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Companies Agree To Penalties For Alleged Backdating

Brocade Communications Systems ($7 million) and Mercury Interactive (a whopping $28 million) reached settlements late last week with the SEC over allegations of backdating at the two companies.    

Brocade and Mercury are the first companies to pay civil penalties in the SEC’s monumental backdating investigation -- until now, the SEC had only imposed penalties against individuals. SEC Commissioners were deadlocked for almost a year over whether to impose civil penalties directly against companies. The Brocade/Mercury settlements demonstrate that the SEC is now prepared to pursue civil penalties against companies as well as individuals in backdating cases. SEC Chairman Christopher Cox explained: "This enforcement action clearly demonstrates the SEC will use all the weapons in our arsenal, including significant corporate penalties, to protect investors and combat fraudulent stock option backdating."

The SEC’s decision to begin imposing civil penalties directly against companies for prior backdating violations raises obvious questions about both the effectiveness and equity of such penalties. When the SEC directly penalizes a company for prior backdating violations, the company’s current shareholders are forced to foot the bill. For example, take the case of Mercury, which was recently acquired by Hewlett Packard. Now Hewlett Packard’s shareholders, who had nothing to do with any alleged backdating at Mercury, are forced to pay the SEC’s penalties. 

Are the SEC’s penalties fair? Do the penalties help protect investors? 

Full post as published by OverRegd - Securities Regulation and Litigation Blog on June 06, 2007 (boomark / email).