Outside Directors Of Mercury Interactive Settle SEC Charges of Stock Option Backdating

Washington, D.C., Sept. 17, 2008 (LAWFUEL) – The Securities and Exchange Commission today filed settled charges against Igal Kohavi, Yair Shamir, and Giora Yaron, three former outside directors of California-based software maker Mercury Interactive, LLC. The SEC’s complaint alleges that the outside directors recklessly approved backdated stock option grants, and reviewed and signed public filings that contained materially false and misleading disclosures about the company’s stock option grants and company expenses.

Without admitting or denying the allegations in the SEC’s complaint, Kohavi, Shamir and Yaron agreed to permanent injunctions and each will pay a $100,000 financial penalty to settle the charges.

Kohavi, Shamir and Yaron served on the board of directors of the company, formerly known as Mercury Interactive Corporation, from 1997 through 2005. They served on its compensation and audit committees from at least 1997 to 2002.

“Shareholders and investors deserve true and accurate information about a company’s executive compensation and financial condition,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement. “The Commission has previously sanctioned outside directors who sign false and misleading public corporate filings while recklessly ignoring warning signs that management is misrepresenting corporate transactions and engaging in financial improprieties. Today’s action serves as further notice that misconduct by outside directors, as well as company management, will not be tolerated.”

Christopher Conte, Associate Director of the SEC’s Division of Enforcement, added, “These directors understood how options were to be priced under Mercury’s stock plan and understood the accounting ramifications of granting in-the-money options. Yet, time and again the directors approved in-the-money option grants that had been backdated by Mercury’s senior managers. Today’s action holds the directors responsible for contributing to the company’s misstated stock option expenses and misleading stock option grant disclosures because they recklessly approved option grants despite numerous facts and circumstances indicating to them that the grant dates they were approving were improperly backdated.”

The SEC’s complaint, filed in federal district court for the Northern District of California, alleges that senior management at Mercury engaged in a fraudulent scheme that involved the backdating of 45 stock option grants to employees and executives that concealed hundreds of millions of dollars of compensation expenses on Mercury’s financial statements. As alleged, the backdating occurred from as early as 1997 to April 2002, while the overstatements of income that resulted from the backdating continued to appear in the company’s financial statements through 2005.

According to the SEC’s complaint, Kohavi, Shamir and Yaron approved 21 of those grants at the recommendation or with the direct participation of senior Mercury management. The complaint alleges that Kohavi, Shamir and Yaron were aware that under Mercury’s stock option plan, options were required to be priced at the closing price of the company’s stock on the day that they approved the grant of options. The complaint also alleges that they were aware that options with an exercise price lower than the price on the date the options were actually approved created a compensation expense. The complaint alleges, however, that Kohavi, Shamir and Yaron repeatedly executed documents approving grants of stock options while failing to observe, among other things, that the exercise price of stock options they were approving was less than the market price of the company’s stock at the time of approval.

The SEC’s complaint alleges that Kohavi, Shamir and Yaron routinely signed unanimous written consents and approved board meeting minutes despite being presented with numerous facts and circumstances indicating that management was backdating option grants. For example, as alleged in the complaint:

Kohavi, Shamir and Yaron approved a grant of options to an employee at a meeting in mid-July 2001 and signed a unanimous written consent just days later memorializing the grant “as of April 4, 2001.” Members of management had not even discussed among themselves making a recommendation to the board for the employee’s grant until late June 2001.
Shortly after a Nov. 6, 2001 board meeting, Mercury’s general counsel sent Kohavi, Shamir and Yaron an e-mail containing a written consent to memorialize a grant of options “approved at the board meeting on November 6, 2001.” The consent, attached to the e-mail sent to Kohavi, Shamir and Yaron, was dated “as of October 1, 2001.” Kohavi, Shamir and Yaron had not been contacted about this grant on Oct. 1, 2001, and took no actions to approve the grant on that date.
Kohavi, Shamir and Yaron were asked to sign a written consent in October 1999 memorializing a July 1999 grant. They declined to sign the consent, deciding instead to discuss the matter in a November 1999 meeting. Following the Nov. 9, 1999 meeting at which the options were approved, Kohavi signed meeting minutes that indicated that the grant had been approved four months earlier at a meeting on July 16, 1999.

In addition to signing unanimous written consents with “as of” dates that preceded the actual date of approval at times by months, the SEC’s complaint alleges that on a few occasions Shamir, Yaron and Kohavi signed multiple written consents presented to them by management for the same grant with different grant dates that had more favorable prices.

The Commission alleges that Shamir, Yaron and Kohavi violated the antifraud, proxy, reporting, books and records and internal controls provisions of the federal securities laws. In addition to the financial penalties, each of the directors agreed to injunctions that permanently enjoin each of them from violating Sections 10(b) and 14(a) of the Securities Exchange Act and Exchange Act Rules 10b-5, 13b2-1 and 14a-9; and from aiding and abetting violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Exchange Act Rules 12b-20, 13a-1, and 13a-13.

The SEC previously filed civil fraud charges in federal district court against Mercury and four of its former senior officers – former Chairman and Chief Executive Officer Amnon Landan, former Chief Financial Officers Sharlene Abrams and Douglas Smith, and former General Counsel Susan Skaer – based on the officers’ stock option backdating scheme and fraudulent disclosures concerning, among other things, Mercury’s “backlog” of sales revenues to manage its reported earnings. Mercury, which was acquired by Hewlett-Packard Company on Nov. 8, 2006, after the alleged misconduct, settled the matter by agreeing to pay a $28 million penalty and to be permanently enjoined. The SEC’s case against the four former senior Mercury officers is being litigated.

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