Another Settled Option Backdating Case
The SEC continued to reduce its inventory of option backdating cases, filing another settled action on Wednesday. SEC v. Sycamore Networks, Inc., Civil Action No. 1:08-CV-11166 (D. Mass. July 9, 2009).
The complaint names as defendants Sycamore Networks, Inc., an optical
networking company, its former CFO Frances M. Jewels, former Director
of Financial Operations Cheryl E. Kalinen and former Director of HR
Robin A. Friedman.
According to the Commission’s complaint, between 2000 and 2005
Sycamore used backdated options to compensate employees, without
properly accounting for about $250 million in related expenses. From
shortly before the IPO for the company in October 1999, Frances Jewels
had authority to approve option grants to all non-officers of the
company. Cheryl Kalinen worked closely with defendant Jewels and was
responsible for overseeing the stock option program.
Between October 1999 and July 2002 Defendants Jewels and Kalinen
repeatedly backdated option grants, providing themselves and employees
with options with prices at which they could purchase shares which were
lower than the market price at the time the options actually were
granted. To conceal these practices, the two falsified grant approval
documentation and concealed the practices. Defendant Friedman
participated in the scheme by altering or creating company personnel
and payroll records so that they would reflect inaccurate start dates
for the employees.
On September 12, 2005, and again on June 21, 2007, Sycamore restated
its financial results for fiscal years 2000 through 2005 to include the
additional stock compensation expenses related to various options. As a
result of its option backdating practices, Sycamore materially
overstated its pre-tax net income or understated pre-tax net losses in
various Commission filings as follows: in fiscal year 2000, a reported
net income became a net loss; and, in fiscal years 2001, 2002, 2003,
2004 and 2005, reported net losses were increased by approximately 30%,
9%, 36%, 34%, and 21%, respectively.
To settle the case:
● Sycamore consented to the entry of a permanent injunction
prohibiting future violations of the antifraud, reporting and proxy
provisions of the federal securities laws. According to the Commission,
this resolution reflected the cooperation of the company.
● Defendant Jewels consented to the entry of a permanent injunction
prohibiting future violations of the antifraud and reporting
provisions. She also consented to the entry of an order requiring the
payment of disgorgement of $30,000, plus prejudgment interest. The
order also includes a directive that Sycamore be reimbursed under SOX
Section 304 the $190,000 in cash bonuses she received during the period
of the fraud and that Ms. Jewels pay a civil penalty of $230,000. Under
the order, Ms. Jewels will be barred from serving as an officer or
director of any public company for five years. In a related
administrative proceeding, she was barred from appearing or practicing
before the Commission as an attorney or accountant for a period of five
years.
● Defendant Kalinen consented to the entry of a permanent injunction
prohibiting future violations of the antifraud and reporting
provisions. In addition, she consented to the entry of an order
directing the payment of $28,000 in disgorgement plus prejudgment
interest and the payment of a civil penalty of $150,000.
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