Rambus Inc. - Report of the Special Litigation Committee of the BOD

Just a few highlights / low lights that jumped out of the report:

"The financial costs to the Company of the investigation, restatement, and litigation are substantial." (p.1)

"After an exhaustive investigation and careful consideration, and in the light of settlement agreements it has reached with several individuals, the SLC finds that it is in the best interest of Rambus that all claims should be terminated and dismissed with prejudice against the named defendants in the derivative actions with the exception of claims against Ed Larsen - the Company's former Vice President of Human Resources." (p.1)

"The SLC intends further to ask the court to stay proceedings against Mr. Larsen until any related governmental inquiries have been concluded." (p.1)

"The SLC believes that the aggregate value of the settlements discussed herein exceeds $6.5 million in cash and cash equivalents and substantial additional value to the Company relating to the relinquishment of claims to over 2.7 million stock options." (p.2)

"The SLC has found no evidence of any bad faith or improper behavior by Mr. Hughes concerning the matters under review, and during his tenure as Chief Executive Officer there have been no material instances of improperly dated stock options at the Company." (p.3)

"While Dr. Horowitz received one insubstantial mispriced stock option grant in his capacity as an employee, the evidence does not suggest that he had any role in or awareness of that mispricing, and Dr. Horowitz has voluntarily agreed to the repricing of that grant." (p.3)

"The SLC's conclusions are based upon its mandate to choose the course of action that, in the exercise of the SLC's business judgment, it is in the best interest of Rambus, taking into account the merits of all potential claims against the named individuals, the costs of pursuing such claims as present a reasonable likelihood of success, and the balance of advantages and disadvantages possible for the Company from proposed settlements of the claims." (p.5)

"The Stock Option Committee of Rambus's Board of Directors was authorized to approve and administer the issuance of stock options to the Company's non-executive employees. A separate committee of the Board, the Compensation Committee, was charged with approving stock option grants to executives." (fn.2, p.6)

From 1999 through 2003, there was a regular practice for grants to new hire non-executive employees of selecting as the grant date that date between the employee's start date and the end of the quarter on which the closing price of Rambus stock on the Nasdaq market was the lowest." (p.7)

" . . . the SLC has determined that it is not in the Company's best interest to set forth in a public report the specific factual findings relating to its conclusions due to ongoing pending litigation matters." (fn.3, p.7)

"The personal involvement by the members of the SLC in their evaluation of this matter has been exhaustive, involving an in-depth review of a significant volume of documentary evidence, both hard-copy and electronic, as well as participating in or reviewing memoranda of interviews of the relevant Rambus personnel." (p.13)

" . . . the Audit Committee identified, collected, and reviewed over 1.5 million electronic documents and hundreds of thousands of pages of hard-copy files from 39 current and former employees and directors." (p.14)

"With respect to electronic documents, the Audit Committee imaged and search the hard drives of 27 individual custodians and collected and reviewed documents from the shared drives of the Company's human resources, finance, and legal departments." (p.15)

" . . . the Audit Committee, and in some instances Audit Committee members themselves, conducted interviews of over 50 individuals who potentially had relevant knowledge . . ." (p.15)

"The factual investigation and accounting analysis phase of the Audit Committee's investigation took over four months." (p.17)

" . . . encompassed approximately 210 separate stock option granting actions relating to approximately 49 million underlying shares." (p.17)

"In-person or telephonic meetings of the SLC were held on at least 20 occasions, and members of the SLC had numerous additional discussions with counsel . . . " (p.18)

Ed Larsen. "The SLC concludes that it is in the best interest of the Company that the claims asserted against Mr. Larsen be maintained in the consolidated derivative litigation." (p.19)

Robert Eulau. "The SLC has concluded that certain of the claims asserted against Mr. Eulau may have merit, but also recognizes the inherent uncertainties and costs of litigation" (p.19). " . . .Mr. Eulau will make a cash payment of $463,256.67. This amount constitutes over 60% of the after tax amount of benefit Mr. Eulua received from improperly priced stock option grants he received in 2001." (p.20)

Geoff Tate. "The SLC has concluded that certain of the claims asserted against Mr. Tate in the derivative actions may have merit, but also recognizes the inherent uncertainties and costs of litigation." (p.20) "The SLC also took note of the fact that, although Mr. Tate received mispriced options during his tenure, he did not exercise the vast majority of those options. Prior to the cancellation of Mr. Tate's options, Mr. Tate executed approximately 28,000 stock options out of the more than 2.7 million that he was granted since the time of the Company's IPO." (p.21) "The SLC has also concluded that Mr. Tate participated in the approval of misdated stock option grants. . . However, the SLC also concluded that it was reasonable for Mr. Tate to believe that Ed Larsen, the Senior Vice President, Administration, was handling the Company's stock option grants in accordance with the appropriate legal and accounting rules for stock option grants and understood the Company's actual practices." (p.21). . . "While Mr. Tate did not develop the relevant policies, and was not responsible for the accounting judgments, he feels a sense of responsibility as Chief Executive Officer and, given his long tenure and relationship with the Company, readily agreed to assist the Company in defraying some of the expense it has incurred." (p.21) . . . "whereby Mr. Tate will make a cash payment of $3.9 million and will relinquish any claims, rights, or interests he may have in the Rambus stock options he was previously granted but which were unexercised as of the time of his resignation from the Board. The original Black Scholes calculations for the grants in question resulted in a valuation of over $43 million . . ." (p.22)

