SEC Sues Former Mercury Execs Over Stock Options Backdating Claims

According to an SEC  press release , the charges filed in the U.S. District Court for the Northern District of California claim that the four executives – Chairman and Chief Executive Officer Amnon Landan, former Chief Financial Officers Sharlene Abrams and Douglas Smith, and former General Counsel Susan Skaer – “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.”

In litigation the regulator claims that during this period Mercury, through Landan and at times Abrams, Smith or Skaer, 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 array of fraudulent conduct at Mercury Interactive over an eight year period, including backdating dozens of stock option grants, backdating senior executive stock option exercises, structuring of overseas option exercises to conceal expenses and concealing the true nature of its earnings, deprived Mercury Interactive’s shareholders and the market of accurate information regarding executive compensation and the company’s accounting for stock options,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement, in the press release.  

From 1997 to 2002, the senior officers used hindsight to select the purported grant dates of the options, backdating the grants by anywhere from days to as much as over four months and making the grants in-the-money from 40 cents to $60 on the date they were actually approved.

However, from 1997 through 2005, the accounting consequences of these benefits were then concealed as Landan, and at various times Abrams, Smith, Skaer and others, caused Mercury to fail to record over $258 million in compensation expenses and to provide false and misleading compensation disclosures to Mercury’s shareholders in filings with the Commission.

Among other things, the complaint by the SEC alleges that:

• Mercury backdated 45 different stock option grants to executives and employees, representing every grant made by the company to executives and employees during 1997 to April 2002.
• Skaer, or others at her direction, prepared false documentation memorializing the grants, including false written consents and meeting minutes.
• The company concealed from its shareholders the benefits reaped by these executives by making fraudulent proxy disclosures relating to officer stock option exercises, while Landan, Abrams and Skaer also concealed the backdated exercises in Forms 4 filed with the Commission.

After the misconduct was initially alleged, Mercury, which was acquired by Hewlett-Packard Company in November 2006, settled the matter by agreeing to pay a $28 million civil penalty and to be permanently enjoined.

According to the release, the SEC’s investigation is continuing.