Another Settlement In the Mercury Interactive Option Backdating Case

The SEC settled another in its series of option backdating cases involving Mercury Interactive, LLC. SEC v. Mercury Interactive, LLC, Case No. 07-2822 (N.D. Cal. Filed May 31, 2007). This settlement is with the former CFO of the company, Sharlene Abrams.

According to the Commission’s complaint, Ms. Abrams, and three others engaged in a scheme to backdate options grants to themselves and others from 1997 through 2005. The complaint alleged that these options were a form of secret compensation which was not properly disclosed and for which the proper accounting charges were not taken.

In contract to most other option backdating cases, the complaint here also alleges financial fraud. The SEC claims that there was false disclosure during the same period regarding a backlog of sales revenue to managing earnings. The defendants are also alleged to have structured fraudulent loans for option exercises by overseas employees and to avoid recording expense.

To resolve the case, Ms. Abrams consented to the entry of a permanent injunction prohibiting future violations of the antifraud, reporting and proxy provisions. She also agreed to the entry of an order requiring the payment of about $2.2 million in disgorgement, along with prejudgment interest. Approximately $1.4 million of that amount represents the in-the-money component of the exercised options. Ms. Abrams previously returned this amount to the company. Ms. Abrams will also pay a civil penalty of $425,000, be barred from being an officer or director of a public company and consented to the entry of an order in an administrative proceeding under Rule 102(e)(3) barring her from appearing or practicing before the SEC as an accountant.

The SEC has entered into other settlements stemming from the option backdating practices at Mercury Interactive as discussed here and here. The Commission is also litigating with others related to this matter.