Compensation

Option Dating, and Theft, Lead to $30M Charge

Eight years of mishandling the timing of stock option grants — and $6.3 million in outright options theft — will force Wireless Facilities to take ...
Marie LeoneAugust 20, 2007

Backdated stock options will force Wireless Facilities Inc. (WFI) to take a charge of between $30 million and $40 million, an internal review has concluded. Approximately $6.3 million of the amount relates to a fraud committed by the former stock options administrator, Vencent A. Donlan, the company said in an announcement.

The review that uncovered the fraud included analysis of more than 14,000 grants issued between September 1999 — two months before the company’s initial public offering — to the present. The company says the “material” charges, most of which stem from the improper dating and pricing of options rather than Donlan’s actions, will be reflected in restated financial results dating back to 1998, and up through September 30, 2006.

Donlan pleaded guilty to federal criminal charges brought against him by the U.S. Attorney’s Office, and consented to an injunction brought by the Securities and Exchange Commission. According to WFI, Donlan defrauded the company by illegally issuing and transferring 700,000 shares of WFI stock and stock options to an account in his name. The regulator also charges that Donlan or his wife exercised the options and sold the stock on the open market, realizing net proceeds of at least $7.7 million. The proceeds were then allegedly transferred or paid to other accounts.

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As WFI’s stock options administrator, Donlan managed the process by which the company distributed stock options to its officers, directors, and employees. In particular, Donlan had primary control over Equity Edge, the software program that WFI used to account for, and transmit information about, its stock options. WFI, which provides outsourced engineering and network services to the wireless communications industry, generates $350 million in annual revenues. In the year Donlan allegedly issued and transferred the shares and options, WFI’s stock price rose from a low of $6.89 to a high of $18.60

The internal investigation cleared the company’s current executive management team of any wrongdoing connected with stock option grants. Further, the company announced a remediation program to ensure that it now has controls in place to thwart schemes like the one Donlan has admitted to devising. For example, in January, the company discontinued, for the most part, the use of stock options as a form of equity compensation and instead issues restricted stock units on a limited basis. Any stock options that are issued, however, will be granted on the 15th of the month — except in unusual circumstances. WFI also has enhanced its documentation procedures and segregated duties related to option granting, and the execution of stock options exercise transactions.

WFI expects to file its delinquent annual report for 2006, as well as its late quarterly reports for the first and second quarters of 2007, on or before September 10. However, the filing delay may affect, inadvertently, another company’s efforts to play catch-up with its own tardy filings.

In June, LCC International acquired WFI’s engineering business in a $39-million all-cash transaction. LCCI has been having its own compliance problems, missing the file deadlines for its 2006 annual report and 2007 first quarter report. Indeed, WFI’s late financial statements could cause further delays at LCCI, which will likely need the updated financial statements of the newly-acquired engineering unit before it can complete its quarterly reports.

On Monday, LCCI received a delisting notice from Nasdaq for being out of compliance with the exchanges listing rules regarding timely filing of financial statements. LCCI reportedly needs more time to review and assess its internal controls over financial reporting, particularly the controls that related to revenue recognition.