Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, July 9, 2008

Sycamore Networks and Three Former Executives Settle Backdating Charges

The SEC filed a settled civil enforcement action against Sycamore Networks, Inc., an optical networking company, and its former Chief Financial Officer Frances M. Jewels, former Director of Financial Operations Cheryl E. Kalinen, and former Director of Human Resources Robin A. Friedman in connection with the backdating of stock options to employees over several years and the failure to disclose options-related expenses to the company's auditors and investors.

The SEC alleged that Sycamore's unreported options-related expenses during its fiscal years 2000 through 2005 totaled nearly $250 million. The complaint further 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 complaint describes an internal memorandum that outlines a plan to grant options at below-market prices to five company employees and keep the company's outside auditors from discovering these grants. The memo, drafted by Kalinen and provided to Jewels and Friedman, analyzed the risk that the company's outside auditors would uncover the conduct. Friedman participated in the plan 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, according to the Commission's complaint.

All defendants have agreed to settle this matter, without admitting or denying the allegations in the Commission's complaint.  Jewels will disgorge ill-gotten gains of $30,000 (plus prejudgment interest on that amount of $4,980.04), reimburse Sycamore (pursuant to Section 304 of the Sarbanes-Oxley Act of 2002) for $190,000 in cash bonuses she received during the period of the fraud, and pay a civil monetary penalty of $230,000. Jewels also will be barred from serving as an officer or director of any public company for a period of five years, and, in a related administrative proceeding, will be prohibited from appearing or practicing before the Commission as an attorney or accountant for a period of five years.  Kalinen will disgorge ill-gotten gains of $28,000 (plus prejudgment interest on that amount of $7,060.71) and pay a penalty of $150,000.  Friedman will pay a penalty of $40,000.  Sycamore consented to the entry of a permanent injunction against future violations.  The SEC's release states that the settlement with Sycamore takes into account the company's cooperation during the Commission's investigation.

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