A three-judge panel of the U.S. Court of Appeals for the Eighth Circuit in St. Louis, Mo. today affirmed the dismissal of the Securities and Exchange Commission’s case against Michael Shanahan Jr., former director of Engineered Support Systems Inc. (ESSI). In a unanimous opinion, the judges agreed that the SEC’s evidence against Shanahan Jr. was “insufficient” and affirmed U.S. District Judge Jean C. Hamilton’s decision to throw out the case after eight-and-a-half days of trial.

“After unrelated corporate scandals and passage of Sarbanes-Oxley changed public perceptions and the regulatory climate, ‘backdating’ took on the universal look of inherent evil,” Judge James B. Loken wrote in the opinion. “But evil must be proved based on contemporaneous standards; at least with respect to outside director Shanahan Jr., the SEC failed to prove it.”

Keker & Van Nest partner Stuart Gasner, lead counsel for Shanahan Jr., said the Court emphasized the difficulty most outside directors had in appreciating the significance of options practices that were common at the time.

“So much of the options backdating scandal was driven by unfair hindsight perspective, and this was a fitting postscript for an enforcement fad that went way too far,” Gasner said.

In 2007, the U.S. Attorney’s Office for the Eastern District of Missouri sought and obtained criminal indictments against Michael Shanahan Jr. and his father, Michael Shanahan Sr., as well as the company’s chief financial officer, charging them with criminal fraud and records-keeping violations. The criminal case against the Shanahans ended when Shanahan Sr. pled guilty to a single charge based on recklessness as to a set of options paperwork on which his signature had been stamped by an assistant, and received a sentence of probation. The criminal charges against Shanahan Jr. were dismissed.

In 2009, the SEC alleged that Michael Shanahan Jr., as an outside director for ESSI, violated numerous federal securities laws by participating in the grant of backdated stock options to ESSI officials including his father. In February 2010, Judge Hamilton granted Keker & Van Nest’s motion for judgment as a matter of law, concluding that the SEC failed to present evidence sufficient for a jury to conclude that Shanahan Jr. was reckless or even negligent in serving as a member of ESSI’s compensation committee. The Eighth Circuit today affirmed that decision.

Partner Michael Celio co-authored the winning brief with Gasner, who argued the appeal in January of this year. Along with Gasner, the Shanahan trial team included associates Jennifer Huber and Suyun Kim. The team in the dismissed criminal case included Gasner, Celio, Keker & Van Nest partner Ben Hur, as well as associate Jen Huber.

“We are thrilled to see Mike so thoroughly vindicated after a long ordeal for his entire family,” Gasner said.  

Stuart Gasner centers his practice in the areas of white collar criminal and securities defense, intellectual property litigation and complex corporate disputes. A federal prosecutor before joining Keker & Van Nest, he has tried more than 20 cases to verdict before juries across the United States.