Mercury Interactive sued over stock-option grants

Four former top executives of software maker Mercury Interactive Corp. illegally backdated $164 million in stock options, investors suing the company claim.

Two investors, in a complaint filed in September in state court in Santa Clara County, claim that from 1996 to 2002 the executives backdated more than 3 million stock options linked to low prices that guaranteed they made an extra $54 million on the grants. The lawsuit includes e-mail exchanges revealing the executives’ participation in the backdating.

“The verbatim e-mails, if true, can be very valuable to investigators and prosecutors,” said Jonathan Howden, a former federal prosecutor who is now a partner at Thelen Reid Brown Raysman & Steiner in San Francisco. “It would seem from reading the complaint that the results of the company’s internal investigation have been shared with the plaintiffs’ lawyers.”

Mercury, a Mountain View, Calif.-based maker of computer-testing software, was acquired last year by Palo Alto-based Hewlett-Packard Co. for $4.5 billion. Mercury had to restate earnings after former Chief Executive Amnon Landon was forced to resign in 2005 amid a company probe into the stock-option grants.

The company restated $570 million, according to the complaint. Mercury is one of more than 200 companies that have disclosed internal or federal inquiries into options that were granted as incentives before 2002. About 100 companies have said they would restate results. Restatements, revisions and charges exceed $9.2 billion so far, according to Bloomberg data.

Mercury executives discussed the practice in e-mails, including a 2000 message in which one executive, who isn’t a defendant in the suit, suggested the company would use “magic backdating ink” to change the price of options granted to an employee.

The suit, reported Tuesday in the Wall Street Journal, names as defendants former Chief Financial Officers Sharlene Abrams and Douglas Smith, former Chief Operating Officer Kenneth Klein and former general counsel Susan Skaer.

The complaint describes how the executives also backdated options for employees. Klein, for example, secured a grant for an employee named Jay Larson in July 2001 that was backdated to April of that year, according to the document.

From Bloomberg News