WASHINGTON (AP) – As lawsuits and federal prosecutions mount over suspect timing of stock option awards at American public companies, corporate human resources executives are increasingly being caught in the gears of cases.
With stock options widely used as perks to attract talent, personnel staff regularly were brought into executives’ machinations on options awards – often signing the relevant paperwork such as memos to employees or letters making job offers. That means their fingerprints are on documents that can enter into the paper trails that prosecutors are using to build options-dating cases.
“HR people have to be careful,” said John Gamble, an attorney at Fisher & Phillips, an Atlanta firm specializing in labor and employment law. “Sometimes they get assignments that they need to think twice about.”
Among the handful of executives who have been charged with fraud by federal prosecutors in the wave of options investigations is Stephanie Jensen, the former vice president for human resources at Brocade Communications Systems Inc. Jensen and Gregory L. Reyes, who was Brocade’s chief executive, pleaded not guilty in August.
The Justice Department prosecutors and the Securities and Exchange Commission allege that Reyes and Jensen regularly backdated minutes of board of directors meetings so that it appeared the stock-options committee granted options on dates that Brocade’s share price was relatively low. The two executives also are accused of having letters of job offers backdated so employees would receive options that were dated at low points in the company’s share price that predated their first day of work.
Stock options allow the recipients to buy shares of their company’s stock in the future at a set price. If the stock rises before the options are exercised, the employee can buy the stock at the predetermined, lower price, then sell it at the higher, current price – and pocket the difference.
Options can be made more lucrative by backdating their exercise price to a historically low point in the stock’s value.
Backdating options can be legal if disclosed properly to investors and approved by the company’s board or shareholders. But unauthorized compensation from options is deemed illegal and can bring fraud charges if documents are falsified in a backdating scheme or information is concealed from the board. If companies backdate options without properly accounting for the move, it can cause profits to be overstated and taxes to be underpaid.
E-mails uncovered in court records in the case of Mercury Interactive Corp., one of the first Silicon Valley companies to acknowledge stock options manipulation, show exchanges between a payroll manager named Susie Fregoso and company executives concerning dating of options. At one point in August 2000, according to an account of the e-mails in Tuesday’s Wall Street Journal, Mercury’s assistant controller told Fregoso the company will use the “magic backdating ink” of Sharlene Abrams, a former chief financial officer.
A telephone message left for a Susie Fregoso in California by The Associated Press was not immediately returned Tuesday. An attorney representing Abrams has declined to comment, citing a confidentiality order issued by the judge in the California court case.
About 130 public companies are under investigation by the Justice Department and the SEC in the affair that has been roiling corporate America. More than $5 billion in company earnings has been erased by restatements necessitated by options-dating problems and more than 60 senior officers and directors – including 18 chief executives – have lost their jobs.
In other situations touching on human resources executives:
-Stephen Landry, who was the human resources director at Sycamore Networks Inc., alleges in a lawsuit that he was forced out of his job in 2000 because he complained about the company’s options award practices to superiors. An internal company memo filed in his suit showed employees discussing manipulating option grant dates to enrich themselves and ranking individuals’ chances of being caught by auditors.
-An internal audit at Broadcom Corp. found that executives bearing substantial responsibility for improper options granting practices included Nancy M. Tullos, a former vice president of human resources. Tullos’ attorney has said his client relied on others at the company for guidance and didn’t select any of the favorable grant dates.
-BEA Systems Inc. announced last week that following a review of its options practices, it will record a charge against earnings of $340 million to $390 million, restructure its general counsel office and human resources department, and find a new senior vice president of human resources.
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On the Net:
Justice Department: http://www.usdoj.gov
Securities and Exchange Commission: http://www.sec.gov
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