Company Memo Shows Manipulation of Stock Option Dates

July 12, 2006 ( - A memo between Sycamore Networks Inc. employees discusses how they could manipulate the dates of stock-option grants to issue them at lower prices while hiding their actions from company auditors.

The Wall Street Journal reports that Stephen Landry, a former human-resources director at Sycamore, revealed the memo, and it has been turned over to the Securities and Exchange Commission (SEC). In a lawsuit filed last month, he claimed the company terminated his employment for revealing the memo to executives and complaining about the company’s stock-option practices.

The memo discusses options grants to six Sycamore employees in late 2000, at a time when its stock price was falling, according to the WSJ. Most of the six employees were new hires, and the memo says the company promised some that they would receive options at the lowest price of the quarter.

According to the news report, the memo also discusses ways to alter employees’ start dates so they could get lower-priced options, and it evaluates the risk that each of the individual changes would be discovered by auditors.

Specifically, the memo discusses changing the hire date of Ed Zaval, a vice president of customer service who “was promised his stock option grant would be issued at the low of the quarter price.” Under the category “risk assessment” the memo says, “Low risk: Senior level employee and the risk of exposure to this agreement is low. No audit risk.”

Concerning another item in the memo regarding a change to the initial offer made to a human resources employee, the memo says the change was a low risk partly because of a relationship the employee had with a chief executive of another company. According to the memo, “that could work to our advantage should the risk of exposure of this agreement surface.”

According to the memo, options to another employee, Jinendra Ranka, were reissued, and the original issue was deleted from the system. This move was rated as high risk since the original grant was included in a previous audit and records would no longer match. Ranka told the WSJ that the reissue was part of a repricing for all employees and, “[t]hey were just trying to make sure that everyone was fairly compensated.”

Landry claims when he was told to change the hire dates of various employees in order for them to receive stock option grants at lower prices, he refused and was replaced. He says he was allowed to stay on at the company as an adviser and was promised a $10.8 million employment agreement and severance package, according to the news report. He claims the company terminated the agreement in June 2005 partly because he brought up improper activity at the company.

The lawsuit alleges breach of contract and wrongful termination.