Backdaters Bite Back

Stock option backdaters, take notice. The Securities and Exchange Commission is at it again -- but at least one of its targets isn't taking the accusations lying down.

Today's case in point is an S.E.C. civil suit accusing three former senior executives of Embarcadero Technologies of backdating stock option grants to the employees of the San Francisco business-software company.

Former chief executive officer Stephen R. Wong settled, but one of the two other executives charged -- former chief financial officer Raj P. Sabhlok -- came out swinging.

"At a time when the S.E.C. is declining to file enforcement actions relating to all but a handful of the more than 200 companies that restated financial statements due to stock option accounting mistakes, the S.E.C.'s selective focus on stock option accounting mistakes at Embarcadero raises serious legal questions," said Richard Marmaro, of Skadden, Arps, Slate, Meagher & Flom.

He objected to the charges because Embarcadero "is no longer public, its stock was thinly traded when it was public, the company had few non-employee shareholders and its restatement amount was by far one of the smallest and totaled less than $15 million," he said in a statement.

The mistakes in financial statements alleged by the S.E.C. were "hypothetical, non-cash expenses that had no bearing on Embarcadero's true bottom line and were not material to Embarcadero's investors," Marmaro said.

He also claimed Sabhlok was not responsible for Embarcadero's stock option granting decisions and did not profit from the option grants at issue in the case.

Jina L. Choi, one of the S.E.C. lawyers in the case, countered that this "was a case that needed to be brought. We don't take a break because it's a small company."

Sabhlock, 44, of Pleasanton, California, is charged along with former controller Michael C. Pattison, 43, of Burlingame, California, in the scheme where they -- along with Wong -- failed to report the millions of dollars in employee compensation that the backdated options represented, thus misleading shareholders.

According to the commission's complaint, filed in federal district court in San Francisco, the backdated options were a recruiting tool. About 800 options representing more than four million shares were granted between 2000 and 2004, and most were dated back to a day when the share price was lower than the actual day of the grant.

As a result, the company had periods where it reported being profitable when it actually was operating at a loss, according to the complaint. In 2002, the S.E.C. said, Embarcadero understated its net losses by some 530 percent.

Wong, 48, who co-founded the firm in 1993 and served two stints as C.E.O., settled the charges without admitting or denying wrongdoing, and agreed to pay a $250,000 civil penalty. He did not award himself stock options.

Sabhlock, who also served as Embarcadero's C.E.O. for six months in 2007, and Pattison, however, were accused of awarding themselves backdated options worth nearly $1.2 million and $300,000, respectively, and of concealing them with false documents.

The S.E.C. is seeking civil money penalties, disgorgement of gains, the return of bonuses, and forfeiture of stock sales from both men. The commission is also seeking an order barring Sabhlock from acting as an officer or director of a public company.

by Elizabeth Olson