Erik Lie, an associate professor at the University of Iowa's Henry B. Tippie College of Business, had discovered a pronounced pattern of companies awarding stock options at cyclical dips in their stock prices. That suggested consistent prescience about where the stock market was going, a series of remarkable coincidences or manipulation for maximum gain. He later published his findings in Management Science in May 2005.
A year later in March, the Wall Street Journal outlined numerous instances in which CEOs - at corporations including UnitedHealth Group and Affiliated Computer Services - were awarded options when stock prices were historically low. The odds of that happening consistently are one in 300 billion, according to The Journal.
Federal agencies were already investigating roughly a dozen companies for backdating, but the coverage pushed the probe wider. SafeNet was among the first companies investigated.
The same month the Journal story ran, the company said in an SEC filing that it would have to restate some of its 2005 earnings because it had found a "material weakness" in its accounting.
Outside auditors had discovered backdated options spread over a couple of quarters, according to court papers, but the connection between the "weakness" and backdating wasn't publicly made until May, when SafeNet disclosed that it had received a U.S. Justice Department subpoena and that the SEC was questioning it about backdating.
SafeNet added a former SEC commissioner to its board and an internal investigative committee. Eventually it concluded that SafeNet had overstated profits by nearly $14 million over six years by improper backdating.
Securities filings showed that between December 2005 and February 2006, Caputo exercised some of the backdated Oct. 1 options, buying and then selling 100,000 shares on three occasions for a profit of more than $2.5 million.
In October 2006, he and Argo resigned together.
"The issues related to stock options occurred under my leadership, and I do not want my continued presence to be a distraction," Caputo said in a statement.
With the SEC probe still hanging over it, SafeNet decided to sell itself to an investment fund and go private, a move that let it deal with its legal problems without public scrutiny. Argo was asked to help facilitate the sale, even though she had been forced to resign.
Last July, Argo was indicted. The charging document outlined eight examples of alleged backdating.
