SEC penalizes companies in options probe
Two Silicon Valley companies, including a unit of Hewlett-Packard Co., have been fined a total of $35 million for alleged manipulation of stock options, marking a new phase in the government’s more-than-yearlong investigation of such conduct.
The Securities and Exchange Commission announced Thursday that San Jose-based Brocade Communications Systems Inc. and HP’s Mercury Interactive unit had become the first firms to be fined in the SEC’s crackdown on option backdating. Until now, all of the penalties stemming from the investigation had been imposed on individual executives.
Brocade and Mercury neither admitted nor denied the SEC’s allegations, laid out in separate complaints filed in federal court in Northern California. The conduct attributed to Mercury is said to have taken place before HP acquired the company last summer.
The fines indicate that the SEC has resolved its internal debate over the propriety of penalizing companies that accommodated option backdating. Theoretically, fining a company hurts, at least indirectly, the purported victims of the backdating -- the company’s shareholders.
Mountain View-based Mercury, which makes software to test computers, agreed to pay $28 million. Brocade, which designs data storage networking products, will pay $7 million.
Options provide the right to buy a company’s shares during a specified period, usually at the market price the day they were granted. Backdating options to days with lower share prices inflates the value of the grants.
If not properly disclosed, the practice may break laws because it hides costs from shareholders.
“The commissioners apparently have agreed to a methodology to apply to cases like this,” said Gregory Bruch, a former SEC enforcement lawyer.
At least 220 companies have disclosed internal or federal stock option probes, and more than 130 have said they must restate financial results. The revelations have prompted the ouster of more than 90 corporate executives and directors and triggered more than $12.2 billion in restatements, revisions and charges.
Prominent California companies being investigated include Apple Inc. and KB Home. The technology sector dominates the list of firms involved because young, fast-growing companies tend to be heavy issuers of options to their employees.
With the announcement of the Brocade and Mercury accords, settlements with more companies are expected.
“The SEC has a significant inventory of investigations,” and each “will rise and fall on its own facts,” SEC Chairman Christopher Cox told reporters in New York. “Undoubtedly we will have more announcements.”
In its suit against Brocade, the SEC accused the company of misstating its income from 1999 to 2004 and concealing such actions with false documents.
The SEC and the Justice Department are also pursuing civil and criminal cases against former top executives at Brocade.
Regulators allege that former Brocade CEO Gregory L. Reyes routinely rewarded employees by granting backdated options. Reyes, charged with criminal fraud in the case, has pleaded not guilty.
“We are pleased the SEC has accepted Brocade’s offer of settlement and now have the investigation and matter concluded,” said Tyler Wall, Brocade’s vice president and general counsel.
The SEC’s complaint against Mercury alleges that from 1997 to 2005, senior managers awarded themselves and others “undisclosed, secret compensation” and failed to maintain proper records for hundreds of millions of dollars in pay.
The SEC on Thursday also filed suit against four of Mercury’s former senior officers, and regulators invoked a provision of the Sarbanes-Oxley corporate reform law in a bid to recover millions of dollars in what was described as improper compensation and profit.
“The widespread and pernicious misconduct -- including lying to shareholders, intentionally false accounting and fraudulent stock options backdating -- in this case warrants the significant sanctions imposed on the company and sought from the former executives,” said Linda Chatman Thomsen, director of the SEC’s enforcement division.
HP’s stock edged up 4 cents Thursday to $45.71. Brocade fell 9 cents to $9.19.
jonathan.peterson @latimes.com
Times staff writer Michelle Quinn contributed to this report, and Bloomberg News was used in compiling it.
