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Mercury settles stock option backdating cases for record $117.5M

[JURIST] Mercury Interactive on Monday settled [press release] derivative lawsuits filed in the US District Court for the Northern District of California regarding allegations of stock options backdating. The software company, acquired [CNET report] by Hewlett Packard (HP) [corporate website] in November 2006, will pay $117.5 million as part of the largest stock option backdating settlement, which resulted from mediation and is still subject to court approval. According to the lawsuits, senior executives and general counsel backdated stock option grants to themselves and other executives and employees without accounting for the backdated options in its financial reports to the US Securities and Exchange Commission (SEC) [official website] and to stockholders. The backdated options allowed option grantees to purchase shares at a price below their market value on the date of the grant, and resulted in illicit compensation as well as the provision of false accounting and reporting information to investors. The backdating occurred from 1997 to 2005 despite a mandate instituted by stockholder vote in 1998 providing that all option grants must be priced according to the market value of Mercury stock on the grant date.

In May, the SEC settled [press release; litigation release] a lawsuit against Mercury based on allegedly improper option grants. Pursuant to the settlement with the SEC, Mercury agreed to pay $28 million in penalties and to consent to a permanent injunction against violating federal securities laws. The former senior executives and general counsel implicated in the backdating scheme still face civil fraud charges filed by the SEC. According to the SEC's allegations [complaint, PDF], the defendants approved the backdated option grants, made fraudulent disclosures to the SEC and to investors, and prepared false meeting minutes and written consents to perpetrate the scheme. In connection with those suits, the SEC seeks to bar the defendants from serving as officers or directors in public corporations, to recover profit from stock sales, and to impose civil monetary penalties and disgorgement with prejudgment interest.

HP, Mercury’s acquirer, is no stranger to allegations of corporate malfeasance. In March, a California judge dismissed felony charges [JURIST report] against four defendants who pleaded guilty to misdemeanors in the pretexting scandal [JURIST news archive] that wracked the technology giant. In December 2006, HP settled [JURIST report] an unfair business practices suit brought by California Attorney General Bill Lockyer for $14.5 million. The backdating of Mercury option grants occurred before HP's acquisition of the company, but HP nevertheless asserted that all liabilities for the backdating scandal would be handled without decreasing the value of HP's stock. AP has more. Reuters has additional coverage. The San Jose Mercury News has local coverage.

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