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Mark Stein: Options Backdating Indictments

Mark Stein writes:

News Blog - Daily Brief: Options Scandal Fallout - A federal grand jury in Manhattan indicted the former chief financial officer of SafeNet Inc. on charges of securities fraud and conspiracy for her role in the alleged backdating of millions of dollars of employee stock options. The U.S. Attorney's office in Manhattan said Carole Argo "engaged in an illegal scheme to deceive SafeNet's board of directors, shareholders, and auditors, as well as securities analysts, the S.E.C., members of the investing public, and others." Her goal, it asserted, was to facilitate the "systematic backdating of options grants" and to conceal how much those backdated grants were costing the company and its shareholders.

Prosecutors didn't say precisely how much the practice allegedly did cost shareholders of SafeNet, a computer-security firm in Belcamp, Maryland. But Ron Walker, a U.S. postal inspector, said that Argo and several unnamed co-conspirators executed a "carefully planned scheme" that netted them "millions of dollars." Backdating the options let Argo and others buy stock for less than their fair-market value on the day the awards were made. That virtually guaranteed a risk-free gain even if the stock price did not rise after then. At the same time, prosecutors say, they said in public filings that "no gain to the options is possible without stock price appreciation, which will benefit all shareholders."

In a separate case in San Jose, California, the S.E.C. filed a civil lawsuit against the former chief executive of KLA-Tencor Corp.... The commission said Kenneth Schroeder repeatedly backdated options after becoming C.E.O. in 1999... undeterred by a lawyer's written warning in March 2001 that "Any attempt to set a price before such a grant is made raises substantial risks under securities and tax laws."

"Corporate executives who deliberately backdate options grants and skew their books to hide compensation expenses are misleading shareholders and investors about the earnings of the company and painting a false picture of executive pay," U.S. Attorney Michael J. Garcia said in a statement.