Mercury Interactive Ex-CFO Is Indicted

Federal tax-evasion and other charges, related to stock-option backdating, filed against Sharlene Abrams.
Stephen TaubApril 22, 2008

The former CFO of Mercury Interactive Corp. was indicted on charges stemming from the company’s stock-option backdating scheme.

Sharlene P. Abrams was charged with one count of income tax evasion and two counts of aiding and assisting in the preparation of false tax returns for two other Mercury executives, according to U.S. Attorney Joseph P. Russoniello.

This is the first case in northern California charging an individual with criminal tax violations in connection with an alleged stock options backdating scheme. On Monday, the Internal Revenue Service filed a criminal complaint
accusing Abrams of tax evasion.

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According to the indictment, Abrams orchestrated the backdating of stock-option exercise dates for herself, then-Mercury CEO Amnon Landan, and then-COO Kenneth Klein, reducing the income taxes due on the gains realized by the exercises in April, May, and August 2001. Abrams also allegedly searched for low points in the price of Mercury stock and backdated the exercises to those dates.

An attorney for Abrams, who hadn’t any comment for the article yesterday, didn’t immediately return a call from today.

The U.S. attorney pointed out that federal tax laws require the payment of ordinary income tax on gains realized on the exercise of non-qualified stock options. Thus, if a person exercises non-qualified stock options, purchasing stock at a lower price than fair market value on that date, the difference between the purchase price and fair market value is taxed as ordinary income.

Although federal law typically doesn’t require payment of ordinary income tax upon the exercise of incentive stock options, the difference between fair market value and the exercise price is included in alternative minimum tax income, which may trigger the imposition of the alternative minimum tax. Profits from the sale of shares received through an exercise of incentive stock options may qualify to be taxed at the long-term capital gains rate, which is more favorable than regular income tax rates, provided other conditions are met.

The maximum penalty for each count of tax evasion is five years in prison and a $250,000 fine. The maximum for each count of aiding and assisting in the preparation of a false tax return is three years and a $250,000.

Abrams is not the first individual to be indicted on tax evasion charges related to the backdating scandal.

Back in July, the U.S. attorney for the District of Massachusetts charged Robert J. Therrien, former president and CEO of software maker Brooks Automation, with tax evasion for his conduct in connection a November 1999 option transaction.

Separately, the Securities and Exchange Commission filed civil fraud charges against Therrien, alleging that he received millions of dollars in undisclosed compensation by fraudulently backdating the exercise of an option to purchase company stock. The regulator also accused Therrien of engaging in a broader fraudulent scheme to grant himself and other Brooks employees and executives undisclosed, in-the-money stock options. The SEC claimed he earned more than $10 million from his fraudulent conduct.

Also last July, Vencent A. Donlan, the former stock options administrator at Wireless Facilities Inc., pleaded guilty to federal fraud and tax charges relating to stock he fraudulently obtained from WFI during his employment.

In the plea agreement, Donlan admitted that between November 2002 and November 2003 he used his position as WFI’s stock option administrator to issue without authorization 728,229 shares of WFI stock to a brokerage account he controlled, and that he sold the stock for a net gain of $6,252,794. He also admitted that he evaded paying $2,202,917 in federal income taxes for the calendar years 2002 and 2003 by failing to declare the income he derived from the fraudulent WFI stock sales.