Is the Mercury Interactive Backdating Case Heading to Trial after Six Years?
After nearly six years of litigation the SEC may have to prove its allegations claiming that stock options were repeatedly and fraudulently backdated at Mercury Interactive LLC, now a part of Hewelett-Packard Co. SEC v. Mercury Interactive, LLC, Civil Action No. 07-2822 (N.D. Cal. Filed May 31, 2007). Although the Commission named four executives as defendants along with the company, with two settlements last week all but former General Counsel Susan Skaer have settled. The company resolved the claims at the time the action was filed. See also SEC v. Kohavi, Case No. 08-4348 (N.D. Cal. Filed Sept. 17, 2008)(settled action against three outside directors alleged to have been involved in the backdating of stock options at the company).
The complaint claims that from 1997 through 2005 defendants Amnon Landan, the former Chairman and CEO of the company, Sharlene Abrams, the former CFO, Douglas Smith, also a former CFO and Ms. Skaer participated in a fraudulent scheme in which they awarded themselves and other employees hundreds of millions of dollars in backdated stock options. The corresponding expense was not recorded in the books and records of the company, rendering them false according to the Commission. Specifically, the complaint alleges that 45 times during the period – that is, for every option grant – the executives used hindsight to backdate the grants to a low point. This permitted them at times to at times obtain more favorable tax treatment and at others enhanced gains. The company did not report the $258 million compensation expense from these grants, thus fraudulently overstating its revenue and income.
Last Friday Messrs. Landan and Smith settled with the Commission. Mr. Landan consented to the entry of a permanent injunction prohibiting him from violating and/or aiding and abetting violations of Securities Act Section 17(a) and Exchange Act Section 10(b) as well as the financial reporting, record-keeping, internal controls, false statements to auditors and proxy provisions of the federal securities laws. In addition, he agreed to a five year officer/ director bar, to pay disgorgement of $1,252,822 (the in-the money component of the options), prejudgment interest and a $1 million civil penalty. He will also reimburse the company $5,064,678 for cash bonuses and profits from stock sales under SOX Section 304.
Mr. Smith consented to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 17(a)(2) and (3). He also agreed to pay disgorgement of $451,200 (the in the money component of the options), prejudgment interest and a penalty of $100,000. Under SOX Section 304 he will reimburse the company $2,841,687. That amount will be deemed satisfied by his prior payment to the company of $451,200 and his agreement not to exercise certain options.
In 2009 Ms. Abrams settled with the Commission. At that time she consented to the entry of a permanent injunction prohibiting future violations of the antifraud and other provisions of the securities laws. She also agreed to pay $2,287,914 in disgorgement which was deemed partially satisfied by a payment to the company. In addition, she agreed to the entry of a permanent officer/director bar and to be barred from practicing before the Commission as an accountant.
The company settled at the time of filing, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(e). It also agreed to pay a $28 million civil penalty.
Ms. Skaer is the sole remaining defendant. She recently lost her effort to have the case resolved in her favor on dispositive motions. The court’s ruling on that motion cleared the way for the case to proceed to trial.
Program: The “New” DOJ and SEC FCPA Guidance: Is there Anything New? A webcast at noon on February 28, 2013 presented by Tom Gorman on behalf of Celesq and West Legal Ed (here).