Human Capital & Careers

Tech Company Founders on Options Timing

Foundry Networks strips its CFO of financial responsibilities and unseats its CEO from the chairmanship, but both will remain with the company.
Stephen TaubJanuary 23, 2007

Backdated options have claimed another career.

Following an internal investigation, Foundry Networks announced that vice president for finance and administration and chief financial officer Timothy D. Heffner has been demoted to vice president of corporate development. His new role will not involve accounting or financial reporting responsibilities, the company stressed.

Heffner will be succeeded in the top finance slot by vice president, corporate controller, and principal accounting officer Daniel W. Fairfax.

The maker of computer hardware also announced that it has split the positions of chairman and chief executive officer. Bobby Johnson Jr. will retain the titles of president and CEO, and he will remain on the board, which will now be chaired by Alfred J. Amoroso.

In addition, the special committee that looked into Foundry’s stock-option practices determined that for fiscal years 1999 through 2005, the company had unrecorded non-cash equity-based compensation charges associated with its equity incentive plans. Foundry plans to record a pre-tax charge of between $185 million and $205 million for that period.

The committee and its advisors reviewed grants made on 107 dates from September 1999, when the company’s stock was first traded publicly, and May 31, 2006. “In some instances, documents, data and interviews suggest that the option grant was prepared or finalized days or, in some cases, weeks after the option grant date recorded in the company’s books,” Foundry disclosed.

The company elaborated that in a substantial number of cases, Johnson selected the grant dates for options and approved grants after the dates were recorded. Foundry stressed, however, that Johnson received no options in connection with those grants, and that it found no evidence that Johnson was advised that the company’s stock-option practices might lead to a misstatement of the company’s financial results.

Although Heffner, the former CFO, did not select grant dates, the special committee found that he was involved in the granting process by, among other things, communicating option grants determined by Johnson to the company’s stock option administrators and human resources group. In addition, Heffner received a limited number of stock options for which the measurement dates will be modified, according to the company.

Heffner has agreed to repay the company about $162,000 in connection with two options he exercised; that figure represents the net after-tax difference between the original exercise price and the price on the corrected measurement dates. He also agreed that any unexercised options which he holds will also be repriced accordingly.

The company added that a number of non-management directors exercised similar options have also agreed to repay the company a total of $86,000.