The ABCs of ACS Lawsuits

They don't call him "Rich" for nothing. Well, it is former ACS CEO Jeffrey Rich's last name. But some shareholders ain't happy about how he got so, well, rich.

We've spilled much virtual ink in recent weeks documenting the troubles at Afflilated Computer Services Inc., which is being investigated by the Department of Justice and the Securities and Exchange Commission for backdating stocks--that is, giving stock options to its top execs and dating them just before those stocks experienced a sharp increase in value, thereby allowing the likes of former CEO Jeffrey Rich, Chairman Darwin Deason and many others to make easy millions. But what we haven't discussed are the handful of shareholder lawsuits that have been filed against ACS--one of which got some publicity when it was filed in April, but others of which have been less covered in the business press.

There are least two others sitting in the U.S. District Court, Northern District of Texas. One, filed on June 22 on behalf of the Alaska Electrical Fund, alleges ACS' "entire Board of Directors and certain top officers" are guilty of "violations of federal and state law, including breaches of fiduciary duty, abuse of control, constructive fraud, corporate waste, unjust enrichment and gross mismanagement which have caused damage to ACS." The 59-page complaint alleges that all the defendants named in the suit--which is pretty much everyone at the top of the ACS food chain, including Rich's replacement Lynn Blodgett, who was not named in the April lawsuit--"participated in the concealment of the backdating option scheme" or knew of it and did nothing to stop it. Citing several Wall Street Journal pieces on the backdating scandal, the suit also claims that ACS is guilty of insider trading, since its filings with the SEC were "false and misleading," at least till the SEC showed up to express a keen interest in the matter.

The suit even provides specifics concerning who got rich and when off the backdating, showing several instances in which Rich got hundreds of thousands of options in 1995 through 2002 at bottom-o'-the-barrel prices--just before they took "a sharp increase." This happened six consecutive times. "According to The Wall Street Journal," says the suit, "the statistical likelihood of the options granted to Rich from 1995 to 2002 occurring by chance on the dates when the prices of ACS stock was so low, and hence so favorable to Rich, would be one in 300 billion"--or, as the paper put it recently, "less likely than flipping a coin 38 times and having it come up 'heads' every time.'"

Since those are essentially the same allegations made in a lawsuit filed on July 7 by Bennett Ray Lunceford and Ann M. Lunceford, at the beginning of this month, former federal Judge Joe Kendall, now acting as the lead attorney in the Alaska Electrical Pension Fund suit, filed documents with the court to consolidate his and the Luncefords' cases. Court records show that AEPF met with the Luncefords and agreed that "AEPF should have primary responsibilty for conducting the litigation." The documents also show that any other litigation filed against ACS regarding the backdating of stock options will also be consolidated into the one case. The single case will be in U.S. District Judge Barbara Lynn's court. --Robert Wilonsky

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Robert Wilonsky
Contact: Robert Wilonsky