Document Shows Mercury Executives Allegedly Discussed Options Dating
By MARK BOSLET and MARK MAREMONT
February 17, 2007 9:00 p.m.
online.wsj.com
SANTA CLARA, Calif. -- As part of a years-long scheme to backdate stock options at Mercury Interactive Corp., former executives allegedly altered documents, repeatedly changed the dates of some option grants, and sent each other emails openly discussing the improper practice, according to a court document that has been at the center of a battle over confidentiality in the case.
In one 2000 email quoted in the court document, filed in state court in California by shareholders suing the former executives, a Mercury finance executive wrote to another official about using "magic backdating ink" to manipulate the date of an options grant. Another employee whose grant allegedly was backdated was told in an email that "the stock price drop made us change the grant date" and "you will be happier with the new price."
In yet another incident described in the filing, insiders allegedly whited out fax headers on documents to disguise the fact that an options grant was approved by directors long after its purported date.
Attorneys for the defendants either didn't comment directly on the document's contents or couldn't be reached.
Mercury Interactive was one of the first companies ensnared in the options-backdating scandal, and it previously has admitted that its top executives improperly altered the dates of more than 50 option grants between 1996 and 2002. The San Jose, Calif.-based software firm, which was acquired by Hewlett-Packard Co. late last year for $4.5 billion, previously restated years of financial results, reducing its pretax income by $566.7 million from 1992 to 2004 -- nearly all due to options-related problems. Most of its top executives from the period in question have left the firm.
Mercury Interactive is one of about 140 companies that are being investigated in a broad federal probe of options backdating. In the past week, a former chief executive of Take-Two Interactive Software Inc. and a former general counsel of Monster Worldwide Inc. separately pleaded guilty to options-related criminal charges in New York.
Stock options, a popular compensation tool, give employees the right to buy a company's stock at a pre-set "strike price," typically the market price on the date of grant. In theory, recipients can't profit unless the share price rises. But at some companies, executives improperly backdated grants by pretending options were issued at an earlier time when the market price was lower, thus increasing the potential profit from the options.
The new information about the Mercury Interactive case is contained in a 35-page shareholder derivative complaint, originally filed in September under seal in Superior Court in Santa Clara, Calif., against four former top executives of the company.
Several news organizations have been waging a legal battle to have some documents in the case unsealed. The former Mercury executives have opposed unsealing the documents. The judge overseeing the case has ordered the documents opened to public view, but they remain sealed pending appeal by the defendants.
A copy of the complaint was appended to another filing in the case, and a Dow Jones News Service reporter obtained the document from the court's files late Friday. Neither Dow Jones & Co. nor The Wall Street Journal is a party to the legal attempt to unseal the documents.
Although filed on behalf of two shareholders, the complaint says it was prosecuted "at the request of" a special committee of Mercury's board, which last year decided to support the shareholder suit against the four ex-executives. The complaint appears to lean heavily on documents and other information from an internal probe overseen by Mercury's board.
The complaint recently was dismissed by the judge overseeing the case on a matter of standing, because the plaintiffs no longer have a stake in the company after HP's purchase, according to defense attorneys involved in the case. It's unclear if the plaintiffs will appeal that order.
The defendants in the case are: Sharlene Abrams and Douglas P. Smith, both former chief financial officers at Mercury Interactive; Susan Skaer, a former general counsel; and Kenneth Klein, a former chief operating officer. The complaint alleges that the four granted themselves more than three million backdated options, locking in a total of $54.2 million in immediate paper gains. In total, the four made "millions in illicit profit" by selling Mercury shares worth about $88 million, the complaint alleges.
Jared Kopel, an attorney for Mr. Klein, declined comment, saying "we can't comment on a document that the courts ordered to remain under seal." Brandon Wisoff, an attorney for Ms. Abrams, also cited the confidentiality order in refraining from commenting on behalf of his client. Patrick Robbins, who represents Mr. Smith, declined to comment. An attorney for Ms. Skaer could not be immediately reached for comment.
