Better Than Backdating (Until You're Arrested)

Innovation in executive compensation is usually welcome, as boards seek to align senior employees' interests with those of the owners, shareholders. But there are limits to how innovative a stock options administrator should be when rewarding executives. Especially when he is the executive.

Vencent A. Donlan, the former stock options administrator at Wireless Facilities Inc., learned the hard way: A conviction on wire-fraud and tax-evasion charges, and a 46-month stretch in a federal penitentiary. The Securities and Exchange Commission disclosed Donlan's sentence late on Friday.

According to the S.E.C.'s complaint in the case, Donlan took 728,229 shares stock and options over 12 months ended in November 2003. He transferred the securities to a brokerage account in his wife's maiden name, then sold them for about $7.2 million.

Donlan was able to conceal the scam—for a while, anyway—because he had complete control of the company's options-granting system. This let him park phony grants in accounts he had created in the abbreviated names of real WFI employees (using a first name of "Tom" instead of "Thomas," for example), but using his wife's real Social Security number. After transferring the securities, he went back and corrected the names, authorities said.

In January 2004, Donlan and Colls bought a home in San Diego, paying $942,000 in cash even though Donlan made only $65,000 a year at the time. Later, the couple bought a $655,000 property in Julian, California, and again paid in cash.

None of this raised any red flags. Donlan left Wireless Facilities in July 2004. His theft was not uncovered until earlier this year, and the company went public in March. It has not said how it uncovered the scheme. (The company changed its name to Kratos Defense and Security Solutions Inc. last month.)

Shortly after disclosing the theft, Kratos handed out bonuses to its senior leaders: Chief executive Eric M. DeMarco (493,750 shares), finance chief Deanna Lund (100,000 shares), and general counsel James R. Edwards (85,000 shares). The awards were described as retention incentives.

The company is now suing Donlan to try to recoup some of its money. Shareholders are suing the company for not having detected the theft earlier than it did.

by Mark Stein