Former SafeNet CFO Faces Fraud Charges

The Department of Justice charges that a former CFO – who now faces a maximum 25-year prison sentence – backdated options grants for six years with...
Stephen TaubJuly 26, 2007

The former chief financial officer of SafeNet has been charged with securities fraud and conspiracy for backdating of millions of dollars’ worth of employee stock options grants. Carole Argo faces a maximum sentence of 25 years in prison, and a maximum fine on each count of the greater of $250,000, or twice the gross gain or loss resulting from the crime, according to an announcement from Michael Garcia, the United States Attorney for the Southern District of New York.

Between 2000 and 2006, Argo and others engaged in an illegal scheme to deceive SafeNet’s board of directors, shareholders, auditors and regulators concerning the company’s systematic backdating of options grants, charges the indictment. In addition, SafeNet failed to record and report compensation expenses related to the backdated grants, says the U.S. attorney.

Federal prosecutors noted that accounting principles – specifically FAS 123R – requires SafeNet to record a compensation expense, and reduce earnings accordingly, when stock options are issued “in-the-money.” To be sure, if the options were backdated to give them immediate value, the company is required to recognize the difference between the option’s strike price and the value of the stock on the grant date on its balance sheet.

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By failing to properly record and report the in-the-money options grants, Argo caused SafeNet “to report materially false and misleading financial results” from 2000 through mid-2006, according to the charges. The Justice Department further alleged that Argo and others backdated numerous grants to newly-hired employees, as well as employees brought on board when SafeNet acquired other companies. Indeed, the indictment describes eight specific occasions on which Argo and others backdated options grants to give herself and others substantial benefits.

According to Garcia, Argo and others routinely backdated options grants by assigning historical “grant dates” retroactively, to reflect a date when SafeNet’s stock price had closed at or near a periodic low point. “With the benefit of hindsight, she created an opportunity … to reap substantial benefits by awarding herself and others backdated options grants with particularly advantageous exercise prices,” noted Garcia’s announcement. As a result, a substantial number of SafeNet’s options grants made during this time period were in-the-money on the day they were granted, and therefore should have triggered a compensatory expense, explained Justice Department.

“Corporate executives who deliberately backdate options grants and skew their books to hide compensation expenses are misleading shareholders and investors about the earnings of the company and painting a false picture of executive pay,” said Garcia. “The defendant was placed in a position of trust and was obligated to perform her duties in the interests of SafeNet, its employees, and, of course, investors. Instead, these charges indicate she and her co-conspirators thought only for themselves.”