Several of the ex-executives named in the suit have denied wrongdoing in past press reports.
The company also has said it plans to pursue separately a lawsuit against Amnon Landan, its former chief executive, who departed in late 2005 when the company first revealed the extent of its backdating woes and was later terminated for cause.
E-mail messages discussing backdating were frequent among Mercury executives, the court complaint says. In one exchange from May 1999, officials debated how to set the date of an April 1999 grant, even though the purported date had passed weeks before. "What is the date for the April grant going to be?" Susie Fregoso, a payroll manager, asked Ms. Abrams on May 5, according to the records. "Right now I have it as April 7 with a price of $27.125. You had mentioned that this might change, any news?"
In another e-mail exchange from Aug. 3, 2000, discussing whether an employee could be retroactively included in an already-issued option grant –which would have been improper unless the company took a special earnings charge -- Assistant Controller Kathy Hawkes tells Ms. Fregoso: "I betcha that Sharlene (Abrams) will overrule these types of things…and we will use her magic backdating ink," according to the court records. "Let's see what happens!"
Another April 2000 email appears to describe how Mr. Landan and Ms. Abrams supposedly backdated a grant to a new employee, who was promised stock options in her job-offer letter. The trouble was, Mercury's stock price was falling, and the officials wanted to wait to lock in a lower price. "The reason the paperwork was not sent out is because the stock price drop made us change the grant date so that you could get the lower price," says the April 28, 2000 message to the new hire from Ms. Fregoso, the payroll manager, as quoted in the filing. "The 'New' grant is being approved next week by Sharlene (Abrams)/Amnon (Landan). I know it has been a while, but believe me, you will be happier with the new price." It ended with an electronic smiley face.
In a mid-March 2002 email, general counsel Ms. Skaer wrote to Mr. Smith, the CFO, suggesting they use a date two weeks earlier for a grant to 30 new employees, "unless we think that the price will be better than that later this month" according to the complaint. "Let me know what you'd like to do," she added. Mr. Smith then forwarded the email to Mr. Landan, the CEO, for his thoughts, the court document states.
In addition, Mercury officials falsified records, including hiring agreements, to cover their tracks, the court document asserts. Mr. Smith, later the CFO, was hired as an executive vice president in mid-2000. According to the complaint, the board approved a grant of 450,000 options to Mr. Smith on July 25, 2000, when Mercury's stock price was $94.69.
But it claims Ms. Abrams and Ms. Skaer falsified Mr. Smith's employment letter to make it appear he was hired on May 23, 2000, and then priced his options on that date, when the share price was $65.20, the court document claims. The backdating added $13.3 million in potential profit to the grant.
A May 22 employment letter was drawn up for Mr. Smith, which he signed and dated May 23, the complaint says. Bogus compensation committee minutes dated May 23 also were drawn up, claiming the board approved Mr. Smith's grant on that date, the complaint says. But electronic "metadata," or electronic tagging information, shows that the minutes weren't created until July 26, it adds.
Other documents were falsified in early 2002, according to the records. At the time, Mercury's share price was rising, and the defendants allegedly decided to backdate an option grant to Mr. Smith and Ms. Skaer to early November 2001, when the stock was significantly lower. In January, Mr. Landan, the former CEO, sent an email to outside directors seeking their consent for the earlier date, the complaint claims. When the directors faxed back the consent forms bearing the November grant date, the complaint says, "Skaer, or someone at her direction, intentionally falsified (the documents) by whiting out the January 20, 2002 fax dates at the top of the return faxes."
But the supposed alteration failed because one of the faxes was sent upside down, and the original date was left on one of the documents, the complaint alleges. Final approval for the grant wasn't obtained until a Feb. 12, 2002, board meeting, when the defendants allegedly changed the date yet again, to one several days earlier that was even more favorable to them, the complaint says.
Write to Mark Boslet at mark.boslet@dowjones.com4 and Mark Maremont at mark.maremont@wsj.com5 URL for this article:
online.wsj.com |
