Risk Management

Theft of Options Brings Stiff Sentence

An ex-stock options administrator gets almost four years — not only for pilfering options but also for evading taxes on the ill-gotten gains.
Stephen TaubOctober 15, 2007

Let this be a lesson to you: If you’re going to steal something, don’t forget to pay income taxes on it.

A former stock options administrator was sentenced to 46 months in prison for wire fraud and tax evasion in connection with the theft of options. Vencent Donlan, formerly with Wireless Facilities, Inc.—now called Kratos Defense & Security Solutions—also must pay more than $6.2 million in restitution to the company and more than $2.2 million to the Internal Revenue Service. Donlan pled guilty in July to stealing more than $6 million worth of stock during his employment.

In his plea agreement, Donlan admitted that between November 2002 and November 2003, he used his position at WFI to issue without authorization 728,229 shares of WFI stock to a brokerage account he controlled and that he sold the stock for a net gain of $6,252,715. He also admitted that he evaded paying $2,202,917 in federal income taxes in 2002 and 2003 by failing to declare the income he derived from the fraudulent WFI stock sales, according to United States Attorney Karen Hewitt.

The Securities and Exchange Commission in May obtained an order freezing Donlan’s assets. On June 5, the SEC obtained an order requiring him to disgorge all ill-gotten gains from the fraud, with prejudgment interest, and pay civil monetary.

According to the SEC, as WFI’s stock options administrator Donlan managed the process by which the company distributed stock options to its officers, directors, and employees. In particular, Donlan had primary control over Equity Edge, the software program WFI used to account for, and transmit information about, its stock options.

Through Equity Edge and related software, Donlan created stock-option grants and opened individual accounts with WFI’s brokerage firm, E-Trade Securities, so that WFI’s officers, directors, and employees could access and exercise those options.

Donlan also used Equity Edge and related software to instruct E-Trade and WFI’s transfer agent, Wells Fargo Shareowner Services, to issue and transfer stock to WFI’s officers, directors, and employees.

According to the SEC, Donlan had primary responsibility for entering WFI’s stock-options data into Equity Edge. Because he had administrative-level user rights on Equity Edge, Donlan was able to issue and transfer stock options on his own authority, giving him effective control over WFI’s options distributions.

In June 2002, Donlan used Equity Edge to create a WFI options account with E-Trade in the name of his wife, Robin Colls Donlan, whom had never worked for the company, but registered it as a joint account.

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