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Originally published March 10, 2007 at 12:00 AM | Page modified March 10, 2007 at 2:01 AM

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Getty Images is lawsuit target

Two shareholder lawsuits are taking aim at Getty Images' stock-option grant practices, alleging a majority of the company's directors and...

Seattle Times business reporter

Two shareholder lawsuits are taking aim at Getty Images' stock-option grant practices, alleging a majority of the company's directors and top officers engaged in a secret scheme to illegally line their own pockets.

The world's largest image provider is one of more than 100 companies being investigated by the U.S. government for a practice known as backdating: falsifying the date stock options were granted to boost profit when the recipient cashes them in.

Seattle-based Getty Images has acknowledged the Securities and Exchange Commission is conducting an informal inquiry into its practices, and the company is also doing an internal investigation.

The lawsuits claim, among other things, that the Getty defendants backdated stock-option grants and reaped profits from the sale of backdated options, filed false financial statements, sold stock with the knowledge backdating was taking place and grossly mismanaged the company.

Both suits are filed by shareholders on behalf of the Getty Images, seeking monetary damages in the form of returning assets to the company and a halt to the alleged practices.

"There is nothing unusual about these particular lawsuits and we think it's fairly routine for companies to receive these types of claims while undergoing a stock-option review," Getty Images spokeswoman Deb Trevino said Friday. "We will respond to them in due course and of course will defend ourselves appropriately."

Besides causing the company to issue false financial statements, backdating stock options "undermined the key purpose of stock-based executive compensation: to provide an incentive to improve the company's performance," the lawsuit filed on behalf of Richard B. Edmonds stated.

Edmonds is a longtime shareholder with "no ax to grind other than keeping company management honest," said Clifford Cantor, one of the attorneys representing Edmonds.

The 60-page lawsuit, filed March 1 in U.S. District Court in Seattle, names Getty Images Chairman Mark Getty, Chief Executive Jonathan Klein, Senior Vice President and General Counsel Jeff Beyle, Senior Vice President for Human Resources Jim Gurke and several other executives and directors as defendants.

The suit alleges three federal violations, including securities fraud. It accuses the directors and officers of giving themselves and others stock-option grants that time after time coincided with lowest share prices of that period.

"In fact, in a striking pattern, 21 out of 25 discretionary grants made from April 1999 to February 2002 coincided with historically low closing prices," the lawsuit stated.

Manipulating the dates was designed to create "immediate and risk-free rewards" for such recipients in direct contravention of the company's shareholder-approved stock-option plans and SEC filings, the lawsuit said. As a result, the company understated expenses and overstated its net income.

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Another lawsuit, filed in King County Superior Court on Jan. 29 on behalf of Alfred Lopez, names 20 defendants, including Getty, Klein, Beyle and Gurke.

Both lawsuits include detailed charts reportedly showing what are alleged to be the most egregious examples of options backdating and which insiders benefited. The King County lawsuit alleges 12 defendants racked up an illegal profit of $5.4 million.

The federal lawsuit claims the company has sustained millions of dollars in damages, including additional compensation expenses and tax liabilities, loss of funds paid for the underpriced options and other expenses.

The lawsuit alleged that certain defendants engaged in insider selling of almost 4 million shares of Getty Images stock with total proceeds of more than $217 million, "a significant portion of which was obtained through the exercise of improperly backdated stock options."

Meanwhile, Getty's internal investigation is still under way.

"At this time, the special committee has neither completed its review nor reached any conclusions about the company's stock option practices," Trevino said. "When the review is complete, we will communicate their conclusions."

Kristi Heim: 206-464-2718 or kheim@seattletimes.com

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