## Facts

- Louisiana Municipal Police Employees’ Retirement System (LAMPERS) was a stockholder of Countrywide Financial Corporation, a Delaware corporation.
- In August 2006, a *Los Angeles Times* article reported that several companies, including Countrywide, may have manipulated the timing of executive stock-option grants.
- After the article, LAMPERS retained Richard Goldberg, Ph.D., to conduct a statistical analysis of Countrywide’s option-grant timing for grants between 1997 and 2002 to determine whether further investigation was warranted.
- Dr. Goldberg concluded that Countrywide’s grant dates showed a statistically significant relationship with short-term favorable stock-price movements after grants, which he said was consistent with possible option “backdating” (using an earlier grant date with a lower price) or “spring-loading” (granting options before release of positive, nonpublic information likely to raise the stock price).
- Based on the press reporting and Dr. Goldberg’s analysis, LAMPERS suspected misconduct connected to Countrywide’s option grants and made a demand under 8 Del. C. § 220 to inspect certain books and records.
- LAMPERS stated its purpose was to investigate possible wrongdoing or mismanagement and to decide whether to pursue derivative litigation or other stockholder action.
- Countrywide refused the demand, arguing LAMPERS lacked a proper purpose because it had not shown a credible basis from which the court could infer possible wrongdoing.
- In the ensuing § 220 action, Countrywide presented testimony from its own statistician, Frederick Dunbar, Ph.D., who challenged Dr. Goldberg’s methodology and opined that the data did not show statistically significant evidence of backdating or spring-loading.

## Issues

1. Whether LAMPERS established a proper purpose and a “credible basis” under 8 Del. C. § 220 to inspect Countrywide’s books and records by relying on a press report and a contested statistical analysis suggesting possible backdating or spring-loading.
2. If inspection was warranted, what categories of documents were “necessary and essential” to LAMPERS’s stated investigative purpose.

## Decision

- The court held that investigating suspected mismanagement or wrongdoing relating to executive option grants, including deciding whether to bring derivative claims, is a proper purpose under § 220.
- The court found LAMPERS met the “credible basis” standard—described as Delaware’s lowest evidentiary burden—through Dr. Goldberg’s statistical evidence, supported by the public reporting that triggered the inquiry.
- The court rejected the argument that Countrywide’s competing statistical testimony defeated inspection; the court did not decide whether wrongdoing occurred, only whether the record supported an inference that warranted investigation.
- The court ordered Countrywide to permit inspection, but limited production to those books and records necessary and essential to examine the company’s option-granting practices during the relevant period.
- The court declined to allow broad, open-ended discovery and addressed inspection through tailored categories of records, with confidentiality and privilege protections to be handled in an appropriate manner.

## Legal Principles

- A stockholder seeking inspection under 8 Del. C. § 220 must prove, by a preponderance of the evidence, a proper purpose reasonably related to the stockholder’s interest.
- Investigating possible wrongdoing or mismanagement—including to determine whether to file a derivative action—is a recognized proper purpose.
- When inspection is sought to investigate wrongdoing, the stockholder must present “some credible basis” from which the court may infer possible wrongdoing; the standard is minimal but requires more than suspicion, curiosity, or speculation.
- Statistical evidence may support the credible-basis showing, even if contested, when it is not facially unreliable and is tied to an articulated theory of misconduct; corroborating public reporting may add support.
- A § 220 proceeding is not a substitute for plenary discovery; inspection is limited to documents that are necessary and essential to accomplish the stated purpose, typically including core board- and committee-level materials relevant to the challenged conduct.
- The court’s role at the § 220 stage is not to adjudicate the ultimate merits of a fiduciary-duty claim, but to determine whether the stockholder has shown a sufficient basis to investigate through limited access to corporate records.

## Conclusion

The Court of Chancery held that LAMPERS’s investigation into potential option backdating or spring-loading was a proper § 220 purpose and that a statistical study, reinforced by press reporting, provided a credible basis to suspect possible misconduct, justifying a narrowed inspection of Countrywide’s books and records limited to what was necessary to pursue that inquiry.


Louisiana Municipal Police Employees' Retirement System v. Countrywide Financial Corp., 2007 Del. Ch. LEXIS 138 (2007)