Wednesday, February 21, 2007
A dismissed complaint in a shareholder derivative suit against Mercury Interactive related to options backdating at the company shows once again the perils of writing things in e-mails that can come back to haunt you. Mercury Interactive is now a subsidiary of Hewlett-Packard, and the California superior court dismissed the case alleging breaches of various state law fiduciary duties because the shareholders no longer have standing to pursue the derivative claim. The complaint was sealed, but somehow the Wall Street Journal obtained a copy (available here), and it details e-mail discussions of setting the options strike prices on particularly favorable dates. Even worse, one e-mail states that to accomplish their goals an officer may need to "use her magic backdating ink." (see paragraph 45 of the complaint)
What on earth would possess someone to write something so stupid? The parties to the e-mail are lower-level employees, but other e-mails involving senior officers indicate an awareness of the effect of the rising stock price on the value of options, and the eventual backdating of them to secure greater benefits to the recipients. The notion that e-mails do not "exist" seems to perdure because people continue to write the darnedest things in them -- recall the "I shouldn't have asked" e-mail from Hewlett-Packard's chief ethics officer about pretexting. More importantly, e-mail traffic can be potent evidence of a person's intent at the time of a transaction because it is usually contemporaneous with the conduct being investigated.
H-P announced the buy-out of Mercury Interactive in July 2006, just as the options backdating investigations kicked into high gear, and it does not appear that there is an ongoing criminal investigation of the company or its officers, at least a publicly-disclosed one. The SEC has been investigating the backdating for a while now. There may be greater involvement from the criminal side in the near future because talk about "magic backdating ink" does not bode well for those involved in the options issuance, even if the company not long exists as an independent entity. (ph)
UPDATE: An article in The Recorder (here) notes the source of the complaint that had been under seal: "A fourth-year associate at Orrick, Herrington & Sutcliffe inadvertently disclosed a sensitive document about stock option backdating that the firm has spent the last five months fighting to keep under seal." It can't be a good day for that lawyer, although the complaint sat in a file at the courthouse for four months and only emerged on Friday, Feb. 16. (ph)