Risk & Compliance

SEC Gets Ounce of Flesh from RIM Execs

Backdating penalties against four officers are a tiny fraction of what they agreed last week to pay Canadian regulators.
David McCannFebruary 17, 2009

The Securities and Exchange Commission today charged BlackBerry maker Research in Motion and four senior executives, including two finance officers, with stock-option backdating. At the same time, the SEC announced that the charges have been settled.

The accused individuals include Dennis Kavelman, the company’s one-time CFO, who reportedly plans to stay on in another capacity; ex-finance vice president and current vice president of corporate operations Angelo Loberto; and James Balsillie and Mike Lazaridis, who remain as co-CEOs. They illegally granted undisclosed, in-the-money options to RIM executives and employees by backdating millions of stock options 1998 through 2006, according to the SEC’s complaint.

Those four are already on the hook for $75 million in penalties for the backdating scheme under settlements reached last week with the Ontario Securities Commission in Canada, but they face much smaller monetary recompense to the U.S. securities regulator.

Their actions “provided them and other employees with millions of dollars in undisclosed compensation,” said Linda Chatman Thomsen, director of the SEC’s enforcement division.

RIM issued a press release that merely recited the details of the settlements with the SEC, and the company declined further comment. Attorneys for the individual executives either declined comment or were not immediately available.

The SEC alleged that the defendants made false and misleading disclosures about how RIM priced and accounted for options. In addition, according to the complaint, the backdating violated the terms of RIM’s stock option plan and a listing requirement of the Toronto Stock Exchange. RIM’s stock is listed on both the NASDAQ and the Toronto Stock Exchange.

Specifically, the SEC accused Kavelman, Loberto, Balsillie, and Lazaridis of backdating option agreements and offer letters, while concealing that the options were granted in-the-money. The complaint also alleged that Kavelman and Loberto took steps to hide the backdating from regulators and RIM’s independent auditor and outside lawyer.

For instance, according to the commission, Kavelman and Loberto usually picked low strike prices within reporting periods and in some instances avoided the lowest price so regulators would not detect the backdating. On one occasion, Kavelman is said to have asked a manager not to document improper pricing in e-mails. Kavelman allegedly wrote, “FYI, it is a major breach of protocol to be discussing (and documenting via email) using option pricing other than that allowable by the Ontario Securities Commission and the SEC in the US.”

The complaint further alleged that after all four executives were aware of backdating issues that had come to light at other companies, they attended RIM’s July 2006 annual shareholder meeting, where Kavelman misled investors by denying that RIM was backdating options.

All the defendants’ settlement agreements came without admitting to or denying the allegations.

RIM consented to a permanent enjoinment from violating the antifraud, reporting, books and records, and internal controls provisions of federal securities laws. The settlement took into account RIM’s cooperation with the investigation, the SEC said.

Kavelman, Loberto, Balsillie, and Lazaridis will pay penalties of $500,000, $425,000, $350,000, and $150,000, respectively. They also agreed to disgorge the in-the-money value of backdated options they exercised, in the amounts of $132,914.60 for Kavelman, $47,950.56 for Loberto, $334,250 for Balsillie, and $328,300 for Lazaridis, plus interest. However, their disgorgement was deemed satisfied by previous payment of these amounts to RIM.

Kavelman and Loberto additionally consented to a five-year bar from serving as officers or directors of public companies and from appearing or practicing before the SEC as accountants for five years.

 

 

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