Securities Law Prof Blog

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

Tuesday, September 9, 2008

SEC Brings Backdating Charges Against Three Former Embarcadero Technologies Executives

The SEC charged three former senior executives of Embarcadero Technologies, Inc., alleging that they fraudulently backdated stock option grants to employees at the San Francisco business software company and reported false financial information to shareholders.  The Commission alleges that the former CEO, President and Chairman, Stephen R. Wong, the former CFO, Raj P. Sabhlok, and the former Controller, Michael C. Pattison, concealed millions of dollars in compensation expenses associated with valuable, “in-the-money” options secretly granted to company employees.

The Commission’s complaints, filed in federal district court in San Francisco, allege that Embarcadero routinely provided valuable options priced at below market prices to its employees. The Commission alleges that the three executives allowed Embarcadero to avoid reporting expenses for these options by backdating paperwork to make it appear as if the options had been granted on an earlier date, when the stock was trading at a lower price. According to the Commission’s complaints, Embarcadero made hundreds of backdated stock option grants during 16 consecutive quarters. As a result, the company significantly overstated its net income (or understated its net loss) from 2000 through 2005. In the year with the largest percentage impact, Embarcadero understated its net losses by more than 500 percent.  The SEC also alleges that all three executives participated in backdating grants and that Sabhlok and Pattison used false documents to support large option awards to themselves that were collectively “in-the-money” by almost $1.5 million.

Wong, without admitting or denying the Commission’s allegations, consented to a permanent injunction and also agreed to pay a $250,000 civil penalty.

The Commission seeks permanent injunctions, civil monetary penalties, and disgorgement against both Sabhlok and Pattison, and forfeiture of bonuses and stock sales pursuant to Section 304 of the Sarbanes-Oxley Act and an order barring against acting as an officer or director of a public company against Sabhlok.

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