Option backdating cases

By Cydney Posner

Finally, some resolution from the SEC on two of the major option backdating cases: Mercury Interactive and Brocade. 

Mercury, which was acquired by H-P after the alleged misconduct, settled the matter by agreeing to pay a $28 million civil penalty and to be permanently enjoined. The SEC also filed civil fraud charges against four former senior officers of Mercury —the former Chairman and CEO, two former CFOs and the former GC. The SEC alleges that the former senior officers perpetrated a fraudulent and deceptive scheme from 1997 to 2005 to award themselves and other employees undisclosed, secret compensation by backdating stock option grants, failing to record hundreds of millions of dollars of compensation expense and falsifying documents to further this scheme. The SEC also alleges that Mercury, through these officers at various times, 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's case against the four former officers is being litigated.

Brocade has agreed to pay a penalty of $7 million to settle the charges that it committed fraud, through its former CEO and other former executives, by backdating stock options, misstating compensation expenses and concealing the conduct by falsifying documents. The SEC has previously charged the former CEO, former CFO and former VP of Human Resources with fraud and other securities law violations; that action is ongoing.

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