LAWFUEL – Legal Newswire – MICHAEL J. GARCIA, the United States Attorney for the Southern District of New York, announced that CAROLE D. ARGO, the
former Chief Financial Officer of Maryland-based software
information security products and services provider SafeNet, Inc.
(“SafeNet”), was sentenced today to six months in prison and
ordered to pay a fine of $1 million in connection with her
participation in a scheme involving the backdating of millions of
dollars’ worth of employee stock option grants. ARGO, who
pleaded guilty to one count of securities fraud on October 5,
2007, was sentenced in Manhattan federal court by United States
District Judge JED S. RAKOFF. According to the Indictment filed
in Manhattan federal court and statements made during ARGO’s
guilty plea proceeding:
Between 2000 and 2006, ARGO and others engaged in an
illegal scheme to deceive SafeNet’s Board of Directors,
shareholders, and auditors; securities analysts; the Securities
and Exchange Commission (the “SEC”); and members of the investing
public, concerning SafeNet’s systematic backdating of options
grants and SafeNet’s failure to record and report compensation
expense in connection with those backdated stock options 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 (the difference between the strike price and
the value of the stock on the date of the grant), and reduce its
earnings accordingly, where employee stock options were issued
in-the-money.
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
earnings.
ARGO and her 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.
In addition to the prison term and fine, RAKOFF
sentenced ARGO to three years of supervised release.
ARGO, 46, lives in Baltimore, Maryland.
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.
Assistant United States Attorneys JOSHUA GOLDBERG and
DEIRDRE McEVOY are in charge of the prosecution.
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