SafeNet probed over options

U.S. attorney in N.Y. subpoenas documents over awards at Md. firm

SEC also is involved

May 19, 2006|By STACEY HIRSH | STACEY HIRSH,SUN REPORTER

SafeNet Inc., the Belcamp network security company, said yesterday that it received a federal subpoena for information about stock option awards as well as an informal inquiry from the Securities and Exchange Commission.

The SEC requested "information relating to stock option grants to directors and officers of the company, as well as information relating to certain accounting policies and practices," the company said in a statement.

Federal officials this week have issued subpoenas to and launched investigations of several other publicly held companies regarding their stock options.

Regulators are looking at possible "back-dating," in which an executive would receive options with an effective date earlier than their grant date to take advantage of previous declines in the stock, The Wall Street Journal has reported.

Options usually bear a "strike price" equal to or more than the price of the stock on the day they are granted. Because the value depends on the difference between the strike price and a higher market price later, the lower the stock on the effective date the better for the recip- ient.

It was unclear last night whether the SafeNet probe is related to the others.

But an examination of payments to SafeNet Chairman and Chief Executive Officer Anthony A. Caputo shows a pattern of immediately exercisable grants of options at or near the bottom of short-term dips in the company's stock price, or at yearly lows.

The SEC declined to comment on the SafeNet case. The U.S. attorney's office for the Southern District of New York, which issued the subpoena, would not confirm or deny an investigation.

"We are cooperating" fully with both the SEC and U.S. attorney's office and "we will provide them any documentation that they need," said SafeNet spokeswoman Donna St. Germain.

St. Germain said the subpoena sought documentation regarding any stock options the company has granted. She declined to expand on her statement about the SEC inquiry.

In March, SafeNet stated in an SEC filing that it would adjust some of its 2005 earnings, strengthen its accounting staff and improve its financial reporting.

SafeNet said in the filing that it had identified a material weakness that "pertains to insufficient staffing and technical expertise in our accounting and financial reporting functions" and that it had hired two new accountants and created a new position of "director of recognition of revenue."

SafeNet announced shortly thereafter that Chief Financial Officer Ken Mueller had left the company, offering few details about his exit.

SEC documents show that on Sept. 29, Caputo received 100,000 options to buy SafeNet shares at the then-market price of $29.70 - a day before the stock rose nearly $7.

On May 19, 2004, Caputo received 100,000 options at $21.70 per share, close to the low for the year of $21.14 and far below the price of $36.74 at the end of 2004.

On Feb. 27, 2003, Caputo received 100,000 options when the stock was $16.47. That was the lowest price of any trading day that year. By October the stock had reached almost $43.

Again in October 2002, SafeNet granted Caputo 100,000 options when the stock was $13.75. Within two months it was $29. In 2001, he got 150,000 options when the stock was $5.85, only a penny above its low point for the year.

In 2002, 2003 and 2004, SEC filings show that Caputo was the only senior SafeNet officer who got options that were immediately exercisable, meaning he could benefit from any short-term price increase. Most options have a vesting period of several years.

Other companies reported yesterday receiving similar inquiries from federal officials regarding stock options.

Caremark Rx Inc., a Nashville pharmaceutical services company, said it was subpoenaed this week by the U.S. attorney in New York and received an informal inquiry from the SEC for stock option documents.

Affiliated Computer Services Inc., a Dallas business process outsourcing and information technology company, filed an SEC document yesterday saying that it received a subpoena from the same office requesting documents about stock options granted from 1998 until now.

Health care giant UnitedHealth Group of Minneapolis said this week that it was subpoenaed for stock option documents dating back to 1999. The Internal Revenue Service has also asked the company for documents involving stock options for top executives, UnitedHealth said in a statement.

Vitesse Semiconductor Corp. of Camarillo, Calif., issued a press release this week saying that three of its top officers were fired because of their "involvement with issues related to the integrity of documents relating to Vitesse's stock option grant process."

stacey.hirsh@baltsun.com

Sun reporter Jay Hancock contributed to this report.

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