Blue Coat Systems and Former CFO Settle Charges of Stock Option Backdating - 12 Nov 2008

Blue Coat Systems and Former CFO Settle Charges of Stock Option Backdating

Posted on Wednesday, November 12, 2008

http://lawfuel.com/show-release.asp?ID=19937

 

Washington, D.C., Nov. 12, 2008 (LAWFUEL) – The Securities and Exchange
Commission today charged Sunnyvale, Calif., network security company
Blue Coat Systems, Inc. and its former chief financial officer Robert
P. Verheecke, alleging that they backdated stock option grants to
executives and employees and reported false financial information to
shareholders.

The
SEC’s complaint alleges that from approximately 2000 through 2005, Blue
Coat concealed nearly $50 million in compensation expenses associated
with valuable “in-the-money” options by backdating paperwork to make it
appear as if the options had been granted on earlier dates. Blue Coat
and Verheecke have agreed to settle the SEC’s charges without admitting
or denying the allegations. Verheecke will pay more than $185,000 in
disgorgement, penalties, and prejudgment interest.

“As Blue
Coat’s chief financial officer, Verheecke was responsible for ensuring
the integrity of the company’s financial statements. Verheecke,
however, caused Blue Coat to report inflated results to investors and
provided misleading documents to Blue Coat’s independent auditors,”
said Marc J. Fagel, Regional Director of the SEC’s San Francisco
Regional Office.

The SEC’s complaint, filed in federal court
in San Jose, alleges that Blue Coat regularly used hindsight to select
favorable exercise prices for employee and officer stock option grants
without accurately reporting the grants to investors. Blue Coat was
required to record an expense for options issued at below-market prices
(“in-the-money” options). In order to avoid these expenses, Blue Coat
allegedly identified dates on which its stock was trading at
historically low prices, then created documents making it look like
options had been granted on those earlier dates. In March 2007, after
an internal investigation, Blue Coat corrected its financial statements
for fiscal years 2000 through 2005, recording nearly $50 million in
additional expenses for misdated options. The majority of the expenses
related to grants prior to May 2001.

Verheecke, of Palo Alto,
Calif., served as CFO from May 2001 through May 2005. According to the
SEC’s complaint, at various times Verheecke used hindsight to pick
stock option grant dates, prepared or distributed misleading option
paperwork, and approved Blue Coat’s false and misleading financial
statements and SEC filings. The SEC alleges that Verheecke personally
exercised backdated options for $30,000 in excess profits.

Without
admitting or denying the SEC’s allegations, Verheecke consented to a
permanent injunction against fraud and other violations of the federal
securities laws, disgorgement and prejudgment interest of $35,946, a
financial penalty of $150,000, and five-year bars from serving as an
officer or director of a public company and appearing or practicing as
an accountant before the SEC. Blue Coat consented to be enjoined from
violating the antifraud and other provisions of the federal securities
laws. The Commission took into account the cooperation that Blue Coat
provided Commission staff during its investigation.