June 1, 2007
SEC Files Securities Fraud Complaint Against Four Former Mercury Interactive Officers
The SEC filed a civil enforcement action alleging securities fraud against four former officers of Mercury Interactive, Inc. for their role in options backdating from 1997 to 2003, and for two defendants allegedly manipulating revenues. The defendants are former CEO Amnon Landan, two former CFOs, Sharlene Abrams and Douglas Smith, and the company's former general counsel, Susan Skaer (SEC Litigation Release here). The company, now a division of H-P after being acquired in 2006, settled the case by agreeing to pay a $28 million civil penalty. This comes on the heels of the Brocade Communications settlement of an options timing complaint for $7 million (see earlier post here), and in Mercury Interactive's case the accounting violations likely triggered the higher fine. One particularly notable piece of evidence cited by the SEC in its complaint (here) regarding the revenue recognition issue is a slide in a PowerPoint presentation prepared by Abrams that discussed how the company treated order backlogs that stated, "Our Hidden Backlog . . . What Any Analyst Would Love to Get Their Hands On!" This is probably worse than some of the e-mails we've seen in cases, regardless of whether there's an innocent explanation for the statement.
The role of Skaer as general counsel fits into a pattern seen with increasing frequency lately. The SEC -- along with federal prosecutors -- has shown a greater willingness to pursue charges against a company's lawyers, particularly in-house counsel, for their role as a gatekeeper who is responsible for ensuring the paper-flow is correct and that the requirements of the law are fulfilled. The number of general counsels accused of securities violations for options backdating continues to grow.
With the civil case filed, the next issue is whether federal prosecutors will file charges. The U.S. Attorney's Office for the Northern District of California has been looking at the company. The SEC's allegations of false filings, including knowing false certifications of the financial statements, is the type of violation that is more likely to trigger criminal charges. Whether the turmoil in the U.S. Attorney's Office explains why the Commission acted alone, or whether the decision was made not to pursue charges, is unknown at this point, but a criminal case can't be ruled out just yet. (ph)
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