Wednesday, July 23, 2008

Former Engineered Support Systems Inc. Chief Executive and Co-Founder Pleads Guilty to Backdating Charge

Former Engineered Support Systems Inc. Chief Executive and co-founder Michael Shanahan Sr. pleaded guilty today to one of twelve federal charges related to backdating company options. As part of the deal, he agreed to pay almost $7.9 million back to his former company.

One article regarding the plea deal includes an interesting discussion of backdating investigations generally.

In court filings, federal prosecutors in St. Louis called the Engineered Support case "one of the most egregious examples of backdating among all of the publicly traded companies in the United States. It strains mathematical formulas to calculate the likelihood of randomly selecting the lowest date within a quarter to issue stock options ... and to do it eight times in a row."

While hundreds of companies and executives have been investigated for backdating, only a handful of those probes have led to criminal charges. The Engineered Support case is the only one outside San Francisco or New York to see a federal prosecution.

Most of the cases ended with guilty pleas, hefty fines and, in some cases, prison time. The one executive who went to trial — Gregory Reyes, chief executive of San Jose, Calif.-based Brocade Inc. — was found guilty and sentenced to 21 months and a $15 million fine. But after a wave of cases filed last year, prosecutions have faded in recent months. Earlier this month, the SEC decided to drop a criminal investigation into Apple CEO Steve Jobs, perhaps the highest-profile target to date.

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