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Shareholders Sue Engineering Firms

ST. LOUIS (CN) - Executives from Engineered Support Systems and DRS Technologies conspired to mislead shareholders into approving a merger, according to a class action in City Court. Two ESSI executives are in prison for backdating stock options, and have been ordered to repay $9.5 million.

Named plaintiff Daniel Nickell says the defendants filed false financial statements to shareholders between Sept. 22, 2005 and Jan. 31, 2006 to get the merger approved. Nickell claims the companies failed to disclose that executive had backdated stock options at ESSI and that DRS was assuming multimillion-dollar liabilities due to the backdating.

Shortly after the 2006 merger, DRS was forced to disclose that it had assumed a $12.5 million charge against earnings for the potential liability caused by the backdating, the suit states.

Nickell claims DRS executives knowingly misled shareholders by omitting the backdating information and went ahead with the merger despite knowing about the backdating at ESSI.

ESSI executives Michael Shanahan Sr. and Gary Gerhardt pleaded guilty to the backdating in St. Louis Federal Court in July 2008. Both are serving federal prison terms. Shanahan will pay $7.87 million and Gerhardt $1.8 million in restitution. They are two of 11 individual defendants named in the suit.

The class consists of any person who sold ESSI stock between Sept. 22, 2005 and Jan. 31, 2006. The class seeks damages and disgorgement of profits the defendants gained through their improper conduct.

Plaintiffs are represented by Richard Hein.

On Dec. 20, 2005, the record date of the merger, there were more than 41.9 million shares of ESSI common stock outstanding.

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