dismiss the case. The lead shareholder plaintiff, the Alaska Electrical
Pension Fund, represented by Coughlin Stoia Geller Rudman & Robbins
partner Shawn Williams, fought against it.

Ware scrapped the deal, citing concerns about fairness and the
independence of the special litigation committee that was appointed by
the board of directors.

"Several pieces of evidence suggest that the [special litigation
committee] was not 'fully empowered to act for the company without
approval by the full board,'" Ware wrote at the time.

KLA is represented by Morgan, Lewis & Bockius partner John
Hemann.

Shearman & Sterling; Orrick, Herrington & Sutcliffe; Hogan
& Hartson; Fenwick & West; Morrison & Foerster; and Munger,
Tolles & Olson are representing different executives who used to
work at KLA-Tencor.

Quipped one of the lawyers, "I'm sad that I'll be losing my
retirement annuity."