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Costco CEO Jim Sinegal, above, is one of the defendants named in a shareholder lawsuit accusing Costco insiders of illegally backdating stock options.Sinegal is shown with shopper Brenda Hanson at the grand opening of the new Costco in Gig Harbor last November.The lawsuit alleges that Costco leaders were part of a scheme to manipulate information to "secretly maximize" personal profits. Shareholder Sandra Donnelly, with the help of Bellevue and San Diego law firms, filed the suit in King County Superior Court on July 17 on behalf of Costco against 20 of its current and former leaders. wholesale club chain, would not comment on pending litigation, a spokesman said Thursday. The primary Bellevue lawyer in the case was not available Thursday because of a death in the family, and Fosler did not know how to reach the plaintiff."Costco's business reputation has been severely damaged by defendants' selfish actions, which portray a company compromised by a systemic lack of managerial integrity," the suit says. The San Diego law firm Robbins Umeda & Fink LLP, which specializes in shareholder litigation, did not return repeated calls.In this post, I take a look at the most basic component of the D&O insurance policy – the insuring agreement.This basic policy clause contains the most critical terms, the definitions of which often determine whether or not a claim will be covered under the policy.In a prior post, I published the first in what I intend to be an occasional series of articles on the nuts and bolts of Directors’ and Officers’ Liability Insurance.I continue the series here with the second post in the series.

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"We believe that the steps we have taken should put this issue behind us both from a financial statement and a controls standpoint." After Costco disclosed the grand jury investigation, Wall Street reacted with a yawn – the stock price rose 26 cents – suggesting that shareholders were not alarmed.

"Backdating isn't just a way for insiders to distort how much they're really paying themselves and others in the company – it also involves issuing stock at cheaper prices than what would be paid if the rules had been followed," SEC Chairman Christopher Cox said in a May 2007 speech in New York.

"For that reason, it threatens a company's shareholders in a very direct way." The 67-page Costco lawsuit carries some serious accusations, but it appears to make at least one math error.

The practice can line executives' pockets with shares they can sell for a profit without risk.

Backdating also cuts tax expenses, resulting in tax fraud.

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