Market lashes SafeNet shares

Stock tumbles 22% over twin U.S. probes

May 20, 2006|By PAUL ADAMS | PAUL ADAMS,SUN REPORTER

Shares of SafeNet Inc. tumbled more than 22 percent yesterday as investors reacted to news that the Belcamp network security firm has received a federal subpoena seeking information about stock option awards and is the subject of a Securities and Exchange Commission inquiry into certain accounting practices.

The stock drop, the second biggest percentage decline on the Nasdaq yesterday, reflected the uncertainty surrounding the investigations and added to questions about the credibility of SafeNet's management.

The latest revelations also come just a few months after the Harford County company - a major provider of network security to the federal government - announced it would restate some of its 2005 earnings and beef up its accounting staff.

Those moves were followed by the departure of Chief Financial Officer Ken Mueller.

The stock closed down $4.28 yesterday to $14.93 per share. About 4.65 million shares were traded, eight times the average daily volume. Shares are down nearly 54 percent for the year.

"You're talking about an SEC investigation and a criminal investigation by the [U.S. attorney's office in New York]," said Todd C. Weller, an analyst for Stifel Nicolaus in Baltimore, who doesn't own shares.

"It's not like this is going to disappear next week, and you're always going to have people wondering, `What are the other issues?'" he said.

SafeNet is one of several publicly traded companies that have recently received subpoenas concerning the possible back-dating of stock options.

Under the practice, an executive receives options with an effective date earlier than their actual grant date.

Options are generally granted at the stock price on the date of the grant. Backdating them could allow the recipient to take advantage of previous declines in the stock and reap a higher reward by selling them after the price goes back up.

The U.S. attorney's office for the Southern District of New York issued the subpoena for SafeNet, but has declined to confirm the investigation. The company has said it is cooperating with the probe.

Analysts said the parallel SEC inquiry may be more troubling. The company revealed Thursday that the SEC has 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."

"I think the big scare is: Is the SEC going to find things that nobody is even thinking of?" said Sean Jackson, an analyst with Avondale Partners, who doesn't own shares and recently downgraded the stock to "market perform" from "outperform."

Documents the company filed annually with the SEC show that in the past several years SafeNet Chairman and Chief Executive Officer Anthony A. Caputo has received immediately exercisable stock option grants at or near the bottom of short-term dips in the company's share price.

In each case, the awards were followed by increases in the stock's price, leaving open the potential for a sizable gain.

In September, for example, Caputo received 100,000 options to buy SafeNet stock at $29.70 per share. A day later, the stock climbed $7 per share. Generally, stock option grants vest over several years, but Caputo's shares were immediately exercisable.

SafeNet spokeswoman Donna St. Germain said yesterday that Caputo has only exercised about one-quarter of the more than 700,000 shares of company stock he's been granted over the course of his 19 years with the company.

Half of the shares he exercised were sold because the grants were about to expire and would have been lost, she said. Another 50,000 were lost because Caputo failed to exercise them before their expiration date. Caputo has purchased more than 500,000 additional shares with his own money over the years, St. Germain said.

"So despite the fact that he could have exercised his options immediately, he's obviously decided not to," she said.

Weller, the Stifel Nicolaus analyst, said investors may remain reluctant to invest in SafeNet until the investigations play out and the company makes moves to regain credibility with Wall Street.

The possibility of widespread abuse of options grants has recently troubled regulators and investor watchdog groups.

Several companies have recently been caught up in federal investigations, including Caremark Rx Inc., a Nashville, Tenn., pharmaceutical services company, UnitedHealth Group of Minneapolis and Vitesse Semiconductor Corp. of Camarillo, Calif.

The problem may extend beyond those companies, according to the Center for Financial Research and Analysis, a Rockville firm that analyzes financial data reported by public companies.

It analyzed 100 large companies for suspicious patterns in the granting of stock options and found that 17 were "at risk" for the practice of backdating and merited further scrutiny.

Companies caught doing so could be forced to pay back taxes, restate earnings and pay fines, said Marc A. Siegel, research director for the center. Whether the problem is widespread in corporate America is difficult to say, he said.

paul.adams@baltsun.com

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