Quest Software said two of its former chief financial officers are among four individuals who may be charged by the Securities and Exchange Commission in connection with the regulator’s probe into the backdating of stock options.
The company itself also may face charges, according to a regulatory filing.
Quest said that on Feb. 29, Wells notices from the Commission were received by the company, former CFOs Brinkley Morse and John Laskey, chairman and CEO Vincent C. Smith, and Kevin E. Brooks, an employee of the company.
The notices provide notification that the SEC staff intends to recommend to the commission that it bring a civil action against the recipients for possible violations of the federal securities laws
The company said that it believes that the issues the staff intends to pursue relate to the company’s historical option granting processes and the accounting relating to those option grants. Under the process established by the SEC, recipients have the opportunity to respond in writing to a Wells notice before the staff makes any formal recommendation regarding what action, if any, should be taken.
The company and Smith intend to provide written submissions to the SEC in response to the notices and may seek meetings with the commission staff, Quest stressed in its filing. Quest also said that it is continuing to cooperate with the SEC.
In June 2006, Quest received an informal request for information from the staff of the Los Angeles regional office of the SEC regarding the company’s historical employee stock option granting practices.
In July 2006, Quest disclosed that it would restate its results from 2000 to 2005 and for the quarter ended March 31, 2006, to correct improper accounting for stock options.
In November 2006, Morse resigned because he refused to answer questions about the company’s stock options practices. At the time, he was most recently senior vice president, corporate development.
Morse had been responsible for Quest’s investment and acquisition strategy. Prior to that, he served as Quest’s CFO from January 2001 to April 2005.
In January 2007, the developer of database management software announced
that after an internal investigation, it had determined that accounting measurement dates for most stock option grants to employees from July 1998 to May 2002 differed from recorded grant dates. It also announced that would take a $150 million pre-tax, non-cash stock-based compensation expense.
That January the commission also issued a formal order of investigation.
In September 2007, Quest said it had found additional mistakes in its historical financial statements that need correcting.
It narrowed the amount of the expected pretax charge to $143 million, from 1999 through March 31, 2006, and said that $137.7 million of the total related to expenses in revising stock-option grant dates. Other adjustments, it said, stemmed from stock-option modifications and repricing of stock option grants, among other things.
The additional errors included, for example, the incorrect or inconsistent application of revenue recognition rules and policies for certain transactions. Quest also determined that it should have recorded intangible asset impairment charges relating to certain acquired software products when they were discontinued rather than continuing ratable amortization over that asset’s remaining estimated useful life.
Last October Quest CFO Michael Lambert resigned to take a job at another company.