Penalties Assessed In Options Scandals

Two California technology companies resolved civil charges related to tampering with stock option awards, agreeing to hand over millions of dollars, the first financial penalties that regulators have imposed in a vast corporate-pay investigation.

Mercury Interactive will pay $28 million and Brocade Communications Systems $7 million to settle cases with the Securities and Exchange Commission, agency officials said yesterday.

The cases demonstrate that the SEC "will use all the weapons in our arsenal, including significant corporate penalties, to protect investors and combat fraudulent stock option backdating," Chairman Christopher Cox said in a statement.

The SEC has been investigating more than 140 such cases at companies including Apple, Barnes & Noble and UnitedHealth. But yesterday's announcements mark the first settlements and fines against public companies.

The long-awaited settlements come nearly a year after prosecutors filed criminal charges against Brocade's former chief executive and onetime human resources director for allegedly changing the dates when stock options were awarded to increase the likelihood that favored employees would win bigger paydays. Brocade was accused of backdating options and misreporting expenses from 1999 to 2004, according to court papers.

Brocade set aside a reserve of $7 million in the first quarter of 2006 as a settlement expense, Leslie Davis, a spokeswoman for the San Jose equipment maker, said in an e-mail earlier this week.

But resolution with the SEC was held up when the agency's five members disagreed over how and when companies should bear the brunt of financial sanctions for backdating activity. Republican commissioners Paul S. Atkins and Kathleen L. Casey have been leery of such corporate fines, while Democrats mostly have supported them.

Earlier this year, Cox implemented a controversial plan that requires enforcement-division lawyers to seek commissioners' approval before starting negotiations over corporate fines. He also asked the agency's chief economist to analyze the issue, inducing further delays.

Stock options give employees the right to purchase stock at a specific price within a set time frame. Cherry-picking the dates to when the options were granted is not itself illegal but can violate accounting and tax rules when the practice is not properly disclosed to investors.

"Falsifying compensation expense is no less fraudulent than falsifying revenue," said Linda Chatman Thomsen, the SEC's enforcement director.

Separately, the agency filed a lawsuit against several former executives at Mercury, a Mountain View, Calif., software maker absorbed by Hewlett-Packard last year, for alleged backdating and other accounting improprieties from 1997 to 2005. The company failed to record more than $250 million in compensation expenses during that period, according to court papers. Every one of 45 stock option grants between 1997 and April 2002 was backdated, SEC lawyers said.

Former chief executive Amnon Landan, former finance chiefs Sharlene Abrams and Douglas Smith, and former general counsel Susan Skaer are contesting the SEC allegations.

Regulators for the first time cited a provision in the 2002 Sarbanes-Oxley law in an attempt to get back an unspecified amount of bonuses and stock-sale profits from the Mercury executives after the company restated its financial reports.

Among the software products Mercury released was a program designed to help businesses comply with their obligations under Sarbanes-Oxley, the complaint said.

"We decided it was about time," SEC associate enforcement director Christopher Conte said of the decision to go after stock profits of the executives.

Ryan Donovan, a spokesman for HP, said its Mercury subsidiary did not admit or deny wrongdoing in the settlement. Mercury had previously booked a $35 million reserve to cover the SEC agreement but needed to use only $28 million under the deal terms announced yesterday.

A number of other settlements, whose terms will vary with the extent and impact of backdating on financial statements, are expected in the months ahead, regulators said.