Securities Law Prof Blog

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

Wednesday, September 17, 2008

Former Outside Directors Of Mercury Settle Backdating Charges

Three former outside directors of Mercury Interactive, LLC settled SEC charges related to backdating stock options.  The SEC alleged that Igal Kohavi, Yair Shamir, and Giora Yaron recklessly approved backdated stock option grants and reviewed and signed public filings that contained materially false and misleading disclosures about the company’s stock option grants and company expenses. Without admitting or denying the allegations in the SEC’s complaint, Kohavi, Shamir and Yaron agreed to permanent injunctions, and each will pay a $100,000 financial penalty to settle the charges.

Kohavi, Shamir and Yaron served on the board of directors of the company from 1997 through 2005 and served on its compensation and audit committees from at least 1997 to 2002.  According to the SEC's complaint: senior management engaged in a fraudulent scheme that involved the backdating of 45 stock option grants to employees and executives from as early as 1997 to April 2002.   Kohavi, Shamir and Yaron approved 21 of those grants at the recommendation or with the direct participation of senior Mercury management, even though the directors were aware that under Mercury’s stock option plan, options were required to be priced at the closing price of the company’s stock on the day that they approved the grant of options and knew that options with an exercise price lower than the price on the date the options were actually approved created a compensation expense. Nevertheless, the directors repeatedly signed unanimous written consents and approved board meeting minutes despite being presented with numerous facts and circumstances indicating that management was backdating option grants.

The SEC previously filed civil fraud charges in federal district court against Mercury and four of its former senior officers – former Chairman and Chief Executive Officer Amnon Landan, former Chief Financial Officers Sharlene Abrams and Douglas Smith, and former General Counsel Susan Skaer – based on the officers’ stock option backdating scheme.   Mercury settled the matter by agreeing to pay a $28 million penalty and to be permanently enjoined. Litigation against the four individuals is ongoing.

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