Analysts Didn’t Defame Former Cyberonics CEO

(CN) - A former Cyberonics CEO was not defamed by two analysts who publicly criticized a stock option grant he received one day before the medical device company's stock jumped 78 percent, a federal judge in Manhattan ruled.

Robert "Skip" Cummins made $2.3 million overnight after the board of directors awarded him 150,000 stock options in a deal the analysts likened to illegal backdating. Backdating consists of granting options on dates when the price of a stock is low.

U.S. District Judge John G. Koeltl reviewed 37 allegedly defamatory statements and found no wrongdoing.

SunTrust Capital Markets analysts Amit Hazan and Jonathan Block were accused of defaming Cummins in two research reports that chronicled "unusual activity" surrounding the option grant.

On June 15, 2004, a Food and Drug Administration advisory panel recommended a therapy for depression developed by Cyberonics. NASDAQ trading for the company's stock was suspended for the entire day.

That evening the board met and awarded Cummins, who had excused himself from the room, with 150,000 stock options, and gave 100,000 to other executives considered responsible for the positive panel recommendation.

All the options issued at the meeting carried the June 14 closing price of $15.23. The next day the stock soared to $34.81.

The analysts' first report lowered Houston-based Cyberonics rating from "buy" to "neutral," and said it "seemed clear" that, like backdated options, the June 15 options were "in the money."

"It appears to us that even if backdating by definition did not occur, the effect was exactly the same," they wrote.

The authors asserted that the options further damaged the credibility of Cyberonics management, citing past criticisms. They said management acted out of self-interest by "taking advantage of material information at a time when their shareholders and investors could not do so."

Hazan gave interviews to the New York Times, Bloomberg.com and the Houston Chronicle. Though he never accused the company's executives of breaking any laws, he told the Houston Chronicle that "it was not correct or ethical for them to do what they did. ... It may be a microcosm of what's happening with this management team."

Cummins resigned at the board's request five months after the information was made public.

Judge Koeltl said Cummins failed to prove the analysts acted negligently, despite only having to show negligence and not actual malice.

The practice of backdating itself is not illegal, so long as it's disclosed in a company's annual report and to the SEC.

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