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.
