The Securities and Exchange Commission has settled charges with a semiconductor company and its former chief financial officer alleging that they engaged in a long-running fraudulent scheme to backdate stock option grants. Under the deal, the former finance executive, Gary L. Fischer, agreed to pay about $540,000 in restitution.
The commission charged that Integrated Silicon Solution Inc. and Fischer concealed millions of dollars of stock option compensation expenses by providing executives and employees with potentially lucrative in-the-money options while backdating the grants to avoid reporting the expenses to investors. Fischer, without admitting or denying the allegations, agreed to a permanent injunction against committing future securities fraud.
The one-time CFO also agreed to pay $414,830 in disgorgement and interest, and a $125,000 civil penalty. In addition, Fischer agreed to a five-year bar from acting as an officer or director of a public company.
Among other violations, “ISSI used in-the-money grants to make up for salary cuts, while avoiding the need to report the expenses by improperly backdating the options,” asserted Linda Chatman Thomsen, the SEC’s Director of Enforcement. Marc J. Fagel, Associate Regional Director of the SEC’s San Francisco Regional Office, added that Fischer caused ISSI to make over 60 backdated grants covering almost 14 million stock options over an eight year period.
Without admitting or denying the allegations, ISSI agreed to a permanent injunction against committing securities fraud and violating the internal controls provisions of the federal securities laws. SEC officials stressed that when determining to accept ISSI’s settlement offer, it considered the cooperation that the company provided during the investigation.
The commission’s complaint charged that Fischer routinely used hindsight to select option grant dates when ISSI’s stock traded at, or near, monthly or quarterly lows, and at prices below the closing price on the date when Fischer actually selected the grant date. The dates he selected were then incorporated into the company’s stock option committee resolutions and compensation committee minutes, even though the committees rarely, if ever, met on the date listed on the minutes and resolutions, the SEC noted.
The SEC explained that pricing the options below current prices would have required the company to report a compensation expense under well-settled accounting principles. By falsely documenting that the options had been granted on an earlier date, ISSI avoided reporting the expenses in its financial statements. The backdated grants, in turn, resulted in materially misleading disclosures, with the company overstating its actual net income or understating its actual net loss in fiscal years 1997 through 2005, including a 528-percent overstatement of actual net income in fiscal year 2004, according to the SEC.
Fischer was also accused of personally benefiting from the backdating scheme.