Safenet judge shows pity

The Baltimore Sun

NEW YORK -- Carole D. Argo, a former chief financial officer at Belcamp-based SafeNet Inc., was sentenced to six months in prison yesterday by a Manhattan federal court judge for her role in manipulating the company's stock-option awards.

She pleaded guilty in October to one count of securities fraud for falsifying the Harford County company's financial reports, in an effort to earn Argo, her boss and some of her other colleagues awards and bonuses worth millions. Prosecutors say she illegally backdated stock options without recording the necessary compensation charges.

The 46-year-old mother of three was the fourth executive from a U.S. company this year to receive a felony sentence for the options crime. She is the third to receive jail time. Argo, who lives in Baltimore, also was ordered to pay a $1 million fine.

"I've spent my entire life trying to be a person of good character, and that's why I'm so sorry that my actions have caused harm," Argo told the court, her voice breaking for a moment as she claimed responsibility for the stock option plan. "I've learned from this, I truly have."

Federal guidelines recommended a sentence of eight to 10 years, but U.S. District Court Judge Jed S. Rakoff said that would be unreasonable.

Rakoff noted that Argo is a frequent volunteer for charitable causes and cares for her own children, along with the family of her widowed sister and a close friend.

"Miss Argo is the sort of person who most people would rightly admire ... but she was willing, when push came to shove, to break the law," Rakoff said, explaining his decision to Argo's many supporters in the courtroom, which included SafeNet's president and its general counsel.

"This is a serious crime, but it's not an Enron, it's not a WorldCom, it's not anything like that," the judge said.

The six-year scheme, which began in 2000, caused SafeNet to overreport its earnings by nearly $14 million and may have led some shareholders to lose money when the stock price dropped after the fraud was disclosed, according to the prosecution.

Argo will spend Easter with her family March 23, then report to prison two days later. The judge recommended she be incarcerated at a minimum-security women's facility in West Virginia.

Hundreds of investigations at companies across the country have led to criminal charges against at least 30 executives for the illegal "backdating" of stock options. The practice allows recipients to buy company stock at a price based on dates in the past when the share price was especially low.

In Argo's case, she was accused of changing the dates on thousands of SafeNet employee options, including her own, and lying about it. She said yesterday that her actions were more about attracting and rewarding employees than making herself rich.

Argo is the only one from SafeNet who has been charged with wrongdoing.

But her indictment, along with a separate Securities and Exchange Commission civil complaint, repeatedly refers to "others known and unknown" who participated in the "illegal scheme." Representatives from the U.S. attorney's office and the SEC declined to comment yesterday.

The person who stood to make the most from the stock-option plan at SafeNet was former Chief Executive Officer Anthony A. Caputo, who resigned in 2006 with Argo.

"The issues related to stock options occurred under my leadership, and I do not want my continued presence to be a distraction," Caputo said as he ended his 20-year career at the company.

Changing the date on his options increased their value by $2.74 million, according to court filings, while Argo's grew by roughly $1.3 million, her attorney said in court yesterday.

Caputo, who's in his mid-60s, has been named as a defendant in related shareholder lawsuits against the company. Both he and Argo reached settlements with SafeNet last spring, agreeing to cancel the exercise price of certain options and to put money in escrow accounts for the network-security company, according to papers filed with the SEC.

Attempts to phone Caputo at his home in Westchester, Pa., were unsuccessful. SafeNet representatives declined to comment.

SafeNet shares no longer are publicly traded. The company was acquired in April for $634 million by California's Vector Capital Corp.

Securities attorneys said backdating cases are difficult to prove. Without a paper trail documenting discrepancies, it's tough to figure out if option dates have been changed, when they were changed, and if they were changed purposely to defraud.

"The key element is intent here," said Jacob H. Zamansky, of New York, a former prosecutor who represents investors.

Argo explained in a company e-mail that the backdating practice better ensured that employees - even new ones - would make money on their options. Paul Engelmayer, Argo's lawyer, yesterday referred to that Sept. 15, 2004, e-mail as the "smoking gun" in the case.

More than 200 companies have disclosed internal or federal backdating investigations and more than 100 of them have had to restate financial results, including SafeNet. More than 90 executives and directors have resigned because of it and more than 400 civil suits have been filed.

But relatively few people have been prosecuted, Engelmayer said. