TheCorporateCounsel.net

November 7, 2005

Senior Managers Lose Jobs Over Option Grant Date Practices

Last week, it was widely reported that the CEO, CFO and General Counsel of Mercury Interactive Corp. resigned involuntarily after an internal investigation revealed that some of the company’s stock option grants had been manipulated over the past decade. The company’s internal investigation was prompted by an inquiry from the SEC; then SEC Enforcement Director Stephen Cutler gave a speech about the Staff looking into granting practices well over a year ago and this is the first publicly known result from that sweep.

According to the company’s Form 8-K, in 49 instances, the stated grant date of the stock options differed from the actual grant date – and in almost every case, the price of Mercury’s stock was higher on the actual grant date than on the stated grant date.

Interestingly, the misdating occurred with respect to grants to all levels of employees – not just the senior managers who were forced to resign. Also interesting was that the CEO, CFO and GC were each aware of and, to varying degrees, participated in the practices (and of course, benefited personally from the practices). At most companies, I would think that the legal department and stock plan administrator’s office would handle dating practices – and that the CEO and CFO would have no clue as to what they were.

It didn’t help that the CEO misreported, on at least three occasions, exercise dates which had the effect of reducing his income (and exposing the company to possible penalties for failure to pay withholding taxes) – and that a $1 million loan to the CEO did not appear to have been approved in advance by the board and was not clearly disclosed.

On the subject of the culpability of the company’s compensation committee – here is what is disclosed in the 8-K: “The Special Committee believes that questions should have been raised in the minds of the Compensation Committee members from 1995 through 2002 (who included present directors Igal Kohavi, Yair Shamir and Dr. Yaron) whether six grants that they approved by unanimous written consent were properly dated. It appears that the Compensation Committee members reasonably, but mistakenly, relied on management to draft the proper documentation for the option grants and to account for the options properly. The Special Committee believes that changes in Board procedures made in recent years will prevent similar oversights occurring in the future.”

It will be interesting to see how many other actions the SEC has in the pipeline over this type of behavior…

Judge Alito and the Securities Law

For those wondering how the Supreme Court nominee has ruled on securities law issues to date, check out this website, where the University of Michigan Law Library has posted an extensive collection of Judge Alito’s opinions. Here is a blogger’s analysis of Judge Alito and the securities law.

Your IR Officer’s Greatest Fear: “Clever and Pernicious” Hacking

From Bruce Carton’s “Securities Litigation Watch Blog“: “According to this SEC press release, the SEC filed an emergency action against an Estonian financial services firm and two of its employees for conducting an alleged fraudulent scheme “involving the electronic theft and trading in advance of more than 360 confidential press releases issued by more than 200 U.S. public companies,” resulting in at least $7.8 million in illegal trading profits.

How did they supposedly steal 360 confidential press releases? How did they earn the “clever and pernicious” description from the SEC?

According to the SEC, ” in June 2004, [the Estonian firm] became a client of Business Wire for the sole purpose of gaining access to Business Wire’s secure client website. Once defendants had access, they surreptitiously utilized a software program, a so-called “spider” program, which provided unauthorized access to confidential information contained in impending nonpublic press releases of other Business Wire clients, including the expected time of issuance.”

The complaint further alleges that the information fraudulently stolen by the defendants has allowed them to strategically time their trades around the public release of news involving, among other things, mergers, earnings, and regulatory actions. Using several U.S. brokerage accounts, the defendants have bought long or sold short the stocks of the companies whose confidential press release information they have stolen, and purchased options to increase their profits.”

Note that Business Wire has issued a press release stating that none of their client’s press releases were accessed before the public saw them.