Off the record - Page 2

Billion-dollar software company Mercury Interactive wants to keep details of a backdating scandal under seal

In another bit of irony, Mercury specializes in making a group of applications designed to help corporate clients fully comply with the new federal financial disclosure rules passed by Congress as part of the Sarbanes-Oxley Act following Enron's implosion.

Amnon Landan, the former Mercury CEO who resigned in November 2005 under pressure following an internal probe, is said to have exercised $5.5 million worth of options and sold 1.04 million company shares for a total of $73.6 million "during the period of wrongdoing," according to another suit filed by investors in federal court last spring.

Two additional executives resigned at the same time as Landan. The list of plaintiffs in the federal suit, which charges that Mercury's backdating imbroglio greatly damaged the company's market value, includes the retirement system for New Orleans municipal employees.

The value of a stock option is determined by its closing price per share on the day the option is granted. Instead of listing that particular date when the options are later exercised, backdating an option generally involves picking a spot earlier on the calendar. That way, employees of companies that make it big can reap huge windfall profits far bigger than they were entitled to receive. As Duke law professor James Cox somewhat famously described backdating, it's like betting on a race and knowing who the winner will be.

Silicon Valley's start-ups during the tech boom relied on hopes and dreams more than directly available cash assets to flashpoint their growth. To attract the best executive talent around, they offered stock options in exchange for hefty salaries. If the top suits performed well from the beginning, when the stock price was low, they could sell the shares much later when their value had climbed sky-high.

But some of the still relatively young companies that dot the fringes of Highway 101 where it weaves toward downtown San Jose are today being charged with failing to inform investors and government regulators just how many zeros were involved in those enriching IOUs.

Defense attorney James Kramer made an important point about backdating, however, to Judge Kleinberg during last week's hearing. "There is nothing about backdating that is illegal," he said. "The issue is whether you properly account for it."

Yet Mercury didn't properly account for more than $567 million in compensation expenses over a 12-year period in its SEC filings. And that's what is illegal. The IRS heavily taxes earnings from backdated stock options, which are akin to tax-free bonuses that aren't reported to the SEC. Investors say the failure to disclose the backdating exposed the company to heavy tax penalties, money that came from shareholders.

"Throughout the development of the options scandal, Mercury Interactive has been one of the most significant companies for the public to watch, due to both the primacy and seriousness of its options problems," Recorder reporter Justin Scheck wrote in a declaration to the judge last week. The Recorder, which serves about 20,000 readers in the state's legal community, asked Jan. 5 for Kleinberg to open the records.

Recorder attorney Olson, who regularly represents the Chronicle in such open-records cases, argued in a memo to the court that the desire to shield top Mercury execs from "adverse publicity" and "potentially embarrassing corporate documents" doesn't justify withholding up to 17 exhibits that Mercury wants to keep away from the press and the public.

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