A pair of Biomet stockholders have filed a lawsuit against the company's officers and directors, alleging insiders were allowed to manipulate the timing of stock options.

In two lawsuits filed in Kosciusko Superior Court Nov. 9, stockholders Karen Long and Clifford M. Thorson allege members of the board of directors and officers were allowed to backdate stock options to maximize their profits.

The lawsuit filed by Long lists Daniel P. Hann, Bradley J. Tandy, C. Scott Harrison, Charles E. Niemier, Dane A. Miller, Garry L. England, L. Gene Tanner, Gregory D. Hartman, James W. Haller, James R. Pastena, Jerry L. Ferguson, Jerry L. Miller, Joel P. Pratt, Kenneth V. Miller, Kent E. Williams, M. Ray M. Harroff, Marilyn T. Quayle, Thomas F. Kearns Jr., Sandra A. Lamb and Niles L. Noblitt as defendants.

Thorson's lawsuit names all the people in Long's lawsuit with the addition of Kent E. Williams.

All defendants named in the lawsuit are members of the board of directors, compensation and stock option committee or the audit committee of the board of directors.

Biomet Inc. is listed as a nominal defendant in both cases.

The suit claims some officers and directors violated state law "including breaches of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment and violations of the Indiana Code that have caused substantial loss to Biomet and other damages, such as to its reputation and goodwill."

The lawsuit also states, "Dating back to at least 1996, defendants have caused or allowed Biomet insiders to manipulate stock option grant dates so as to secretly maximize their profits from the stock options. Specifically, certain Biomet insiders changed their respective stock option grant dates to take advantage of lower exercise prices than the price on the actual grant date. The price of Biomet shares on the reported option-grant date therefore was lower than the share price on the actual day options were issued."

By backdating the stock options, the lawsuit alleges, the defendants received instant gains. The backdating also led Biomet investors to believe the company's net income and earnings per share were of higher value than they actually were.

"By 2006, these defendants have allowed themselves and others the ability to sell over $226 million worth of Biomet stock and realize millions of dollars in illicit compensation through the exercise of backdated option grants and subsequent sale of Biomet stock.

"...The defendants have caused or allowed Biomet: (i) to file materially false and misleading financial statements that materially understated its compensation expenses and materially overstated its quarterly and annual net income and earnings per share and (ii) to make disclosures in its periodic filings and proxy statements that falsely portrayed Biomet's options as having been granted at exercise prices equal to the fair market value of Biomet's common stock on the date of the grant."

The lawsuit claims that the backdating practices are unacceptable because they skew a company's profit reports.

"Under generally accepted accounting principles, the instant paper gain gotten from backdated stock options was equivalent to paying extra compensation and was thus a cost to Biomet. The costs were not properly recorded. In turn, since these costs were not properly recorded, Biomet's profits were overstated. Thus, a restatement of Biomet's past financial results will be necessary to correct for these improprieties," the lawsuit claims.

In July, Biomet was identified by Tao Levy, an analyst with Deutsche Bank, as "having a 'greater risk of options irregularities.' Levy also identified five options grants between 1997 and 2002 that appeared suspicious."

Levy wrote, "While we cannot determine if options were backdated, we have provided some analysis on the stock performance around the implied option-grant dates for companies under coverage. Based on our analysis, Stryker and Biomet appear most vulnerable to questioning on options. ... Overall this analysis would indicate that Stryker and Biomet grant performance show similar characteristics to other companies that have announced stock-option-backdating investigations."

Levy's investigation prompted the plaintiffs to look into Biomet's option grants in the past and they found "several option grants that were blatantly dated at the lowest share price for the period in which they were granted. Further, these suspicious grants span from at least 1996 until 2001. During this time certain of the defendants engaged in excessive amounts of insider sales."

The lawsuit asks for judgment against all the named defendants for "the amount of damages sustained by (Biomet) as a result of the individual defendants' breaches of fiduciary duties, abuse of control gross mismanagement, waste of corporate assets, unjust enrichment and violations of the Indiana Code."

The plaintiffs also ask that Biomet improve internal procedures to protect shareholders from such actions in the future by strengthening the supervision and developing procedures to allow greater shareholder involvement in the board; control insider stock selling; allow shareholders to nominate members for election to the board; and improve internal audits.

The lawsuit also seeks a jury trial and restitution for Biomet from each of the defendants. [[In-content Ad]]