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Google, SEC Settle Over Stock Options

No Action Taken on Playboy Interview

By David A. Vise
Washington Post Staff Writer
Friday, January 14, 2005; Page E05

Google Inc. yesterday settled Securities and Exchange Commission allegations that it awarded about $80 million in stock options from 2002 to 2004 without properly informing employees about the company's financial performance.

The search engine company, which was enormously profitable in that period, "viewed the disclosure of the information to employees as strategically disadvantageous, fearing the information could leak to Google's competitors," the SEC alleged.

The SEC said Google did not properly disclose financial information to employees before issuing stock options. (Paul Sakuma -- AP)

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Without admitting or denying wrongdoing, Google and its general counsel, David C. Drummond, settled the SEC allegations by agreeing to halt any improper activities and to abide by federal securities laws in the future. Neither Google nor Drummond was fined, in part because this was the first time that the SEC has brought a case under certain federal regulations triggered whenever more than $5 million of stock options are granted in a 12-month period.

While Google's top attorney, Drummond, knew the company might be violating federal disclosure requirements for employee stock options, he did not make the company's board of directors aware of that risk before it voted to issue the securities, the SEC said. Drummond at one point delayed board action on the issuance of stock options while researching the issue, which he discussed with outside counsel, the SEC said.

"The securities laws exist to ensure full disclosure to investors, including employees accepting stock options as compensation," Stephen M. Cutler, director of the SEC's enforcement division, said in a statement yesterday. "Companies cannot freely decide that they don't need to comply with the law."

The SEC decided against taking action against Google over allegations that the company violated the "quiet period" prior to its initial public offering of stock when its founders, Sergey Brin and Larry Page, granted an interview to Playboy magazine in the spring of 2004.

The quiet period is designed to prevent executives from hyping a company's business and financial prospects before it sells shares to the public.

Facing the risk that the SEC could delay its IPO last August after Playboy published the interview, Google addressed the issue by filing the interview, which garnered immense publicity, with the SEC as an added exhibit to the prospectus describing the company. Soon thereafter, the SEC said it would not delay Google's IPO.

"We are pleased there will be no further proceedings regarding the Playboy article, and we are satisfied with the settlement on the stock option issues," said Steve Langdon, a Google spokesman. "We are glad to have these issues behind us."

In addition to resolving the SEC probes yesterday, Google settled a parallel investigation into similar matters by state securities regulators in California.

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