Opinion ID: 206316
Heading Depth: 3
Heading Rank: 1

Heading: Evidence of the backdating scheme

Text: Monster's vice president for human resources, Erin Barriere, testified how stock options typically work at Monster. She explained that a stock option usually gives the holder the right to buy a share at a set price, known as the strike price or exercise price, and that this price is normally the fair market value of the stock on the day the option is granted. Trial Tr. at 88-91, 126. The typical vesting period for an option at Monster was four years, with 25 percent of the granted shares vesting after each one-year interval. Cooperating witness Myron Olesnyckyj testified that he worked at Monster from 1994 until 2006, when he was fired because of his participation in the backdating scandal. Olesnyckyj testified that he helped put together documentation relating to the backdating and hid information from directors, auditors, and the public. He testified to how the scheme worked: A. By backdating I mean that we would select a price with the benefit of hindsight. We would look back for some period of time to select a favorable low price, and instead of having the documents reflect the actual market prices on the date of selection of that price by the compensation committee, I would create fictitious documents, suggesting that price was selected on the date of the low price. Q. Did the date you or others selected have anything to do with the date the grants were actually approved by the compensation committee? A. It did not. Q. What did Monster tell its auditors and the public about how the exercise price was being chosen for option grants during the period 1997 through 2006? A. Monster told its auditors and the public that the price reflected the price on the actual date of approval by the compensation committee, and that price reflected the fair market value on the date of approval by the compensation committee. Q. Were those representations accurate? A. They were not.... Q. What was the purpose of the backdating of option grants? A. The purpose of the backdating of option grants was to provide in-the-money options at low prices without taking the required expense for those options.... That served the purpose of making the company's earnings and profits look a lot better than they were. Trial Tr. at 315-16. During the years in question, Monster filed public documents with the SEC claiming that it followed Accounting Principles Board Opinion No. 25 (Oct. 1972), titled Accounting for Stock Issued to Employees (APB 25). As effective during the relevant years, APB 25 required a company to record any expense or charge on its earnings for the value of an employee stock option on its measurement date, defined as the date on which the officials at the company who were authorized to confer stock options approved and issued a known and specified number of options at a known and specified price. Because of this requirement, whenever a company issued any options in the money (meaning, any options with a strike price lower than the fair market value of the stock on the measurement date), it was required to report a charge on its earnings in the form of a compensation expense, apportioned over the vesting period. Under Monster's official stock option policy, no members of managementTreacy includedhad authority to grant options, whether acting individually or collectively. Rather, exclusive authority to grant options was vested in a Compensation Committee comprising independent directors, all of whom had to sign a unanimous written consent form (UWC) to confer an option, and every UWC had to specify an as of date, meaning the date on which the option was deemed to have been granted. The Government introduced evidence at trial to show that Treacy and his co-conspirators granted options to themselves and others with strike prices often far below the fair market value of the stock on the day of the grant, and did so by falsifying UWCs with as of dates chosen in hindsight based on low closing prices and not based on the dates of any actual action taken by the Compensation Committee. By backdating the UWCs, the conspirators could avoid the requirements of APB 25 and compensate themselves without reducing Monster's reported earnings. Copies of e-mails introduced at trial showed that Treacy often voted on when to set as of dates and vesting dates, and approved backdating proposals by other conspirators. The prosecution also introduced documents that Treacy had signed, including SEC filings and management representation letters that contained false statements. Treacy's own profit was significanthe received more than one million options in eight different grants, six of which were backdated.