Washington, D.C., July 9, 2008 (LAWFUEL) – The Securities and Exchange Commission today charged Sycamore Networks, Inc. and three of its former executives in connection with the backdating of stock options spanning several years at the Chelmsford, Mass.-based optical networking company.
According to the SEC’s complaint, filed in federal court in Boston, Sycamore’s former Chief Financial Officer Frances M. Jewels and former Director of Financial Operations Cheryl E. Kalinen fraudulently backdated options grants to obtain more favorable options prices for employees. They misled the company’s investors and auditors about the practice and did not disclose its consequent expenses in Sycamore’s financial statements. They also personally benefited from grants of below-market options. The SEC also charged Sycamore’s former Director of Human Resources Robin A. Friedman with helping to mislead Sycamore’s auditors. The company and the former executives agreed to settle the SEC’s charges, with the former executives paying more than $650,000 combined. Jewels also agreed to be barred from serving as an officer or director of a public company for five years.
“Misleading investors about expenses is serious misconduct that must have consequences,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement. “Such practices are particularly troubling when the expenses relate to the compensation of those who engage in misconduct.”
David P. Bergers, Director of the SEC’s Boston Regional Office, added, “Investors fundamentally rely on officials at public companies to act as gatekeepers and to deal with auditors openly and above board. Failing to do so not only breaches that trust but violates the federal securities laws.”
According to the SEC’s complaint, Sycamore’s unreported options-related expenses totaled nearly $250 million between 2000 and 2005. The SEC alleges that Jewels and Kalinen repeatedly backdated options grants between October 1999 and July 2002 to prices at or near monthly or quarterly low points for the company’s stock, providing employees with options with prices at which they could purchase shares that were lower than the market price at the time the options actually were granted. The SEC alleges that Jewels and Kalinen falsified, or caused others to falsify, various company documents concerning these below-market options grants.
The SEC’s complaint particularly describes an internal memorandum that set out a plan to grant below-market options to five company employees and conceal the nature of the grants from the company’s auditors. The memo, drafted by Kalinen and provided to Jewels and Friedman, analyzed the risk that the company’s outside auditors would uncover the conduct. The SEC alleges that Friedman participated in the plan described in the memo by altering or creating, or causing others to alter or create, company personnel and payroll records so that they would reflect inaccurate start dates for the employees.
Without admitting or denying the allegations, the defendants settled the SEC’s charges on the following terms:
Jewels, who resides in East Hampton, N.Y., is to pay a total of more than $450,000, made up of a penalty of $230,000, reimbursement to the company of $190,000 in cash bonuses she received during the period of the fraud, and disgorgement of ill-gotten gains from the sale of Sycamore stock of $30,000, plus prejudgment interest on the disgorgement. Jewels also will be barred from serving as an officer or director of a public company for five years, and prohibited from appearing or practicing as an attorney or accountant before the Commission for five years in a related administrative proceeding. She also consented to an injunction barring her from violating multiple provisions of the federal securities laws, including those prohibiting fraud, misleading of auditors, and making false statements in proxy and other public filings.
Kalinen, of Scottsdale, Ariz., is to pay a penalty of $150,000, plus disgorgement of ill-gotten gains of $28,000 plus prejudgment interest. She also consented to an injunction against violations of the antifraud and misleading-of-auditors provisions of the securities laws, among others.
Friedman, who resides in Boca Raton, Fla., is to pay a penalty of $40,000 and will be prohibited from appearing or practicing as an attorney before the Commission for two years in a related administrative proceeding. She also consented to an injunction against violations of the securities laws, including provisions prohibiting the misleading of auditors.
Sycamore consented to an injunction against several securities law violations, including the antifraud provisions. The settlement with Sycamore takes into account the company’s cooperation during the Commission’s investigation.