SEC settles with 2 firms, charges 4 execs

NEW YORK (CNNMoney.com) -- The Securities and Exchange Commission announced Thursday it settled options probes against computer maker Brocade Communications Systems, which agreed to pay $7 million, and software maker Mercury Interactive, which will pay $28 million.

The SEC also brought charges against four former Mercury officers for their allegedly fraudulent activities relating to the company's stock options.

The suit claims the four senior Mercury officers, ex-Chairman and CEO Amnon Landan, ex-CFOs Sharlene Abrams and Douglas Smith, and ex-General Counsel Susan Skaer, undertook a scheme from 1997 to 2005 to give themselves and other employees undisclosed compensation through backdated stock option grants.

The civil suit also claims that the officers failed to record hundreds of millions of dollars of compensation expense and that the executives falsified documents.

"The widespread and pernicious misconduct - including lying to shareholders, intentionally false accounting, and fraudulent stock options backdating - in this case warrants the significant sanctions imposed on the company and sought from the former executives," said Linda Chatman Thomsen, director of the commission's Division of Enforcement.

The SEC noted in its release that the charges against Mercury's former executives were the watchdog's first-ever use of Section 304 of Sarbanes-Oxley, allowing it to seek the repayment of bonuses and stock sale profits received by CEOs and CFOs when financial results are later restated.

Charges against the company, acquired by Hewlett-Packard (up $0.04 to $45.71, Charts, Fortune 500) in November of 2006, were filed in federal District Court for the Northern District of California.

The settlement with Brocade (down $0.09 to $9.19, Charts) was reached a year ago but was held up by the SEC while it deliberated whether and how much stock options abuses hurt investors.

The commission's complaint against Brocade, filed in federal court in San Francisco, alleged that Brocade's former CEO, president and chairman, Gregory L. Reyes, provided extra compensation to employees by granting valuable stock options for which a financial statement expense was required.

To avoid reporting the undisclosed compensation, the company's executives allegedly created false records making the options appear to be granted at a lower price on an earlier date.

The backdating of options allows executives to buy shares from the company at a price lower than the price of the stock option grant. Numerous companies have been forced to restate results when backdating scandals have been uncovered.