Another Settled Option Backdating Case

The SEC continued to reduce its inventory of option backdating cases, filing another settled action on Wednesday. SEC v. Sycamore Networks, Inc., Civil Action No. 1:08-CV-11166 (D. Mass. July 9, 2009). The complaint names as defendants Sycamore Networks, Inc., an optical networking company, its former CFO Frances M. Jewels, former Director of Financial Operations Cheryl E. Kalinen and former Director of HR Robin A. Friedman.

According to the Commission’s complaint, between 2000 and 2005 Sycamore used backdated options to compensate employees, without properly accounting for about $250 million in related expenses. From shortly before the IPO for the company in October 1999, Frances Jewels had authority to approve option grants to all non-officers of the company. Cheryl Kalinen worked closely with defendant Jewels and was responsible for overseeing the stock option program.

Between October 1999 and July 2002 Defendants Jewels and Kalinen repeatedly backdated option grants, providing themselves and employees with options with prices at which they could purchase shares which were lower than the market price at the time the options actually were granted. To conceal these practices, the two falsified grant approval documentation and concealed the practices. Defendant Friedman participated in the scheme by altering or creating company personnel and payroll records so that they would reflect inaccurate start dates for the employees.

On September 12, 2005, and again on June 21, 2007, Sycamore restated its financial results for fiscal years 2000 through 2005 to include the additional stock compensation expenses related to various options. As a result of its option backdating practices, Sycamore materially overstated its pre-tax net income or understated pre-tax net losses in various Commission filings as follows: in fiscal year 2000, a reported net income became a net loss; and, in fiscal years 2001, 2002, 2003, 2004 and 2005, reported net losses were increased by approximately 30%, 9%, 36%, 34%, and 21%, respectively.

To settle the case:

? Sycamore consented to the entry of a permanent injunction prohibiting future violations of the antifraud, reporting and proxy provisions of the federal securities laws. According to the Commission, this resolution reflected the cooperation of the company.

? Defendant Jewels consented to the entry of a permanent injunction prohibiting future violations of the antifraud and reporting provisions. She also consented to the entry of an order requiring the payment of disgorgement of $30,000, plus prejudgment interest. The order also includes a directive that Sycamore be reimbursed under SOX Section 304 the $190,000 in cash bonuses she received during the period of the fraud and that Ms. Jewels pay a civil penalty of $230,000. Under the order, Ms. Jewels will be barred from serving as an officer or director of any public company for five years. In a related administrative proceeding, she was barred from appearing or practicing before the Commission as an attorney or accountant for a period of five years.

? Defendant Kalinen consented to the entry of a permanent injunction prohibiting future violations of the antifraud and reporting provisions. In addition, she consented to the entry of an order directing the payment of $28,000 in disgorgement plus prejudgment interest and the payment of a civil penalty of $150,000.