Washington, D.C., March 12, 2009 (LAWFUEL) – The Securities and Exchange Commission today charged Aliso Viejo, Calif.-based software manufacturer Quest Software, Inc. and three current or former officers for stock option backdating.
The SEC’s complaint alleges that Quest, its executive chairman Vincent Smith, its former chief financial officer John Laskey, and former controller and principal accounting officer Kevin Brooks improperly granted undisclosed in-the-money stock options to executives and employees by backdating millions of options from 1999 through 2002. As a result of this misconduct, Quest reported a $113.6 million restatement of its operating income in September 2007. Quest has agreed to settle the SEC’s charges, and the three executives have agreed to pay more than $300,000 combined to settle the allegations against them.
“Today’s action reinforces that the Commission will hold companies and executives accountable for engaging in misconduct that deceives investors,” said Rosalind R. Tyson, Director of the SEC’s Los Angeles Regional Office. “By participating in the backdating scheme, these executives ignored their responsibilities as Quest’s primary financial gatekeepers.”
According to the SEC’s complaint, filed in federal court in Santa Ana, Calif., Quest failed to accurately describe its stock option practices in its public filings and failed to properly account for the backdated options in its financial statements. This resulted in false and misleading disclosures to Quest’s shareholders in filings with the SEC from 1999 through 2005.
The SEC further alleges that Quest backdated 28 separate grants involving more than 11 million shares of common stock. Quest’s failure to properly record compensation expenses in connection with the backdated options resulted in the overstatement of Quest’s operating income by 4 percent to 963.1 percent and the understatement of its operating loss by 26.12 percent to 154 percent from 1999 through 2005.
Specifically, the SEC’s complaint alleges that Smith and Laskey approved a policy by which Quest would pool stock option grants each month and backdate the grants to coincide with the lowest stock price of the month. The complaint alleges that the backdated grant dates bore no relation to when the grant was actually approved, resulting in artificially low exercise prices for the stock options. According to the complaint, although he knew about the use of hindsight to date stock option grants, Brooks failed to ensure the accuracy of Quest’s financial statements and disclosures. The complaint also alleges that Smith, Laskey, and Brooks took steps to prevent Quest’s independent auditors from discovering the backdating, including the use of false written consents by Quest’s board of directors.
All defendants have agreed to settle the SEC’s charges without admitting or denying the allegations in the SEC’s complaint.
Quest consented to the entry of an order permanently enjoining it from violating certain antifraud provisions, as well as the record-keeping, financial reporting, internal controls, and proxy provisions of the federal securities laws.
Smith consented to the entry of an order permanently enjoining him from violating or aiding and abetting violations of certain antifraud provisions, as well as the record-keeping, financial reporting, internal controls, proxy, false statements to auditors, Sarbanes-Oxley certification, and securities ownership reporting provisions of the federal securities laws. Smith also agreed to pay a $150,000 penalty.
Laskey and Brooks each consented to the entry of orders permanently enjoining them from violating or aiding and abetting violations of certain antifraud provisions, as well as the record-keeping, financial reporting, internal controls, false statements to auditors, and securities ownership reporting provisions of the federal securities laws. Brooks and Laskey agreed to pay penalties of $60,000 and $50,000 respectively. Brooks also agreed to pay disgorgement of $34,775, representing half of the in-the-money value of backdated options he had exercised (the other half was previously repaid to the company), and prejudgment interest of $5,808.29. In addition, Brooks, a certified public accountant, agreed to a five-year suspension from appearing or practicing as an accountant before the SEC.
All settlements are subject to approval by the court.