RealTime IT News

SEC Settles Backdating Cases With Mercury, Brocade

UPDATED: We knew the fines were coming. It was just a matter of when.

The Securities and Exchange Commission (SEC) settled stock-option backdating cases with Mercury Interactive and Brocade Communications Systems totaling $35 million.

Mercury, acquired by HP last year, agreed to a permanent injunction and a $28 million fine without admitting or denying the allegations. Brocade meanwhile will shell out $7 million under the same terms.

In options backdating, company officials offer a grant recipient the right to buy shares priced to an earlier date when the stock price was lower. The idea is to give the recipient a financial boost. The SEC and other federal regulators are currently investigating more than 100 companies for backdating issues.

The SEC claims former Mercury officers Chairman and CEO Amnon Landan, former CFOs Sharlene Abrams and Douglas Smith, and former General Counsel Susan Skaer conducted a fraudulent scheme from 1997 to 2005 to award themselves and other employees millions of dollars in secret compensation by backdating stock option grants and falsifying documents to further the scheme.

The commission also claims that Mercury, through Landan and at times Abrams, Smith or Skaer, made fraudulent disclosures concerning Mercury's backlog of sales revenues to manage its reported earnings and structured fraudulent loans for option exercises by overseas employees to avoid recording expenses.

The SEC also said today it has triggered separate civil fraud against the four former officers in a federal California court.

The Mercury case sets a major precedent because it is the first time the SEC has used Section 304 of the Sarbanes-Oxley financial accounting act, which allows the commission to seek the repayment of bonuses and stock sale profits received by CEOs and CFOs where financial results are later restated.

"The $28 million corporate penalty in this case, together with a permanent injunction, should send a clear signal that fraudulent stock-option backdating and other financial fraud will be severely punished," SEC Chairman Christopher Cox said in a statement about the Mercury case.

For additional details about the alleged crimes, see this statement.

Storage networking vendor Brocade agreed to pay the SEC $7 million, and added that it does not expect any action by the Department of Justice about the backdating issue.

"We are pleased the SEC has accepted Brocade's offer of settlement and now have the investigation and matter concluded," said Tyler Wall, vice president and general counsel for Brocade, in a statement.

Brocade is making the payment more than 15 months after setting aside the $7 million in an escrow account while the SEC investigated myriad other companies for backdating transgressions, including Apple , Comverse Technology  and Mercury Interactive.

The SEC commissioners, who haven't faced such a wide-ranging impropriety over stock-option incentives, were reportedly at odds over whether the backdating perpetrated by a few executives warranted fines for the companies.

However, the SEC and a California district court charged former Brocade CEO Gregory Reyes and Stephanie Jensen, former vice president of human resources, with federal securities fraud last July.

The Department of Justice levied additional charges against Reyes and Jensen in August.

Several companies remain under investigation, and it can be inferred from SEC Chairman Cox' statements today that the group will not rest.

"The SEC will do everything within our power to see to it that illegal options backdating is stamped out," Cox said.

Cox earlier this year set up a pilot program, whereby the SEC's enforcement staff must get permission from the SEC to discuss penalties and settlement ranges versus a company.