Blue Coat Systems and Former CFO Settle Charges of Stock Option Backdating

Washington, D.C., Nov. 12, 2008 (LAWFUEL) – The Securities and Exchange Commission today charged Sunnyvale, Calif., network security company Blue Coat Systems, Inc. and its former chief financial officer Robert P. Verheecke, alleging that they backdated stock option grants to executives and employees and reported false financial information to shareholders.

The SEC’s complaint alleges that from approximately 2000 through 2005, Blue Coat concealed nearly $50 million in compensation expenses associated with valuable “in-the-money” options by backdating paperwork to make it appear as if the options had been granted on earlier dates. Blue Coat and Verheecke have agreed to settle the SEC’s charges without admitting or denying the allegations. Verheecke will pay more than $185,000 in disgorgement, penalties, and prejudgment interest.

“As Blue Coat’s chief financial officer, Verheecke was responsible for ensuring the integrity of the company’s financial statements. Verheecke, however, caused Blue Coat to report inflated results to investors and provided misleading documents to Blue Coat’s independent auditors,” said Marc J. Fagel, Regional Director of the SEC’s San Francisco Regional Office.

The SEC’s complaint, filed in federal court in San Jose, alleges that Blue Coat regularly used hindsight to select favorable exercise prices for employee and officer stock option grants without accurately reporting the grants to investors. Blue Coat was required to record an expense for options issued at below-market prices (“in-the-money” options). In order to avoid these expenses, Blue Coat allegedly identified dates on which its stock was trading at historically low prices, then created documents making it look like options had been granted on those earlier dates. In March 2007, after an internal investigation, Blue Coat corrected its financial statements for fiscal years 2000 through 2005, recording nearly $50 million in additional expenses for misdated options. The majority of the expenses related to grants prior to May 2001.

Verheecke, of Palo Alto, Calif., served as CFO from May 2001 through May 2005. According to the SEC’s complaint, at various times Verheecke used hindsight to pick stock option grant dates, prepared or distributed misleading option paperwork, and approved Blue Coat’s false and misleading financial statements and SEC filings. The SEC alleges that Verheecke personally exercised backdated options for $30,000 in excess profits.

Without admitting or denying the SEC’s allegations, Verheecke consented to a permanent injunction against fraud and other violations of the federal securities laws, disgorgement and prejudgment interest of $35,946, a financial penalty of $150,000, and five-year bars from serving as an officer or director of a public company and appearing or practicing as an accountant before the SEC. Blue Coat consented to be enjoined from violating the antifraud and other provisions of the federal securities laws. The Commission took into account the cooperation that Blue Coat provided Commission staff during its investigation.

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