Nov. 7--Some stockholders of the former Engineered Support Systems Inc. filed a class-action lawsuit late Wednesday in St. Louis Circuit Court against the company, former CEO Michael Shanahan and other top executives, some of whom have been convicted in federal court of backdating stock options.

The suit claims that leaders of the Cool Valley-based defense contractor breached their fiduciary duty by selling the business at an undervalued price in an attempt to distance themselves from the risk of prosecution in the backdating.

More than 600 investors, who would qualify for the suit, lost up to $250 million in the 2006 sale of ESSI to DRS Technologies Inc., said Darren Robbins, an attorney for the San Diego law firm that filed the case.

"Normally, an executive would try to get the best price for their shareholders," Robbins said. "But they were then reading in the newspaper that people were getting caught backdating options, and they wanted to extract themselves from the liability."

ESSI's stock was one of the fastest-growing in the 1990s.

An SEC lawsuit and another similar shareholder suit in federal court last year are still pending.

Barry Short, attorney for Shanahan Sr., said he could not discuss the suit at length because he was still studying it. Of what he's read, Short said, he found the petition to be "ill-conceived."

"There are many allegations that will be answered in due course," Short said.

Executives named in the suit along with Shanahan include his son, Michael F. Shanahan Jr., Steven Landmann and Gardy C. Gerhardt. All four were indicted when federal investigators uncovered the backdating practices in July 2007.

Investigators said that for two years straight, insiders looked back over the previous quarters to the find the lowest stock price, then issued purchase options with that date, guaranteeing an immediate profit on paper. Backdating is not illegal if it's disclosed.

In some cases, if the stock price dropped, ESSI canceled and re-issued the options at the lower price.

Mark S. Newman, CEO of DRS Technologies Inc., is accused in the lawsuit of knowing about the backdating scandal when he bought the company for about $2 billion and distributing false information to shareholders at the time.

"He was willing to assume the liability because he was getting such a good deal," Robbins said.

DRS officials did not return a request for comment.

Shanahan pleaded guilty this summer of falsifying records and was sentenced to three years of probation. His son, Michael Shanahan Jr., was put in a pre-trial diversion program. Gerhardt and Landmann also pleaded guilty. Gerhardt was ordered to prison for 15 months, and Landmann is scheduled for sentencing today.

Attorneys for Gerhardt and Landmann could not be reached for comment.

Robbins' San Diego-based firm, Coughlin Stoia Geller Rudman and Robbins, specializes in lawsuits involving options backdating and mergers. The firm is best known for recovering more than $7 billion for defrauded Enron investors.

The plaintiffs in the ESSI suit are asking for $100 million to $250 million in actual damages plus punitive damages and attorney costs.

hratcliffe@post-dispatch.com -- 314-621-5804

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