A group of investors, led by two pension funds, stands to benefit from an unusual criminal court sentence handed down to Chan Desaigoudar, former CEO of California Micro Devices.
U.S. District Judge Vaughn Walker, for the northern district of California, ordered Mr. Desaigoudar to turn over the 1.5 million shares of Cal Micro stock he owned, now worth about $3 million, to the class, along with $2 million he had received in directors' liability insurance. The fine was in addition to Mr. Desaigoudar's three-year prison sentence.
Last year a jury found Mr. Desaigoudar guilty of committing criminal securities fraud. His attorneys are appealing the conviction.
The class already received a $13 million settlement from Cal Micro, a Milpitas, Calif., electronics component manufacturer, and $4 million from Coopers & Lybrand, the company's auditor when the fraud occurred.
The pension funds -- the $24 billion Colorado Public Employees' Retirement Association, Denver, and the $82 billion California State Teachers' Retirement System, Sacramento -- are not in it for the money. "Their losses were small," said Joseph Hassett, partner with Hogan & Hartson, Washington, lead counsel for Colorado Employees in the suit. "Their interest in doing this was to see the system work right."
The class action lawsuit was filed in August 1994. The next year, a new federal law gave institutional investors the right to take charge of securities fraud cases in which substantial losses were suffered.
As the Cal Micro case progressed, plaintiffs worked for a resolution in the spirit of the new law. The case, Mr. Hassett said, was "representative of the philosophy behind the reform act."
The system appears to have worked very well.
The $22 million award is well over two-thirds of the minimum in financial damages that expert witnesses, hired by plaintiffs' attorneys, estimated the class suffered. And it is only a little less than half of the maximum damage estimate of $48.3 million.
A 1996 survey by National Economic Research Associates, a New York consulting firm, said the average value of securities fraud settlements had been 14% of investor damages.
Mr. Desaigoudar's case followed a chain of events that led to Cal Micro's stock price falling to less than $4 a share in January 1995 from $23 a share in June 1994.
"It's significant that a CEO of a company engaged in reporting false revenue got any jail time at all, and it was also significant that (he was ordered) to make restitution to the class of stockholders," Mr. Hassett said.
The appeal of the verdict by Mr. Desaigoudar and Steven Henke, Cal Micro's former chief financial officer, who was also convicted of fraud, could take up to 18 months, said Frank R. Ubhaus, a partner in Berliner Cohen, a San Jose, Calif.-based law firm representing Mr. Desaigoudar.
In the early 1990s, Cal Micro had about $40 million in annual revenue and was on a sharp growth path. But the company got in trouble as it prepared for a second public stock offering in 1993.
According to documents filed in civil and criminal fraud cases, Cal Micro executives, starting with Mr. Desaigoudar, were under pressure to improve the company's revenue outlook.
In court papers, the government said company officials resorted to fraud, pumping up revenue statements with invoices for sales of products that had not been shipped and, in some cases, had not even been made.
"This is a wonderful example of what institutional investors can do if they get involved" in such cases, said Joseph Grundfest, a former Securities and Exchange Commissioner and now a professor at Stanford University Law School in California.
Judge Walker's decision to designate the two pension funds as lead plaintiffs meant that the lawsuit obeyed the spirit of the new securities fraud law.
George Kim Johnson, chief counsel for the Colorado pension fund, said Judge Walker also played a key role in helping investors win their settlement, partly by raising issues about the selection of counsel and the settlement.
In many previous class action suits, lawyers' fees had taken large chunks of settlements.
In his decision approving the Cal Micro settlement, Judge Walker wrote the "presence of large institutional investors as class representatives reduced substantially the agency problems associated with class actions and correspondingly reassured the court about bona fides of proposed settlement, contained adequate cash component, class representatives had reviewed and approved attorneys fees, which amounted to roughly 10% of probable total settlement value . . ."
Average attorneys' fees in similar class action cases had been 32% of the settlement, according to the National Economic Research Associates study.
Mr. Desaigoudar's sentence was also in the spirit of the reform act, the Colorado fund's attorney said.
"One of the aspects of the whole reform act is those parties who are legally responsible for the problem should be the ones who contribute to making it right," Mr. Johnson said.
