Options Backdating Scorecard: A Guilty Plea

Still think options backdating is a victimless crime? Try to tell that to Carole D. Argo, the former finance chief at SafeNet Inc. She's pleaded guilty to securities fraud for her role in backdating options at that security-software company in Maryland.

Argo, 46, is scheduled to be sentenced on January 21, 2007, in Federal District Court in Manhattan, where she pleaded guilty on Friday. She faces a maximum penalty of 20 years' in prison and a $5 million fine.

A federal grand jury in Manhattan indicted the former chief financial officer of SafeNet Inc. last July on charges of securities fraud and conspiracy for her role in the alleged backdating of millions of dollars of employee stock options.

The U.S. Attorney's office in Manhattan said Argo and her co-conspirators concealed their options backdating practices from Safenet's shareholders and outside auditors, as well as securities analysts, the Securities and Exchange Commission, and members of the investing public.

Indeed, in public filings, SafeNet stated, "No gain to the options is possible without stock price appreciation, which will benefit all shareholders. If the stock price does not increase above the exercise price, compensation to the named executive will be zero."

But backdating the options let Argo and others buy stock at below fair-market value on the day the awards were made. That virtually guaranteed a risk-free gain even if the stock price did not rise after then.

Prosecutors added that Argo and her accomplices—whom the authorities did not name—failed to properly account for Safenet's backdated, in-the-money options grants as a compensation expense in Safenet's filings with the S.E.C. As a result, SafeNet reported "materially false and misleading" financial results from 2000 through mid-2006.

by Mark Stein