Former CFO of SafeNet Guilty of Securities Fraud

LAWFUEL – The Legal Newswire – MICHAEL J. GARCIA, the United States Attorney for the Southern District of New York, announced that CAROLE ARGO, the former Chief Financial Officer of Maryland-based software
information security products and services provider SafeNet, Inc.
(“SafeNet”), pleaded guilty today to securities fraud in
connection with the backdating of millions of dollars’ worth of
employee stock option grants at SafeNet. ARGO, 46, of Baltimore,
Maryland, pleaded guilty in Manhattan federal court before United
States District Judge JED S. RAKOFF.

According to the Indictment to which ARGO pleaded:
Between 2000 and 2006, ARGO and others engaged in an illegal scheme to deceive SafeNet’s Board of Directors, shareholders, and auditors, as well as securities analysts, the Securities and Exchange Commission (“SEC”), members of the investing public and others, concerning SafeNet’s systematic backdating of stock options grants and SafeNet’s failure to record and report compensation expense in connection with those grants.

A stock option typically gives its holder the right to
buy a share of stock at a future date at a set price, known as
the “exercise” or “strike” price. Companies frequently grant
stock options to employees as a retention measure and performance
incentive. Options with an exercise price equal to the current
trading price of the underlying stock on the date of the option
grant are commonly referred to as being “at-the-money”; options
with an exercise price below the current trading price of the
stock are “in-the-money.” During the relevant time period,
applicable accounting principles required SafeNet to record a
compensation expense, and reduce its earnings accordingly, where
employee stock options were issued in-the-money. The compensation expense required to be recognized was the difference
between the strike price and the value of the stock on the grant.
ARGO and her co-conspirators routinely backdated
options grants by papering them as if they had been issued on
historical “grant dates” — selected by ARGO and her coconspirators
— when SafeNet’s stock price had closed at or near
a periodic low point. With the benefit of hindsight, ARGO
created an opportunity for herself and others at SafeNet to reap
substantial benefits by awarding herself and others backdated
options grants with particularly advantageous exercise prices.
As a result, a substantial number of SafeNet’s options grants
during this time period were actually in-the-money on the day
they were granted and, therefore, had both an immediate
compensatory value to the recipient and generated an obligation
on Safenet’s part to report a corresponding expense.
Because the options fraudulently appeared to have been
issued at the fair market price on a purported grant date, they
appeared not to require a charge to SafeNet’s earnings. Instead
of disclosing this information and properly expensing the in-themoney
portion of those options grants, ARGO and her coconspirators
— by backdating options and failing to record and
report an expense for those options — used options as “free”
compensation that did not result in a reduction in the company’s

ARGO and their co-conspirators concealed their options
backdating practices from Safenet’s shareholders and outside
auditors, as well as securities analysts, the SEC, and members of
the investing public. In addition, ARGO and her accomplices
failed to properly account for Safenet’s backdated, in-the-money
options grants as a compensation expense in Safenet’s public
filings with the SEC. As a result, ARGO and her co-conspirators
caused SafeNet to report materially false and misleading
financial results in public filings with the SEC for the period
from 2000 through mid-2006. Indeed, in public filings, SafeNet
stated, “No gain to the options is possible without stock price
appreciation, which will benefit all shareholders. If the stock
price does not increase above the exercise price, compensation to
the named executive will be zero.”

During the period charged in the Indictment, ARGO and
others backdated numerous grants to newly hired employees and new
employees from SafeNet’s acquisition of other companies. Instead
of granting these options as of the date of hire as required by
SafeNet’s governing policy, ARGO and others waited until the end
of a reporting period to issue these grants, allowing pending
grants to accumulate so that ARGO or others acting at her
direction could select “grant dates” with low exercise prices.
Similarly, with regard to grants to existing SafeNet
employees, including ARGO and other senior executives, ARGO,
together with others, backdated stock options grants to days when
SafeNet’s stock was trading at or near periodic low points. On
certain occasions, after SafeNet’s Compensation Committee or
Board of Directors had met and agreed to a grant and communicated
to senior management the number of options to be granted to
specific individuals, ARGO and others acting in concert with her
“pocketed” the grant until a later time and then looked back to
select a date with a particularly low share price. By acting in
this manner, ARGO and her co-conspirators manipulated the “grant
date” on the options to give herself and others a particularly
fortuitous exercise price.

The Indictment describes eight specific occasions on
which ARGO and her co-conspirators backdated options grants to
give herself and/or others substantial benefits. SafeNet did not
properly record or report a compensation expense for the first
six of these grants, and only accounted for the latter two grants
after SafeNet’s outside auditors and internal accountants
discovered the backdating.

ARGO pleaded guilty to one count of securities fraud.
ARGO admitted to backdating options grants at Safenet,
specifically the option grants to herself and the CEO dated
October 1, 2001 and certain subsequent grants, and failing to
record compensation expenses for those backdated option grants.
Also, in admitting to signing and certifying public SEC filings
which included inaccurate compensation expenses for those
backdated option grants, ARGO said she “acted willfully and with
the intent to defraud.” The charge carries a maximum penalty of
20 years’ imprisonment and a $5 million fine. ARGO will be
sentenced by Judge RAKOFF on January 21, 2007, at 4 p.m.

Mr. GARCIA, a member of the President’s Corporate Fraud
Task Force, praised the investigative work of the United States
Postal Inspection Service and thanked the SEC for its assistance
in this matter.

For information regarding further proceedings in this
case, interested parties and victims may consult the following
Assistant United States Attorneys JOSHUA GOLDBERG and
DEIRDRE McEVOY are in charge of the prosecution.
07-241 ###

(212) 637-2600

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