KLA to Pay $65M in Stock Option Case

SAN FRANCISCO -- Computer chip supplier KLA-Tencor Corp. has agreed to pay $65 million to resolve a shareholder lawsuit triggered by the company's rampant mishandling of employee stock options.

If approved by a federal judge, the settlement will be the second largest paid to shareholders of one of the dozens of companies entangled in a stock option scandal that swept across corporate America during the past two years, with Silicon Valley at the epicenter.

A court hearing hasn't been scheduled to review KLA-Tencor's proposed settlement, which was announced late Thursday.

Mercury Interactive, one of the first companies to acknowledge stock option chicanery, reached a $117.5 million settlement in a shareholder suit last year. The liability fell on Hewlett-Packard Co., which bought Mercury Interactive for $4.9 billion despite the software maker's stock option woes.

With about $2 billion in annual revenue, KLA-Tencor is likely to feel the financial pinch of its settlement more acutely than HP, the world's biggest technology company, with more than $100 billion in annual revenue.

KLA-Tencor shares gained 20 cents to finish Friday at $42.17.

San Jose-based KLA-Tencor has already been hard hit by its stock option abuses, which involved a practice known as "backdating." This slippery technique involves retroactively picking a date to price the underlying value of the stock options to increase the potential windfall for the recipient.

The manipulation isn't illegal unless the maneuvering isn't recorded on the books properly _ a problem that tripped up KLA-Tencor and a long list of other companies.

To clean up its accounting mess, KLA-Tencor wiped out more than $230 million in previously report profits.

The botched financial statement led to a class-action suit representing KLA shareholders who alleged they had been duped about the company's true condition. The civil complaint represented shareholders who bought KLA-Tencor stock during a nearly five-year stretch ending in May 2006.

After federal securities regulators opened an investigation into KLA-Tencor's stock option record-keeping, the company opened its own inquiry. That led to the retirement of its chairman, founder Kenneth Levy, who acknowledged receiving improperly priced options.

KLA-Tencor also severed its ties with a former chief executive, Kenneth Schroeder, and accepted the resignation of its general counsel, Stuart Nichols.

The SEC closed its investigation into KLA-Tencor last year after the company agreed to an injunction prohibiting it from violating securities laws governing record-keeping.