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Penn West Petroleum Ltd. chairman Murray Edwards, addresses the company's annual meeting in Calgary, Friday, Aug. 20, 2004.

Jeff McIntosh/The Globe and Mail

Penn West Petroleum Ltd. is facing allegations of manipulating stock options, with an investor demanding the company launch legal action against six former board members.

David Lester, a Penn West investor, filed a lawsuit against Penn West and its current board, alleging the price for past stock option grants were likely "manipulated, whether through backdating, improper or unauthorized use of insider information or otherwise," according to court documents. He also alleges Penn West violated its disclosure obligations, among other accusations.

Backdating options, an illegal practice, refers to setting prices for the securities at favourable levels for the option holders, with the benefit of hindsight. Options are often issued to insiders such as executives and directors as a form of compensation and incentive to boost shareholder value.

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Ensign Energy Services Inc. insiders in April agreed to pay $4.37-million back to the company in order to settle a dispute similar to the Penn West allegations.

Murray Edwards, a high-profile oil patch executive, founded Penn West, Ensign and Canadian Natural Resources Ltd. He is one of the former board members Mr. Lester wants Penn West to take action against. He is the only executive named in both the Penn West and Ensign cases.

Stock options come with so-called strike prices which often reflect the stock price at the time the options are issued or an average of the stock price in the days leading up to the option grant. Option holders are given the right to buy stock at the strike price and profit if the stock rises afterward. Backdating refers to retroactively selecting the grant date, with the intention of picking a low strike price. Penn West, Mr. Lester alleges, issued options that were already "in the money," violating its option plan. Penn West's then-board members "failed in their duties as directors," according to his court document filed May, 2013.

Clayton Paradis, a spokesman for Penn West, a large oil producer with a market value of about $5-billion, said the company acknowledges the lawsuit but will not comment because the case is before the courts.

Erik Lie, a professor of finance at the Tippie College of Business at the University of Iowa and backdating expert, identified 27 times Penn West granted options between 1993 and 2010 with the strike price equal or very close to the average stock price during the five preceding trading days, according to his affidavit in support of Mr. Lester's claims. In 15 of those dates, the average five-day price immediately before the grant date is lower than any of the average five-day prices over the following 20 trading days.

"I conclude that the grant dates were likely to have been manipulated to coincide with dates on which the lagged five-day average market prices were particularly low," he said in an affidavit. "I believe that the form of grant manipulation is backdating." Mr. Lie was retained by Siskinds LLP and Jensen Shawa Solomon Duguid Hawkes LLP – Mr. Lester's lawyers. Those law firms also represented the shareholder who went after Ensign.

The probability that the five-day average price immediately before the grant date is the lowest five-day average prices during the 21-day period starting the day before the grant date in these 15 cases is 0.019 per cent, or one in about 5,000, Mr. Lie wrote in his affidavit.

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Mr. Lester wants the company to pursue legal action against Mr. Edwards, Nabih Faris, Thomas Phillips, Murray Nunns and John Brussa, who were all directors that served on Penn West's compensation committee during the relevant times. He also wants Penn West to launch legal proceedings against Bill Andrew, Penn West's former chief executive officer and board member.

None of the allegations have been proven in court. Mr. Edwards did not return a call and e-mail seeking comment. Mr. Andrew, Mr. Phillips and Mr. Nunns did not return messages seeking comment. Mr. Brussa and Mr. Faris declined to comment. Steve Leitl, a lawyer at Norton Rose Fulbright who is acting for Mr. Brussa, Mr. Andrew and Mr Phillips, declined to comment because the case is before the court.

Mr. Edwards was one of the Ensign executives who settled that case in April agreeing to pay $529,288.

Other companies have paid millions of dollars to settle options backdating cases. Canada's most high-profile backdating case involves Research In Motion Ltd., now BlackBerry Ltd. Co-founders Jim Balsillie and Mike Lazaridis, along with other insiders, reached settlements with the U.S. Securities and Exchange Commission for $1.425-million (U.S.) and the Ontario Securities Commission for $77-million (Canadian) in 2009.

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