Human Capital & Careers

Ex-CFO at Defense Contractor Indicted

Allegedly defrauded Engineered Support Systems and its shareholders by backdating stock options on at least eight occasions between 1996 and 2002.
Dave Cook and Stephen TaubMarch 27, 2007

Gary Gerhardt, former chief financial officer of Engineered Support Systems Inc. (ESSI), was charged with 10 counts of securities fraud in connection with backdated stock options, according to Michael Reap, First Assistant U.S. Attorney for the Eastern District of Missouri.

The former finance chief, who served as CFO from 1993 and as a director from 1998 until January 2006, is the tenth ESSI executive to face criminal charges in the defense contractor’s stock-option scandal. His indictment was returned on March 15 but remained sealed until March 26.

The former finance chief was charged with one count of falsifying books and records, four counts of making false statements in Securities and Exchange Commission filings, two counts of mail fraud, two counts of wire fraud, and one count of conspiracy. Each count carries a maximum penalty of at least 5 years imprisonment.

The indictment alleges that Gerhardt and others defrauded ESSI and its shareholders by backdating stock options on at least eight occasions between 1996 and 2002. The backdating “diluted shareholders’ profits and deprived the public of accurate information regarding the company’s earnings and its executive’s compensation,” according to the U.S. Attorney.

ESSI was acquired by DRS Technologies in February 2006.

Earlier this month, former ESSI controller Steven Landmann pleaded guilty to one count of making false statements. He faces a maximum penalty of five years in prison and a fine of $250,000 when he is sentenced on May 25.

Gerhardt and Landmann were also the subject of a parallel civil proceeding brought last month by the SEC. According to the commission, ESSI employees and directors received about $20 million in unauthorized compensation as a result of the backdating, $15 million of which was received by top executives and directors. Gerhardt personally profited by $1,906,300, and Landmann, by $518,972, the agency alleged.

SEC charges are pending against Gerhardt. As for Landmann: without admitting or denying the charges, last month he agreed to pay disgorgement of $518,972, prejudgment interest of $108,099, and a civil penalty of $259,486. He also agreed to a permanent officer-and-director bar, a permanent suspension from appearing or practicing before the commission as an accountant, and a permanent injunction against further violations of the relevant securities laws.

An attorney for Gerhardt could not immediately be reached for comment.

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