Thursday, July 26, 2007
The SEC sued computer chipmaker KLA-Tencor and its former CEO for options backdating that occurred primarily from 1999 to 2002, although there is alleged to be one award in 2005. The company settled the matter and, interestingly, there was no civil penalty and the allegations in the complaint (here) do not include any claims that the antifraud provisions were violated. Unlike other companies that had to pay millions of dollars as part of the settlement, KLA-Tencor is getting off fairly lightly with only a "sin no more" injunction prohibiting future violations of the recordkeeping provisions. Its former CEO, however, did not settle, and the SEC's separate complaint (here) against him alleges violations not only of the accounting and reporting requirements but also Rule 10b-5, the main antifraud provision. According to the SEC Litigation Release (here):
[T]he Commission charges that he repeatedly engaged in backdating after becoming CEO in 1999, including pricing large awards of options to himself that were "in the money" by millions of dollars -- a potential windfall never disclosed to KLA-Tencor's shareholders. According to the complaint, Schroeder received a legal memorandum in March 2001 cautioning that "the Board and its committees are limited in their ability to grant options at a retroactive price without exposing the company to risk of an accounting charge." The memo further warned that "[a]ny attempt to set a price before such a grant is made raises substantial risks under securities and tax laws [and] accounting rules and gives rise to disclosure obligations." The Commission alleges that Schroeder nonetheless continued to backdate options.
The company disclosed in May 2006 (here) that it had received grand jury subpoenas from the U.S. Attorney's Offices in Brooklyn and San Francisco, and it's not clear which office is controlling the investigation and whether any criminal charges are likely to follow the SEC complaint. (ph)