Cost of Backdating: Six Months, $1 Million

It was much more than a legal wrist slap for Carole D. Argo, former finance chief at SafeNet Inc., whom federal prosecutors nabbed in a stock-option backdating investigation.

U.S. District Court Judge Jed Rakoff sentenced Argo, 46, to six months in prison and ordered her to pay a $1 million fine for participating in a scheme to backdate millions of dollars worth of employee option grants at the Maryland software firm.

She pleaded guilty to one count of securities fraud last October, admitting that she backdated options awards between 2000 and 2006 for herself and others.

Federal prosecutors said Argo and others, whom they did not identify, concealed their options backdating practices from company shareholders, outside auditors, and the Securities and Exchange Commission.

She apologized during sentencing, but Judge Rakoff was unmoved. While noting her otherwise unblemished record, he added that "she also was willing—when push came to shove—to break the law."

Argo, of Baltimore, Maryland, is not the first executive to receive a prison term. Former Brocade Communications Systems Inc. C.E.O. Gregory Reyes was sentenced to 21 months in prison and a $15 million fine earlier this month after he was found guilty at trial of conspiracy, securities fraud and other counts.

Last week, former Monster Worldwide Inc. C.E.O. Andrew McKelvey, 73, struck a deal with federal prosecutors, admitting that he engaged in options backdating. He avoided prison time because he is terminally ill.

Argo—who was at one point pulling down compensation worth nearly $2 million yearly—issued options grants on dates when SafeNet's stock price had closed at or near a low point. Such manipulation allowed Argo and some colleagues to enjoy "particularly advantageous exercise prices," according to the U.S. Attorney's Office.

Issuing options alleged to be at a fair market price avoided any requirement they be charged against SafeNet's earnings, according to the legal papers. Thus, Argo and her colleagues reaped "free" compensation that did not reduce the company's earnings, the prosecutor said.

Argo reports to prison at the end of March, to the federal minimum-security prison in Alderson, West Virginia, where Martha Stewart served her jail time. In addition, Judge Rakoff sentenced Argo to three years of supervised release.

The outcome of the S.E.C. investigation is pending, according to her lawyer, Paul Engelmayer.

by Elizabeth Olson