Ex-Defense Contractor Execs Accused in Options Backdating

July 23, 2007 (PLANSPONSOR.com) - Three former senior officials of a St. Louis-based defense contractor have been indicted by a federal grand jury in connection with a scheme to backdate stock options.

Charged in the case were Michael F. Shanahan Sr. and his son Michael F. Shanahan Jr., according to a Reuters news report. The elder Shanahan was co-founder and chairman of Engineered Support Systems Inc. (ESSI), while his son was a former company director.

According to the indictment, handed down by the grand jury in the U.S. District Court for the Eastern District of Missouri, Shanahan Jr. sometimes operated like a one-man compensation committee, overseeing option grants that benefited his father more than anyone else.

The indictment accuses the Shanahans and ESSI’s former chief financial officer, Gary C. Gerhardt, of backdating option awards over several years. The indictment charges that option awards were double backdated in the summer of 1999, when the company’s stock kept sliding downward.

A fourth official, former ESSI controller Steven Landmann, has pleaded guilty to making a false statement in connection with the case.

A separate U.S.  Securities and Exchange Commission complaint against the men charged that when asked whether ESSI had a compensation committee, Shanahan Jr. replied, “You’re looking at it.”

ESSI was sold last year to DRS Technologies Inc. for nearly $2 billion. ESSI senior executives and board members collected more than $200 million, including money from cashed-out stock options, according to the Reuters report.

Shanahan Sr. is well known in St. Louis for once running the St. Louis Blues professional hockey team. He co-founded ESSI in 1982 and turned a small-time metal-bending operation into a key supplier to the U.S. military.