Washington, D.C., July 12, 2007 – LAWFUEL – The Legal Newswire – The Securities and Exchange Commission today filed a civil injunctive action against Michael F. Shanahan, Sr. (Shanahan), the former Chief Executive Officer and Chairman of the Board of Engineered Support Systems, Inc., and his son, Michael F. Shanahan, Jr. (Shanahan Jr.), a former member of Engineered Support’s Compensation Committee of its Board of Directors, alleging that they participated in a fraudulent 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 complaint, Engineered Support employees and directors received approximately $20 million in unauthorized and undisclosed compensation as a result of the backdating, $16 million of which was received by top executives and directors. Shanahan personally profited from the backdating scheme by more than $8.9 million.
Linda Thomsen, Director of the Commission’s Division of Enforcement, said, “Our actions today demonstrate that the Commission will aggressively pursue individuals who are alleged to have engaged in fraudulent stock option granting practices to secretly enhance their own compensation.”
Merri Jo Gillette, Director of the Commission’s Chicago Regional Office, said, “Truthful disclosure of executive compensation is an important issue for shareholders. Concealing compensation and misleading shareholders in order to obtain approval for stock option plans will not be tolerated.”
The complaint alleges that, from 1997 through 2002, Shanahan and Shanahan Jr. approved the issuance of backdated stock options that coincided with historically low closing prices of Engineered Support’s common stock. The company’s stock options vested at the time of grant, providing the option recipients with instantly realizable compensation. In addition, the complaint alleges that, on at least two occasions, Shanahan approved the cancellation and reissuance of previously backdated Engineered Support stock options that had fallen out-of-the-money with new backdated grant dates and exercise prices, in order to bring them back in-the-money. The complaint also alleges that Shanahan granted additional Engineered Support stock options to non-employee directors in excess of authorized amounts, from which these directors profited by approximately $6 million. The complaint alleges that Shanahan Jr. profited by $379,738 from the receipt of unauthorized stock options.
As part of the scheme, Shanahan and Shanahan Jr. allegedly caused Engineered Support to misrepresent in its Forms 10-K, proxy statements, and registration statements filed with the Commission that all stock options had been and would be granted at the fair market value of the company’s common stock on the date of the award. The complaint also alleges that Engineered Support failed to report the additional compensation its executives had received through in-the-money option grants, and that the company failed to disclose the repricing of options that had fallen out-of-the-money, or the granting of stock options to non-employee directors in excess of authorized amounts.
The Commission’s investigation in this matter is continuing.