Attorney Error Discloses Backdating Docs

The complaint alleges that four former Mercury executives “grossly enriched themselves at the expense of Mercury by granting themselves (and their colleagues) millions of underpriced options to purchase Mercury stock.”

The complaint, by Lerach Coughlin Stoia Geller Rudman & Robbins partner Amber Eck, alleges that Skaer, Smith, former CFO Sharlene Abrams and former COO Kenneth Klein caused the company “to improperly pay out $164 million to themselves in unwarranted stock-option based compensation.” The complaint states that $54 million of that $164 million is directly attributable to backdating.

It also states that Mercury spent $70 million in attorneys fees investigating its stock option backdating problem.

COVER-UP ALLEGED

Mercury was one of the first companies to publicly admit problems with its options grants. The company was forced to restate earnings by $570 million following an internal investigation. Its board of directors took the rare step of joining plaintiff lawyers in a shareholder suit seeking damages from ousted executives. That changed after Hewlett-Packard Co. announced it had acquired the company last year.

The complaint accuses all four former executives of acting improperly. As for former GC Skaer, it alleges that she “created and falsified documents regarding the backdated options, personally selected backdating dates based on stock price, took minutes in the board and committee meetings where backdating was discussed, and was involved in covering up the backdating.”

In one instance, Skaer was granted 25,000 options and Smith got 400,000 at a Feb. 12, 2002, board meeting. The options were backdated to Nov. 2, 2001, when the stock was trading some $12 lower. “This difference � equates to a $4.8 million benefit to Smith, and a $303,500 benefit for Skaer,” the complaint alleges.

Smith had begun lobbying for a low strike price in October 2001, when he sent an e-mail to CEO Landon with a blind copy to Klein, stating, “[A]ssume a $25 strike for new options (could we go back to the lows??). �” The board voted to grant Smith his 400,000 options on Nov. 6, 2001, but put off pricing the grant because by then the company’s stock was trading above the price Smith had suggested, according to the complaint.

“What do you want to do about Doug’s option since the price is going up,” Skaer e-mailed CEO Landon on Nov. 14. “Keep waiting?” The next month, Smith himself sent Skaer an e-mail proposing various dates that could be chosen, according to the complaint.

On Jan. 11, 2002, Landon e-mailed the compensation committee members, with a “cc” to Skaer, asking them to fax their “unanimous written consent” for the option grants to Skaer. The consent forms were dated Nov. 5, 2001, according to the complaint. The committee members faxed the forms to Skaer’s office, but either Skaer or “someone at her direction” altered the forms by whiting out the Jan. 20, 2002, fax dates at the top of the pages, according to the complaint.