Gary Harmon. (CFO March '93-middle '01) "The SLC has concluded that certain of the allegations against Mr. Harmon in the derivative actions may have merit . . . while Mr. Harmon did receive some mispriced options, his actual realized financial benefit from those options was less than $50,000 . . . the Company and Mr. Harmon entered into an agreement . . . whereby Mr. Harmon will pay $100,000 to the Company." (pp.22-23)

J.Thomas Bently, Sunlin Chou, PhD., & Abraham D. Sofaer. "There is no evidence that would support any claim of wrongdoing or unjust enrichment by any of these individuals. . . The SLC therefore concludes that it is in the Company's best interest that these claims be terminates." (pp. 23-24)

Harold Hughes. "The SLC has concluded that pursuing the claims asserted against Mr. Hughes in the derivative actions would be unjustified on the merits . . . and would also entail significant costs to the Company. Further, because of Mr. Hughes' extremely important role at the Company, such litigation would be highly disruptive of the ongoing conduct of the Company's business. As CEO, Mr. Hughes is critical to the execution and implementation of the Company's business strategy and is responsible for its key customer relationships. Accordingly, the SLC has concluded that those claims should be dismissed." (pp.24-25)

Mark Horowitz. "The SLC has concluded that pursuing the claims asserted against Dr. Horowitz is the derivative actions would not only be unjustified on the merits . . . but would also entail significant costs to the Company . . . SLC has concluded that those claims should be dismissed." (p.31) "The SLC found no evidence of any bad faith or improper behavior by Dr. Horowitz. (p.32) "Again, the evidence does not suggest any failure on Dr. Horowitz's part to act in good faith or any sustained or systematic failure on his part to exercise oversight. Moreover, there is no evidence that Dr. Horowitz engaged in self-dealing." (p.35) "The mispriced options Dr. Horowitz received were granted in April 2001 . . . Dr. Horowitz has voluntarily agreed in principle to the repricing of the options in question." (p.36)

David Mooring. "The SLC has concluded that most of the claims asserted against Mr. Mooring in the derivative actions have not merit . . . evidence indicates that Mr. Mooring had minimal responsibilities relating to the stock option granting process, and no role in the approval of his own stock option grants . . . no evidence that Mr. Mooring had any awareness that the stock option granting process was flawed . . . the Company and Mr. Mooring entered into an agreement . . . whereby Mr. Mooring will deliver to the Company 163,333 shares of the Company's stock." (pp.37-38)

William Davidow, PhD., Bruce Dunlevie, P. Michael Farmwald, PhD., Charles Geschke, PhD., and Kevin Kennedy, PhdD. "The SLC concludes that the derivative claims asserted against these individuals are without merit. The SLC has also concluded that it was reasonable for members of the Compensation Committee to have relied upon teh Company's former Senior Vice President of Human Resources and former Chief Financial Officers to ensure that the Company's procedures for issuing and accounting for stock option grants were appropriate." (p.44)

John Danforth. "The SLC concludes that it is not in the best interest of the Company to pursue the claims made in the consolidated derivative actions against Mr. Danforth . . . that the derivative claims asserted against Mr. Danforth would not succeed . . . that pursuit of the derivative claims against Mr. Danforth would have negative consequences for the Company . . . Accordingly, the SLC concludes that it is in the Company's best interest that these claims be dismissed." (p.49) "The SLC found no evidence of any bad faith or improper behavior by Mr. Danforth . . . did not knowingly engage in any improper activity relating to the stock option matters investigated by the SLC." (p.50) "Mr. Danforth did receive one option grant which the Company now believes was mispriced, but the lack of evidence that he was aware of the mispricing undermines the notion that his retention of those options would be against the fundamental principles of justice or equity and good conscience . . . Mr. Danforth has voluntarily agreed to reprice a portion of his mispriced options, and has reached an agreement in principle to settle with the Company any claim for reimbursement of I.R.C. (section) 409A liability." (pp.51-52)

Laura Stark. " . . . there is no evidence that Ms. Stark had knowledge that the Company's stock option granting process was flawed or that the accounting for the stock options was improper . . . the SLC concludes that it is in the Company's best interest that these claims be terminated." (p.54) "While Ms. Stark received several mispriced stock option grants, there is no evidence that she was involved in the approval of her own grants" (p.56) "Ms. Stark has agreed in principle to the repricing of her unexercised options, substantially mitigating the cost to the Company of the mispriced options she was granted and has voluntarily not taken advantage of the 409A reimbursement made available to other current employees." (p.57)

Subodh Toprani "Mr. Toprani had no role in the stock option granting process at Rambus, and there is no evidence that Mr. Toprani had knowledge of any improperly dated options." (p.59) "Accordingly, the SLC concludes that it is in the Company's best interest that these claims be terminated." (p.60) "Mr. Toprani did receive several mispriced option grants, but the lack of evidence that he was aware of the mispricing undermines the notion that his retention of those options would be against the fundamental principles of justice or equity and good conscience." (p.62)

"For the foregoing reasons, the SLC concludes that, in the best interest of the Company, the claims against Ed Larsen should be pursued in the consolidated derivative action pending in the United Sates District Court for the Northern District of California and that the SLC should assert control over the litigation of such claims. The SLC concludes that the claims alleged against the remaining defendants should be terminated." (p.64)