In a rare and perhaps unprecedented rebuke to the Securities and Exchange Commission, a federal judge granted Keker & Van Nest’s motion for judgment as a matter of law after eight days of trial testimony in a stock options backdating case against Michael Shanahan Jr., a former outside director of St. Louis-based defense contractor Engineered Support Systems, Inc (ESSI).

U.S. District Judge Jean C. Hamilton ruled at the conclusion of the government’s case 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 SEC had alleged that Shanahan Jr. had helped lead a scheme to backdate stock options intended to provide “stealth compensation” to his father—Michael Shanahan Sr., the former chairman of the company—and others.

In a 12-page order read aloud in court on Feb. 12, 2010, Judge Hamilton emphasized that the SEC’s own witnesses—including ESSI’s former controller Steven Landmann and Professor Randy Heron, a leading expert in the field—disagreed on cross-examination as to what the language in ESSI’s options plan meant, making it impossible to conclude that statements in ESSI’s securities filings could be the basis of a securities fraud violation.

In an extraordinary move, the judge dismissed the case after hearing just the government’s case.  Legal insiders have called Judge Hamilton’s ruling on KVN’s motion for judgment as a matter of law (a so-called JMOL motion) “exceptionally rare” in cases brought by the SEC.

Keker & Van Nest partner Stuart L. Gasner, lead trial attorney for Shanahan Jr., said the SEC’s case simply fell apart on cross-examination.

“This is a case that was thin from the beginning, and what little the SEC had was either unsupported by their own witnesses or contradicted when they were pressed,” Gasner said.

Gasner, a veteran white collar defense attorney and former federal prosecutor, questioned the SEC’s decision to bring the case at all. In 2007, the U.S. Attorney’s Office for the Eastern District of Missouri sought and obtained criminal indictments against both Shanahans, 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.

“This case was the product of government overkill from day one,” Gasner said. “Even the government’s star witness, Landmann, admitted at trial that he did not think he was doing anything illegal. For the SEC to proceed against a lone outside director after the criminal case had been dismissed against him, was just piling on.”