Options fraud admitted

Argo, former SafeNet executive, pleads guilty to 1 federal count

October 06, 2007|By Laura Smitherman | Laura Smitherman,Sun reporter

Former SafeNet Inc. executive Carole D. Argo pleaded guilty yesterday to a federal charge that she illegally manipulated the Belcamp-based company's stock option program to boost the value of awards and bonuses by millions of dollars for herself, former CEO Anthony A. Caputo and others.

Argo, 46, entered a guilty plea to one count of securities fraud in a New York federal court yesterday. The charge carries a maximum penalty of 20 years in prison and a $5 million fine; she is scheduled for sentencing before U.S. District Judge Jed S. Rakoff on Jan. 21. Argo, of Baltimore, served as the Harford County encryption-technology company's chief financial officer until she resigned, along with Caputo, in October 2006.

"I agreed to document the CEO's options as if they were granted on Oct. 1, 2001," Argo told the judge yesterday, without naming the chief executive, Bloomberg News reported. "I acted willfully and with intent to defraud."

According to the indictment, Argo backdated options on that date for herself and the "former CEO," inflating the worth of those awards to about $576,000 and $1.9 million, respectively. Caputo, who was chief executive at the time, has not been charged with wrongdoing in the case, nor in a separate civil lawsuit filed by the Securities and Exchange Commission in August. Caputo could not be reached to comment yesterday.

At least 200 companies have reported internal or federal investigations over options, and 100 have said they would restate financial results. More than 90 executives and directors have left their jobs over backdating.

Backdating works by retroactively setting the grant dates of stock options to take advantage of past dips in share prices. Options allow an owner to buy stock at a certain price in the future, so the lower the exercise price, the more valuable the option. The practice isn't necessarily illegal but must be disclosed as an accounting and compensation cost.

Argo's plea follows the conviction in August in San Francisco of former Brocade Communications Systems Inc. chief executive Gregory Reyes in the first backdating case to go to trial.

Jacob Zamansky, a former prosecutor who represents investors in private practice, said the Brocade case may have convinced Argo to plead guilty rather than face a jury.

"Rather than suffering a long jail term, she probably decided to cut a deal and turn state's evidence on the CEO to get a lighter sentence," Zamansky said.

"Backdating is stealing. Essentially they are getting yesterday's price today," Zamansky added. "Regulators are trying to show this is not proper conduct for officers of a public company."

A spokeswoman for U.S. Attorney Michael J. Garcia, who is prosecuting Argo, declined to comment on the case and whether an investigation is continuing. In a news release, Garcia's office said Argo and her alleged co-conspirators, who are not named, hid their backdating from shareholders and outside auditors as well as regulators and the investing public.

Argo oversaw a program to backdate options not only for senior managers but new rank-and-file employees, according to the indictment. The practice made the options more valuable and inflated the company's earnings, allowing the company to meet certain goals that triggered bonuses.

Argo's New York-based lawyers, Paul A. Engelmayer and Peter K. Vigeland, did not return telephone calls seeking comment. Argo initially pleaded not guilty at a July arraignment.

SafeNet ceased being a public company in April when California's Vector Capital Corp. acquired it for $634 million.

Company spokeswoman Donna St. Germain declined to comment yesterday on Argo's plea but noted that neither federal prosecutors, nor the SEC, have named the company or any current employee as a defendant.

laura.smitherman@baltsun.com

Bloomberg News contributed to this article.

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