Human Capital & Careers

Stock-option Manipulation at Mercury

CEO, CFO, and general counsel resign from the maker of business software.
Stephen TaubNovember 2, 2005

Mercury Interactive Corp. announced that three top executives have resigned after an internal investigation found a long history of manipulation of the company’s stock-option grants.

Chief executive officer Amnon Landan; executive vice president and chief financial officer Douglas Smith; and vice president, general counsel, and secretary Susan Skaer resigned after it was discovered that since 1995, there have been 49 instances in which the stated date of a Mercury stock-option grant is different from the date on which the option appears to have actually been granted.

In almost every instance, the company disclosed, the price on the actual grant date was higher than on the stated date. The incorrect reporting, noted a special committee of Mercury’s board, would have had the effect of reducing the executives’ taxable income significantly and exposing Mercury to possible penalties for failure to pay withholding taxes.

Mercury added that these practices involved the overwhelming majority of the grants between January 1996 and April 2002, and involved grants to all levels of employees. The intentional selection of a favorable price for option grants appears to have ended around that April, after which the company began to follow a different dating practice for grants.

In July, Mercury appointed a special committee to look into prior stock options grants. The company has also been the subject of an informal investigation by the Securities and Exchange Commission since last November.

Mercury named Anthony Zingale CEO, David Murphy senior vice president and CFO, and Brian Stein principal accounting officer.

According to the special committee, Landan, Smith, and Skaer were each aware of the options practices, and each of them participated in them and benefited from them to some degree.

Mercury also disclosed that a $1 million loan to Landan in 1999, which has since been repaid, did not appear to have been approved in advance by the board, and although it was referred to in some of the company’s public filings, it was not clearly disclosed at the time.

In addition, the special committee asserted in its report that with respect to option grants and exercises, Mercury’s internal controls and accounting controls were inadequate.

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