(Updates with judge’s reasoning in third paragraph.)
Sept. 21 (Bloomberg) -- Cincinnati Bell Inc. must face an investor lawsuit challenging millions of dollars in bonuses and compensation paid to executives after the Ohio-based telephone and wireless company reported a drop in earnings.
An Illinois-based pension fund can proceed with its suit alleging Cincinnati Bell’s directors erred in approving more than $8 million in compensation payments to the phone company’s top managers, U.S. District Judge Timothy Black in Cincinnati ruled yesterday. The pay raises ranged from 54 percent to 80 percent for executives, according to court filings.
The fund’s suit raises “a plausible claim that the multimillion-dollar bonuses approved by the directors in a time of the company’s declining financial performance violated Cincinnati Bell’s pay-for-performance compensation policy,” the judge said in an 11-page ruling.
Cincinnati Bell shareholders opted in May to reject the company’s compensation plan in a so-called say-on-pay vote mandated by new U.S. Securities and Exchange Commission rules.
Lisa McLaughlin, a Cincinnati Bell spokeswoman, declined to comment on the judge’s ruling.
The SEC rules, which also call for companies to hold votes on how often shareholders should consider executive pay, was part of the agency’s rulemaking under the Dodd-Frank Act.
In response to the 2008 credit crisis, that law directed regulators to let investors vote their view on executive pay amid public furor over incentives rewarding risky trading that helped topple Bear Stearns Cos. and Lehman Brothers Holdings Inc.
Cincinnati Bell, which bought data-center operator CyrusOne last year for $525 million, reported that its 2010 earnings fell to $28.3 million, or 9 cents a share, compared with $89.6 million, or 37 cents a share, the year before. In regulatory filings, the company attributed the loss to costs associated with the CyrusOne acquisition.
Lawyers for Decatur, Illinois-based NECA-IBEW Pension Fund, a Cincinnati Bell shareholder, sued the company’s board in July seeking to recoup bonuses and compensation paid to executives including Chief Executive Officer John F. “Jack” Cassidy.
The fund’s attorneys contend directors weren’t acting in investors’ best interests in approving the bonuses and raises at a time when Cincinnati Bell’s net revenue has dropped 68 percent and generated “negative 18.8 percent annual shareholder return,” according to court filings.
Cincinnati Bell’s lawyers countered that directors acted within their discretion in approving the pay plan and said the pension fund can’t show any evidence of fraud or wrongdoing in connection with the creation of the compensation system.
Black concluded the pension fund had raised enough questions about directors’ decision to award the bonuses and raises to allow the suit to proceed.
The fund’s suit “provides factual allegations and not simply conclusory allegations,” the judge said.
The case is NECA-IBEW Pension Fund v. Cox, U.S. District Court, 11-cv-00451, Southern District of Ohio, Western Division (Cincinnati).
--With assistance from Jesse Hamilton in Washington. Editors: Michael Hytha, Peter Blumberg
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