Stock option tremors hit Md. firm

Two top officers of Harford company quit on same day

October 19, 2006|By Jamie Smith Hopkins, Stacey Hirsh and Tricia Bishop | Jamie Smith Hopkins, Stacey Hirsh and Tricia Bishop,Sun reporters

A stock options scandal has claimed the top two executives of Harford County technology company SafeNet Inc., part of an accelerating trend of resignations in corporate America stemming from investigations into whether option awards were rigged to maximize their value.

SafeNet announced yesterday that Anthony A. Caputo, its chairman and chief executive, and Carole Argo, its president, chief operating officer and acting chief financial officer, voluntarily resigned Tuesday, effective immediately.

Their departure was the result of the company's continuing probe of stock option grants, SafeNet said.

"The issues related to stock options occurred under my leadership and I do not want my continued presence to be a distraction to the important work we perform for our customers every day," Caputo said in a statement yesterday.

The information encryption and security company, which has contracts with numerous government agencies, tapped independent director Walter W. Straub as its new chairman and interim CEO.

Chris Fedde, senior vice president and general manager of SafeNet's enterprise security division, was named president and chief operating officer. John W. Frederick, SafeNet's vice president and worldwide controller, stepped up as chief accounting officer and interim chief financial officer.

The company, which employs 1,200 globally and about 200 in Harford County, is hiring an executive search firm to find a permanent chief executive and chief financial officer.

Caputo and Argo are the latest in a string of executives who have left their posts amid inquiries into whether options were back-dated to coincide with lows in the stock price rather than at a higher price on the date they were actually granted, ensuring a larger profit. Businesses are allowed to backdate options if they are properly taxed, accounted for and disclosed - but if the options aren't, the practice is illegal. An option is a right granted by a company to buy its stock at a specified price.

Dozens of companies are under federal or internal scrutiny for stock option practices. Companies ranging from Apple Computer Inc. to McAfee Inc. have in recent weeks announced the resignations or firings of key officials. On Sunday, UnitedHealth Group said its chief executive had resigned.

From 2000 through 2005, SafeNet issued 5.2 million options to all employees, of which Caputo got 691,600 and Argo 295,000, documents filed with the SEC show. In the same period, Caputo exercised 150,000 options worth $6.4 million and Argo exercised 58,500 options worth $1.2 million, according to the documents.

In mid-May, when SafeNet disclosed that it had received options-related inquiries from the Justice Department and the Securities and Exchange Commission, an analysis by The Sun found a multiyear pattern of grants priced at or near the bottom of short-term dips in the company's stock.

Some options grants to Caputo and other executives bore strike prices - the amount the executive pays for the shares - that were identical to the stock's lowest price for a full year. On Feb. 27, 2003, for instance, Caputo received 100,000 options when the stock was $16.47 - the lowest price of the year. Eight months later, the stock was nearly $43 a share.

SafeNet's stock, which fell sharply after the probes were disclosed, dropped 79 cents yesterday, to close at $21.20.

SafeNet formed a board committee in June to investigate the option grants. Last month the Belcamp company said it would have to revise financial statements from 2000 through March 31 because some grants made between 2000 and 2005 were accounted for "using incorrect measurement dates under applicable accounting rules in effect at the time." The additional expense it will have to record could total as much as $20 million, it said.

It was not clear yesterday how much Caputo and Argo will receive as part of a severance package. Their contracts specify that they are entitled to accrued vacation and six months' severance pay if they voluntarily resign. But Straub, former CEO of a company acquired by SafeNet in 2004, said the board will decide what they will get and whether they will keep their stock options.

As of the end of last year, Caputo held 541,600 options worth $8 million - all vested, meaning they can be cashed in. Argo held 276,500 options worth $3 million, of which two-thirds were vested.

Straub said the two executives were not asked to resign. He insisted there were no new developments in the investigation to prompt their same-day decisions.

"They both have been major contributors to the company, and they felt it was in the best interest so the management here could focus on the business, which is doing well," said Straub, who added that he is not planning major changes. "I'm sure they mutually agreed that it's time."

Straub would not comment on the internal investigation, other than to say it is continuing and he is aware of no new subpoenas.

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