Risk Management

Ex-Monster Controller Faces Backdating Charges

Former president, too, is cited in SEC case, and is hit also with federal criminal claims.
Stephen TaubApril 30, 2008

The Securities and Exchange Commission charged the former controller and the former president of Monster Worldwide Inc. for their alleged roles in a multiyear scheme to secretly backdate stock options for thousands of Monster officers, directors, and employees.

The SEC complaint alleges that former Monster president and chief operating officer James J. Treacy, along with former controller Anthony Bonica, participated in a scheme that began in 1997. The company stock options were fraudulently backdated to coincide with the dates of low closing prices for the New York-based company’s shares, the SEC said.

“These defendants circumvented disclosure requirements and accounting principles designed to provide investors with an accurate picture of a company’s performance,” said Linda Thomsen, director of the SEC’s Division of Enforcement. “Our enforcement action today demonstrates yet again that the commission will not tolerate deception of investors through unlawful options backdating and will aggressively pursue those responsible.”

Separately, Treacy was charged with criminal securities fraud and conspiracy in connection with the backdating of millions of dollars’ worth of employee stock option grants in a two-count indictment, according to Michael Garcia, U.S. Attorney for the Southern District of New York.

According to Garcia, Treacy conspired with other former senior executives at Monster to systematically backdate stock option grants to Monster employees between 1997 and 2003, in an effort to provide profitable options to employees without recording the required compensation expenses, thereby falsely inflating Monster’s earnings. As a result, Monster’s public filings with the SEC between 1997 and 2005 fraudulently understated the company’s compensation expenses by a total of more than $300 million, the US Attorney added.

The SEC’s complaint alleges that Treacy and Bonica personally benefited from the fraudulent scheme by receiving and exercising backdated grants of in-the-money options.

Paul Shechtman, an attorney for Bonica, told CFO.com that he was “disappointed that the SEC, unlike the U.S. Attorney’s Office,
decided to bring a proceeding against Tony Bonica. The facts will show
that he was not involved in a back-dating options scheme.” Evan Barr, an attorney for Treacy, gave CFO.com a statement saying that his client “is completely innocent of these charges and looks forward to being vindicated at trial.” A representative of Monster didn’t immediately respond to a CFO.com query.

The SEC charged Treacy and Bonica with violations of the antifraud provisions of the federal securities laws and with violating or aiding and abetting the violation of reporting requirements as well as other violations. The commission seeks permanent injunctive relief, disgorgement of ill-gotten gains, and financial penalties from each, and a bar against Treacy from being an officer or director in the future.

In the criminal case, Treacy was accused of making misleading statements about the company’s options grant practices to Monster’s outside auditors. He allegedly signed management representation letters in which he falsely represented that Monster’s financial statements were presented in conformity with Generally Accepted Accounting Principles, for example, and attested that there had been no fraud involving management or employees who had significant roles in internal controls.

Treacy himself allegedly received in excess of one million options (adjusted for a stock split and a spin-off of a Monster division) on eight different grant dates. He exercised about 745,000 of these options for a total gain of more than $23 million, approximately $13.5 million of which was derived from the in-the-money portion of backdated option grants.

The indictment charges Treacy with one count of securities fraud and one count of conspiracy to commit securities fraud, make false statements in SEC filings, make false statements to auditors, and falsify corporate books and records.

If convicted, he faces a total maximum prison sentence of 20 years on the substantive securities fraud count and five years on the conspiracy count. In addition, on each count, he faces a fine of the greater of $250,000 or twice the gross pecuniary gain or loss from the offense.

In January, the U.S. attorney indicted former Monster CEO Andrew McKelvey for backdating-related securities fraud and conspiracy, citing a resulting $300 million of inflated earnings in the company’s understatement of compensation expenses. While the government said McKelvey accepted responsibility for his participation in the scheme, the U.S. chose to defer prosecution because he has a terminal illness.