Human Capital & Careers

Sycamore Blames Ex-CFO for Misdated Options

An audit committee probe will tack on a $215.6 million expense to the fiber optic switch maker's financials.
Stephen Taub and David KatzJune 6, 2007

A Sycamore Networks audit-committee probe that found that a former CFO and other ex-finance officials deliberately altered the measurement dates of stock option grants will result in a restatement that will add a non-cash expense of about $215.6 million covering fiscal years 2000 through 2007, the company reported on Tuesday.

The 2006 audit committee investigation “identified evidence suggesting that the recorded grant dates for a significant number of these options were deliberately altered, with the effect of obtaining more favorable exercise prices for the grantees,” according to a release by the fiber optic switch maker. The audit committee found that a former CFO, a former director of financial operations, and a number of people who reported to them were responsible for the changes. Those officials left the company before the beginning of a previous investigation in 2005 for reasons unrelated to the stock-options investigation, the company reported.

Although the company did not provide the names of the officials in its press release, the ex-CFO is apparently Frances Jewels, who resigned from Sycamore as finance chief in 2004. In a wrongful-termination suit filed last year against Sycamore, former HR director Stephen Landry claimed that shortly after he was hired in October 1999, Jewels reportedly instructed him to change employees’ hire dates so that they could receive stock options with lower strike prices. Neither Jewels nor her attorney in the case could be reached at presstime.

The audit committee also concluded that all measurement dates associated with stock-option grants issued to current CFO Richard J. Gaynor and to its board members were correct. The company also stressed that chairman Gururaj Deshpande and president and chief executive Daniel E. Smith have never received stock options from the company.

Sycamore reported that 97 percent of the estimated $215.6 in extra expense was recorded for the periods through the fiscal year ending July 31, 2004. In August 2005, the audit committee completed a prior probe that had unearthed certain stock options granted between 1999 and 2001 that were erroneously accounted for, forcing it to take a non-cash stock-compensation expense of about $33.8 million.

In June 2006, the committee launched a second probe into Sycamore’s stock-option practices and related accounting issues after an ex-employee provided information about the timing of his 1999 new-hire option grant. The committee’s second probe was also motivated by the company’s discovery of information not known to exist at the time of the 2005 restatement.

In September 2006, Sycamore announced that the appropriate measurement dates for certain stock option grants differed from the originally recorded grant dates and that its financials for previous periods and its earnings releases and similar communications shouldn’t be relied upon.

In its latest report, the company reported that the audit committee also concluded that before the 2005 probe, no member of current management or the board was aware of improprieties concerning the administration of Sycamore’s stock-option program or that its accounting or other disclosures were inaccurate.

Sycamore, which has been delinquent in filing prior financials with the SEC, said it intends, “as soon as practicable,” to file its annual report for the fiscal year ended July 31, 2006. That report will contain restated financial statements for the years ended July 31, 2005 and July 31, 2004 and the restatement of selected financial data for fiscal years 2003 and 2002. It will also provide information about the accounting issues identified by the probe and the added stock compensation charge to be recorded.

The company also stated that it has been cooperating with the SEC and the United States Department of Justice throughout the course of the independent investigation.

Sycamore has also been trying to avoid being delisted from NASDAQ as a result of its delayed filings. On June 1, it said it submitted additional information to the Listing Council in support of its request for continued listing on the NASDAQ Global Market.

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