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Mercury Heads May Face Stock-Option Probe

Mercury Interactive said this week that its directors may face civil charges from the Securities and Exchange Commission following the company's admission that its former managers backdated stock-option grants.

Mercury CFO David Murphy said the SEC last month advised Mercury board directors Igal Kohavi, Yair Shamir and Giora Yaron that it is considering filing civil charges against the directors, alleging that they knew of the stock-option backdating.

"We don't know what remedial or monetary terms they [SEC] will seek," Murphy said on a conference call today, noting that righting the wrongs could cost Mercury $70 million.

Stock-option backdating is a practice in which the stock-option grant is different from the date on which the option appears to have actually been granted, ensuring the exercise prices are lower than the market price.

Exercising such grants puts more money in the recipients' pockets.

Former Mercury CEO Amnon Landan and CFO Douglas Smith, as well as General Counsel Susan Skaer were aware of and participated in the practice from 1996 to 2002 and were fired last November following an internal audit by Mercury and the commencement of a formal investigation by the SEC.

Landan also took a loan in 1999 that did not appear to have been approved in advance by the Mercury board and was referred to in some of the company's public filings, but was not clearly disclosed. It has since been repaid.

Such disclosures by Mercury have done only so much to assuage the ire of the SEC, which may argue that that the current directors were aware of some of the 49 instances of backdating as well as the loan.

Murphy said on the conference call the directors have advised the SEC that they intend to argue that they did not violate the federal securities laws, that they did not participate in or know of option backdating and that the charges under consideration are legally and factually without basis.

In the meantime, the directors have offered to withdraw from their respective positions on the applicable committees of the company's board, an offer the board has accepted.

Murphy said Mercury, which ironically makes management software to help corporations meet federal compliance regulations, is still cooperating in the ongoing SEC investigation of the company and has made "significant adjustments" to its previously filed financial statements.

Thanks to the grant backdating, Mercury has restated its financial statements for the fiscal years 2004, 2003 and 2002 with the SEC in an amended Form 10-K/A through December 31, 2004.

The restated financial statements reflect a decrease in income before taxes of $566.7 million for 1992 through December 31, 2004, including adjustments to stock-based compensation expense resulting from the backdating.

The company, whose stock ticker "MERQ" was delisted on the NASDAQ in January because of the compliance issues, will file an amended Form 10-Q/A for the quarter ended March 31, 2005, with the SEC later this month.

"We have taken a rigorous and thorough approach to completing the restatement and recertification of our financial statements said Tony Zingale, president and CEO at Mercury.

Mercury is the latest high-tech company to be examined for the manipulation of stock-option grants, which include backdating and other such practices that may be more prevalent than the public realizes, thanks to the slew of grants triggered by the late 1990s Internet boom.

Quest Software today said it will restate its annual and interim financial statements for the periods from 2000 through 2005 after determining that many of approvals for the company's stock option grants awarded from 1999 to 2002 were obtained subsequent to the measurement dates used for financial reporting purposes.

Apple said last week an internal investigation has discovered irregularities related to certain stock-option grants made between 1997 and 2001.

CA and McAfee are also looking into their stock-option practices.