Thursday, February 8, 2007
The SEC filed a civil securities fraud complaint (here) against two former financial executives at Engineered Support Systems, Inc. alleging that they backdated options over a six-year period. Gary C. Gerhardt is the former CFO and Steven J. Landmann is the former Controller, and they are accused of backdating options worth over $15 million for senior executives at the company. The Commission alleges that Gerhardt and Landmann personally profited by $1,906,300 and $518,972 respectively. Landmann settled the case and agreed to pay disgorgement of $518,972, prejudgment interest of $108,099, and a civil penalty of $259,486, along with a permanent bar from serving as an officer or director of a public company. Gerhardt did not settle and appears to be fighting the civil action. According to the SEC's Litigation Release (here):
The complaints allege that, from 1997 through 2002, Gerhardt instructed Landmann to backdate company stock option grants to coincide with historically low closing prices of Engineered Support's common stock. The company's stock options vested at the time of grant, allowing the option recipients to obtain immediate cash profits. In addition, the complaints allege that, on at least two occasions, Gerhardt ordered Landmann to cancel previously issued Engineered Support stock options that had fallen out-of-the-money and to reissue them with new backdated grant dates and exercise prices, to bring them back in-the-money. The complaints also allege that Gerhardt directed Landmann to issue additional Engineered Support stock options to nonemployee directors in excess of authorized amounts, from which these directors received a total gain of approximately $6 million.
As part of the scheme, Gerhardt and Landmann allegedly caused Engineered Support to misrepresent in its Forms 10-K and proxy statements filed with the Commission that all stock options were granted at the fair market value of the stock on the date of the award. Engineered Support also failed to report the additional compensation its executives had received through in-the-money option grants. In addition, the company failed to disclose the repricing of options that had fallen out-of-the-money, or the granting of stock options to nonemployee directors in excess of authorized amounts.