Former Controller Consents to Permanent Injunction, Officer-and-Director Bar, and Payment of $886,557
Washington, D.C., Feb. 6, 2007 – The Securities and Exchange Commission today filed civil injunctive actions against Gary C. Gerhardt, the former Chief Financial Officer of Engineered Support Systems, Inc., and Steven J. Landmann, the company’s former Controller, alleging that they participated in a six-year fraudulent options backdating scheme in which they granted undisclosed, in-the-money stock options to themselves and to other Engineered Support officers, employees, and directors. According to the complaints, Engineered Support employees and directors received approximately $20 million in unauthorized compensation as a result of the backdating, $15 million of which was received by top executives and directors. Gerhardt and Landmann personally profited by $1,906,300 and $518,972 respectively.
Landmann, the former Controller, settled the civil action filed against him by consenting to a permanent injunction and an officer-and-director bar, and by agreeing to pay disgorgement of $518,972, prejudgment interest of $108,099, and a civil penalty of $259,486. As part of the settlement, Landmann also consented to a permanent suspension from appearing or practicing before Commission as an accountant.
Linda Thomsen, Director of the Commission’s Division of Enforcement, said, “As alleged in the complaints filed today, the executives at Engineered Support improperly increased their compensation without telling their shareholders. Our actions against Gerhardt and Landmann demonstrate the Commission’s ongoing commitment to addressing fraudulent stock-option practices and ensuring full and fair disclosure of executive compensation.”
Merri Jo Gillette, Director of the Commission’s Midwest Regional Office, said, “The complaints allege that defendants granted themselves and other Engineered Support executives millions of dollars in undisclosed compensation through their fraudulent options backdating. In this case, the improper backdating was exacerbated by the fact that the company’s options vested immediately. Gerhardt and Landmann undermined the company’s stated goal of using stock options to tie management’s compensation to shareholder return. Instead, they granted themselves and others instant compensation that was entirely unrelated to the future performance of the company’s stock.”
The complaints allege that, from 1997 through 2002, Gerhardt instructed Landmann to backdate company stock option grants to coincide with historically low closing prices of Engineered Support’s common stock. The company’s stock options vested at the time of grant, allowing the option recipients to obtain immediate cash profits. In addition, the complaints allege that, on at least two occasions, Gerhardt ordered Landmann to cancel previously issued Engineered Support stock options that had fallen out-of-the-money and to reissue them with new backdated grant dates and exercise prices, to bring them back in-the-money. The complaints also allege that Gerhardt directed Landmann to issue additional Engineered Support stock options to nonemployee directors in excess of authorized amounts, from which these directors received a total gain of approximately $6 million.
As part of the scheme, Gerhardt and Landmann allegedly caused Engineered Support to misrepresent in its Forms 10-K and proxy statements filed with the Commission that all stock options were granted at the fair market value of the stock on the date of the award. Engineered Support also failed to report the additional compensation its executives had received through in-the-money option grants. In addition, the company failed to disclose the repricing of options that had fallen out-of-the-money, or the granting of stock options to nonemployee directors in excess of authorized amounts.
The complaints also allege that Gerhardt and Landmann caused Engineered Support to file materially misstated financial statements with the Commission in its Forms 10-K and 10-Q that did not recognize compensation expense for the company’s stock option grants, as required by generally accepted accounting principles. As a result, Engineered Support overstated its aggregate pretax operating income by approximately $26 million, or 21%, for fiscal years 1997 through 2002.
The Commission’s investigation in this matter is continuing.