SEC Charges Two in Six-Year Backdating Scheme

February 6, 2007 ( - The Securities and Exchange Commission (SEC) has filed charges against two former executives at Engineered Support Systems Inc., accusing them of participating in a six-year options backdating scheme in which they granted in-the-money options to themselves and other executives.

The SEC has filed civil injunctive actions against Gary C. Gerhardt, the former Chief Financial Officer of Engineered Support Systems, Inc., and Steven J. Landmann, the company’s former Controller, alleging that they participated in a six-year fraudulent options backdating scheme in which they granted undisclosed, in-the-money stock options to themselves and to other Engineered Support officers, employees, and directors, according to an SEC press release.

According to the complaints, Engineered Support employees and directors received approximately $20 million in unauthorized compensation as a result of the backdating, $15 million of which was received by top executives and directors. Gerhardt and Landmann personally profited by $1,906,300 and $518,972 respectively. Landmann has consented to settle the action.

The Scheme

The complaints allege that, from 1997 through 2002, Gerhardt instructed Landmann to backdate company stock option grants to coincide with historically low closing prices of Engineered Support’s common stock. The company’s stock options vested at the time of grant, allowing the option recipients to obtain immediate cash profits.

In addition, the complaints allege that, on at least two occasions, Gerhardt ordered Landmann to cancel previously issued Engineered Support stock options that had fallen out-of-the-money and to reissue them with new backdated grant dates and exercise prices, to bring them back in-the-money. The complaints also allege that Gerhardt directed Landmann to issue additional Engineered Support stock options to nonemployee directors in excess of authorized amounts, from which these directors received a total gain of approximately $6 million.

The complaints also allege that, as part of the scheme, Gerhardt and Landmann caused Engineered Support to misrepresent in its Forms 10-K and proxy statements that all stock options were granted at the fair market value of the stock on the date of the award, and that Engineered Support also failed to report the additional compensation its executives had received through in-the-money option grants.

False Reports

The complaints also allege that Gerhardt and Landmann caused Engineered Support to file materially misstated financial statements with the Commission in its Forms 10-K and 10-Q that did not recognize compensation expense for the company’s stock option grants, as required by generally accepted accounting principles. As a result, Engineered Support overstated its aggregate pretax operating income by approximately $26 million, or 21%, for fiscal years 1997 through 2002.

Without admitting or denying the Commission’s allegations, Landmann has consented to a permanent injunction from violating and/or aiding and abetting violations of the antifraud, proxy statement, reporting, record-keeping, and the false statements to auditors provisions of the federal securities laws – and he has consented to pay disgorgement of $518,972, prejudgment interest of $108,099, and a civil penalty of $259,486, and to be permanently barred from serving as an officer or director of a public company. The settlement is subject to approval by the United States District Court for the Eastern District of Missouri.