Ex-officer of SafeNet indicted in stock plot

The Baltimore Sun

Carole D. Argo, a former top executive at Harford County technology company SafeNet Inc., was indicted yesterday on charges of rigging stock-option grants in a six-year scheme that netted her and other employees millions of dollars in improper stock gains and inflated bonuses.

Argo, 46, is expected to be arraigned today in Manhattan federal court on charges of securities fraud and conspiracy. If convicted, she faces a maximum of 25 years in prison and fines of at least $250,000, according to the U.S. Attorney's Office for the Southern District of New York.

The office declined to say whether other SafeNet employees would be charged, though the indictment repeatedly refers to known and unknown "co-conspirators."

"Carole Argo is innocent of these charges. She worked hard and in good faith to make SafeNet a strong and successful company, and looks forward to her vindication in a court of law," said Paul Engelmayer, Argo's New York-based attorney.

Argo, who is listed as living in Baltimore, is at least the eighth U.S. executive to be criminally charged amid a widespread investigation into whether corporate officers manipulated the dates on which stock option awards took effect in order to make them as valuable as possible.

Stock options allow someone to buy a stock at a certain price at a future date. They are intended to be incentives that pay off if a company makes more profit and its stock price increases. They are supposed to be granted at the current stock price so employees benefit only if the stock price goes up.

But at SafeNet, according to the indictment, Argo systematically changed actual award dates to coincide with dips in the company's stock price, making the options instantly profitable.

SafeNet's reported profits were inflated for years because the additional value of the re-dated options was not deducted from income, and SafeNet executives' bonuses were inflated because they were based on reported profits, according to the indictment.

At least 200 companies have disclosed internal or federal investigations into possible options backdating or re-dating, and 100 said they will restate financial results. So far, the restatements, revisions and charges against corporate earnings exceed $12.7 billion. More than 90 executives and directors have left their jobs, and more than 400 lawsuits have been filed against more than 100 companies.

"Corporate executives who deliberately backdate options grants and skew their books to hide compensation expenses are misleading shareholders and investors about the earnings of the company and painting a false picture of executive pay," Michael J. Garcia, the U.S. attorney for the Southern District of New York, said in a statement.

Argo, a former chief financial officer, president and chief operating officer at SafeNet, resigned from the Belcamp encryption-technology company in October, along with CEO Anthony A. Caputo. He has not been charged, though he is referenced in the indictment as a "former CEO" who benefited financially from the re-dating.

Caputo could not be reached yesterday. He issued a statement at the time of his resignation acknowledging that stock option "issues" had "occurred under [his] leadership."

SafeNet, which ceased being a public company in April when California's Vector Capital acquired it for $634 million, declined to comment yesterday.

In the 45-page indictment, Argo is accused of engaging "in an illegal scheme to deceive SafeNet's Board of Directors, shareholders, and auditors, as well as securities analysts, the [Securities and Exchange Commission], members of the investing public and others" over a six-year period beginning in 2000.

Before Argo came to SafeNet as its chief financial officer in 1999, option awards were typically granted by a compensation committee of the board of directors. But in mid-2000, she and Caputo requested permission, which was soon granted, to make most decisions on option awards themselves. That's when the backdating - eight instances of which are outlined in the indictment - supposedly began.

For example, in January 2001, SafeNet's compensation committee agreed to grant Caputo 25,000 options at the stock's then-current price of $46.81. But the stock price plunged shortly thereafter, and the award date was changed to April 3, 2001, when the stock was selling for about $12 - increasing the value of the option awards by nearly $1 million.

Later that year, Caputo refused to sign a new employment contract unless he was granted more than the 50,000 options he had already been promised. SafeNet's compensation committee added 100,000 options to the deal, along with 25,000 options to Argo. Those options were granted in December, but Argo subsequently backdated the award to a time in October when the stock was trading for less than $6, the indictment says.

By January of 2002, those options were worth $576,000 to Argo and $1.92 million to Caputo.

After Argo was promoted to chief operating officer in 2004, she sent an e-mail to the company's new financial officer explaining the practice in relation to newly hired employees, saying that the norm was to "pick the best price" within the quarter the person was hired.

"I think this is a good practice because of the volatility of our stock price," she wrote. "Who wants to have an option priced on your start date and then have the option underwater a month later when you are notified of the award price."

Last September, SafeNet said it would have to restate financial statements from 2000 through March 31, 2006, because some option grants "were or likely were accounted for using incorrect measurement dates under applicable accounting rules," according to an SEC filing.

"The defendant was placed in a position of trust and was obligated to perform her duties in the interests of SafeNet, its employees, and, of course, investors. Instead, these charges indicate she and her co-conspirators thought only for themselves. Their carefully planned scheme netted them millions, illustrating the magnitude of their greed," said Ron Walker, an inspector-in-charge at the U.S. Postal Inspection Service, which assisted in the investigation.

If Argo is found guilty, she will have to forfeit all property traceable to the crime.

tricia.bishop@baltsun.com

Bloomberg news contributed to this article.

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