Former St. Louis Blues owner, Michael Shanahan, enters guilty plea to Backdating options - canadianpress.google.com - 7/23/2008
Former St. Louis Blues owner, Michael Shanahan, enters guilty plea
1 day ago
ST. LOUIS — A former owner of the St. Louis Blues hockey team faces
sentencing later this year after pleading guilty to a federal charge
for backdating stock options.
In a plea agreement reached on
Monday, former Engineered Support Systems Inc. co-founder Michael
Shanahan Sr. also agreed to repay US$7.9 million. In exchange for the
guilty plea on one count of falsifying the records of a publicly traded
company, the government dropped 11 other charges against Shanahan. The
government also agreed to drop charges against his son, Michael
Shanahan Jr.
Assistant U.S. Attorney Jeff Jensen, who handled the
case, declined comment because charges are still pending against
another former Engineered Support executive, chief financial officer
Gary Gerhardt.
Shanahan did not have a listed phone number. His lawyer, Barry Short, did not return a phone call seeking comment.
The
68-year-old Shanahan was the chief executive of Engineered Support
Systems, a company that supplied military support and equipment. He led
a group of St. Louis businessmen that bought the Blues from Harry
Ornest in 1986. The group sold the NHL team in 1999.
A federal
grand jury last July charged the Shanahans and Gerhardt with securities
fraud. Federal prosecutors accused the men of backdating stock options
between 1996 and 2002 in a scheme they claim enriched executives and
board members by nearly $20 million.
Prosecutors said the
executives were able to retroactively pick dates for stock options that
coincided with low points in the company's stock price, allowing them
to make greater profits when they exercised the options, according to
the indictment.
In his plea, Shanahan did not admit orchestrating
the backdating scheme. But the plea agreement said he "knowingly and
intentionally signed stock option award letters" with the false date of
July 25, 2002.
A sentencing date has not been set. Under federal
guidelines, Shanahan could face up to 21 months in prison, though he
could get less time due to "substantial assistance" in the case,
according to the plea agreement.
Shanahan will pay the $7.9
million he made as a result of the scheme to DRS Technologies, based in
Parsippany, N.J. Prosecutors say Gerhardt earned $1.8 million from the
scheme, while Shanahan Jr. earned $80,000.
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Jul 21, 2008 (St. Louis Post-Dispatch - McClatchy-Tribune Information Services via COMTEX) --
EASI | Quote | Chart | News | PowerRating
-- Former Engineered Support Systems Inc. Chief Executive and
co-founder Michael Shanahan Sr. pleaded guilty today to one of 12 federal charges related to backdating company options and agreed to pay almost $7.9 million back to his former company.
Shanahan Sr. did not admit that he had orchestrated the scheme, which
prosecutors said cost the company $20 million over six years. He
pleaded guilty to one felony count of falsifying the records of a
publicly traded company and admitted that he "knowingly and
intentionally signed stock option award letters falsely dated July 25,
2002, with reckless disregard as to the false date on the backdated
award letters."
Shanahan Sr. faces 15 to 21 months in prison when sentenced
later this year, according to the plea agreement. He may get less time,
as prosecutors will ask a judge to give him a break for cooperation. He
provided "substantial assistance" in the case, the plea agreement says.
As part of the deal, prosecutors agreed to drop the other 11
charges against Shanahan Sr. and all charges against his son, Michael
Shanahan Jr., a former director and member of the board of directors'
compensation committee. Shanahan Jr. will have to enter pre-trial
diversion.
The Shanahans faced charges of conspiracy, wire fraud,
mail fraud, making false statements to the Securities and Exchange
Commission and falsifying records of a publicly traded company.
Prosecutors said that the scheme cost stockholders $20 million over six
years and earned Shanahan Sr. $7.8 million.
Shanahan Jr. earned $80,000 in the scheme.
Former Chief Financial Officer Gary Gerhardt continues to face
the same charges as the Shanahans, and jury selection is scheduled for
next month. He reaped $1.8 million, prosecutors said.
Prosecutors say that the three were involved in an almost
decade-long scheme to defraud shareholders by cherry-picking the dates
upon which stock options were granted to guarantee the best profits.
They also allege that the men altered company records to cover up the
scheme.
Stock options allow company executives and employees to buy
stock at a set price. If the company stock price is rising, those
options mean profits. If the stock price falls, they're worthless.
Backdating is not illegal if disclosed. But by essentially
going back in time and picking a point at which the stock price is
lower, executives were more likely to profit. They would also subvert
the original intent of stock options -- to award executives and
employees for the company's performance and an increase in stock price.
Former Controller Steven J. Landmann pleaded guilty in March
2007 to one felony count of making false statements in a filing to the
SEC and said that "senior executives" told him to backdate their stock
options.
Landmann also admitted that the options were canceled and
reissued if the stock price fell, something the SEC calls "double
backdating."
In court filings, federal prosecutors in St. Louis called the
Engineered Support case "one of the most egregious examples of
backdating among all of the publicly traded companies in the United
States. It strains mathematical formulas to calculate the likelihood of
randomly selecting the lowest date within a quarter to issue stock
options ... and to do it eight times in a row."
While hundreds of companies and executives have been
investigated for backdating, only a handful of those probes have led to
criminal charges. The Engineered Support case is the only one outside
San Francisco or New York to see a federal prosecution.
Most of the cases ended with guilty pleas, hefty fines and, in
some cases, prison time. The one executive who went to trial -- Gregory
Reyes, chief executive of San Jose, Calif.-based Brocade Inc. -- was found guilty and sentenced to 21 months and a $15 million fine.
But after a wave of cases filed last year, prosecutions have
faded in recent months. Earlier this month, the SEC decided to drop a
criminal investigation into Apple CEO Steve Jobs, perhaps the
highest-profile target to date.
Shanahan will refund the money to DRS Technologies Inc. of
Parsippany, N.J., which spent about $2 billion to buy Cool Valley-based
Engineered Support in 2006.
DRS is in the process of being acquired by the Italian company Finmeccanica SpA.
Tim Logan of the Post-Dispatch contributed to this report.
rpatrick@post-dispatch.com -- 314-621-5154