Human Capital & Careers

Option Cases: Two More Down, One Stays Up

As Computer Sciences and Sepracor are let off the hook, Sycamore Networks is hit with a Wells Notice over alleged manipulations of grant dates.
Stephen TaubNovember 27, 2007

The Securities and Exchange Commission has closed two more stock-option investigations without taking any action, but it moved closer to bringing charges in another case.

Computer Sciences and Sepracor Inc. both announced that they received notices from the SEC that probes into their historical option-granting practices had been completed and that no enforcement action was recommended.

Back in May, Computer Sciences said it discovered “significant errors” in its accounting for tax liabilities in fiscal years 2000 through 2006. It added that correcting the errors, as well as less-significant slip-ups, would result in a total charge of $300 million to $400 million through March 31, 2006.

That amount did not include about $60 million in after-tax charges the company took through the same period as a result of its previously disclosed internal probe of stock-option grants dating back to 1996.

Sepracor said in August 2006 that it would restate prior results because it had determine that the measurement dates for certain stock-option grants differed from the recorded dates for the awards, partly due to backdating the grants.

Meanwhile, Sycamore Networks said in a regulatory filing that it received a Wells Notice from the SEC in connection with a previously disclosed investigation into the drug company’s option-granting practices and related accounting. The document serves as notification that the SEC staff has made a preliminary determination to recommend a civil action against the company for possible securities-law violations.

An optical networking products maker, Sycamore two years ago announced that it would restate its financials for fiscal years 2000 through 2004 to correct its accounting for stock options granted from 1999 through 2001. The restatement reflected $33.8 million in additional non-cash stock compensation expense.

In June 2006, Sycamore’s audit committee launched a second probe after an ex-employee provided information about the timing of his 1999 new-hire option grant. Three months later the company announced that the appropriate measurement dates for some grants differed from the originally recorded grant dates and that its financials for previous periods couldn’t be relied upon.

A Sycamore audit-committee probe found in June 2007 that a former CFO and other ex-finance officials deliberately altered the measurement dates of stock-option grants. This was expected to result in a restatement adding a non-cash expense of about $215.6 million covering fiscal years 2000 through 2007. The individuals, including CFO Frances Jewels, had left the company before the beginning of a previous investigation in 2005 for reasons unrelated to the stock-options investigation.

In a wrongful-termination suit filed last year against Sycamore, former human resources director Stephen Landry claimed that shortly after he was hired in October 1999, Jewels instructed him to change employees’ hire dates so they could receive stock options with lower strike prices.

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