SafeNet panel to conduct inquiries

Illegal profit-taking, backdating alleged

June 06, 2006|By STACEY HIRSH | STACEY HIRSH,SUN REPORTER

SafeNet Inc., the Belcamp-based information security company that has come under scrutiny in recent weeks by federal regulators, has ordered a special committee to investigate a shareholder's complaint involving allegations of backdating stock options.

The complaint against SafeNet's current and former officers and directors was filed in Harford County Circuit Court and disclosed in a document filed late Friday with the Securities and Exchange Commission.

It "alleges state law claims for breach of fiduciary duty and unjust enrichment arising from alleged backdating of stock option grants," according to the SEC document.

Backdating is the term for an executive receiving options with an effective date earlier than their actual grant date.

SafeNet is one of several publicly traded companies that have received subpoenas in recent weeks concerning stock options.

The Wall Street Journal has reported that federal investigators are looking into possible backdating. It is unclear if the SafeNet probe is related to the others.

SafeNet has said only that it received a federal subpoena last month and an informal inquiry from the SEC seeking "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 declined to comment yesterday beyond the SEC filing.

SafeNet also said in the filing that it received a letter from a law firm representing an unnamed shareholder. The letter ordered the company to "recover short-swing profits alleged to be made by officers and directors" in an apparent violation of the Securities Exchange Act of 1934, according to the SEC document.

Short-swing profits are those made within six months of a trade.

The Securities Exchange Act says short-swing profits that a company's owner, director or officer makes from buying or selling a company's equity security can be recovered by the company. Any shareholder can file a suit to recover the gains.

SafeNet said its special committee would investigate that as well. The committee will be able to hire independent attorneys and other outside advisers, the company said.

SafeNet makes encryption technologies to protect communications and sensitive data for businesses and the government. The company promotes itself as protecting more financial transactions and government secrets than any other in the world.

The shareholder complaints are the latest in a series of issues SafeNet has faced in recent months, from disclosing a "ma- terial weakness" in its accounting functions to a fourth-quarter profit that disappointed investors when it was reported in February. Those figures later were restated. Also, SafeNet's chief financial officer left the company in April.

The company has said the ma- terial weakness was a staffing and personnel issue. The company said it hired two senior executives in revenue recognition and expanded its accounting department.

Todd C. Weller, an analyst for Stifel Nicolaus in Baltimore who does not own shares of SafeNet, said it was not surprising that the company was having a special committee investigate the most recent complaints. But Weller said the "more issues that arise mean that management, boards, committees have to deal with these issues, so it certainly can strain a company's ability to execute in the near term."

Shares of SafeNet fell $1.03, nearly 6 percent, to close at $16.28 yesterday.

stacey.hirsh@baltsun.com

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