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Univ. of Toledo College of Law

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Monday, March 23, 2009

Former Mercury Interactive CFO Settles Backdating Charges with SEC

The SEC today settled civil fraud charges against Sharlene Abrams, a former Chief Financial Officer of Mercury Interactive, LLC, arising from an alleged scheme to backdate stock option grants and from other alleged misconduct.  The SEC previously charged Abrams and three other former senior Mercury officers with perpetrating a fraudulent and deceptive scheme from 1997 to 2005 to award themselves and other Mercury employees undisclosed, secret compensation by backdating stock option grants and failing to record hundreds of millions of dollars of compensation expense. The Commission's complaint alleges that during this period certain of these executives, including Abrams, backdated stock option exercises, made fraudulent disclosures concerning Mercury's "backlog" of sales revenues to manage its reported earnings, and structured fraudulent loans for option exercises by overseas employees to avoid recording expenses.

Without admitting or denying the allegations in the Commission's complaint, Abrams consented to the entry of a final judgment permanently enjoining her from violating and/or aiding and abetting violations of the antifraud, financial reporting, record-keeping, internal controls, false statements to auditors, securities ownership reporting and proxy provisions of the federal securities laws, and barring her from serving as an officer or director of a public company. Abrams will pay $2,287,914 in disgorgement, of which $1,498,822 represents the "in-the-money" benefit from her exercise of backdated option grants, and a $425,000 civil penalty. Under the terms of the settlement, Abrams' disgorgement of her "in-the-money" benefit—$1,498,822—would be deemed satisfied by her previous voluntary payment of that amount to Mercury. The settlement is subject to the approval of the United States District Court for the Northern District of California.

As part of the settlement, and following the entry of the proposed final judgment, Abrams, without admitting or denying the Commission's findings, has consented to the entry of Commission order, pursuant to Rule 102(e)(3) of the Commission's Rules of Practice, suspending her from appearing or practicing before the Commission as an accountant.

The Commission previously filed settled charges in this matter against Mercury and three former outside directors of Mercury. On May 31, 2007, the Commission filed civil fraud charges against Mercury based on the stock option backdating scheme and other fraudulent conduct noted above. Mercury, which was acquired by Hewlett-Packard Company on Nov. 8, 2006, after the alleged misconduct, settled the matter by agreeing to pay a $28 million penalty and to be permanently enjoined. See Litigation Release No. 20136 (May 31, 2007). On September 17, 2008, the Commission filed settled charges against three former outside directors of Mercury alleging that they 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. The outside directors settled the matter by consenting to permanent injunctions and the payment by each director of a $100,000 penalty. See Litigation Release No. 20724 (Sept. 17, 2008). Mercury and the outside directors settled the charges without admitting or denying the allegations in the Commission's complaint.

The Commission's litigation against the other senior Mercury officers is continuing.

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