Blue Coat under ‘formal’ SEC investigation; ex-officer issued subpoena

Blue Coat Systems, the Sunnyvale provider of Web site security systems, revealed today that the Securities and Exchange Commission, which had been conducting an informal investigation into the company’s historical stock option granting practices, has now begun a formal “nonpublic investigation” into the matter, and has issued a subpoena to a “former officer” with the

And who might that former officer be?

One educated guess: former chief financial officer Robert Verheecke. An internal investigation concluded in December 2006 that Verheecke “was aware of the fact that stock option grant dates and prices were selected with the benefit of hindsight” (i.e., backdated) and that his “actions in connection with the improper authorization, recording and reporting of stock option pricing raise serious concerns.”

The company reported that Verheecke made a $5 million profit from the sale of stock associated
with the backdated options. His employment with Blue Coat “terminated” on December 31, 2005,
and he “declined” a request to be interviewed by the committee.

The company’s former general counsel, Cameron Laughlin, was also “aware of the fact that
grant dates were selected with the benefit of hindsight and should have appreciated the legal
significance of these actions.” But the report noted that she “had limited public company
securities and corporate governance experience prior to joining us.”

The company’s current chief executive, Brian NeSmith, participated in the stock option
granting process and was aware of the backdating, but “did not appreciate the accounting or
legal implications of these actions,” according to the findings of the special committee.

Nor did David Hanna, who chairs the board and served as a member of the compensation
committee that OK’d the options in question. Although the investigation found that Hanna was
sent e-mails “that indicated that stock option grant dates and prices were being selected
with the benefit of hindsight,” it “was unclear whether Mr. Hanna received and reviewed all
of the emails in question.” Nor could the investigation conclude “with substantial
certainty” that he was “aware” of the improper practices. In any case, he did not
“appreciate the accounting or legal implications of these matters.”

News of the formal SEC inquiry comes the day after Blue Coat completed its $200 million
purchase of Packeteer, a Cupertino maker of Internet application infrastructure tools, and the
same day as Francisco Partners disclosed buying about half of an $80 million debt offering by
Blue Coat that would give the San Francisco private equity firm a a 5.25 percent stake in Blue
Coat, should the convertible debt be exchanged for shares of the company.

Blue Coat’s stock fell 44 cents, or 2.4 percent, to $17.78 Tuesday. Its shares, which jumped
174 percent last year, are down 45 percent so far in 2008.


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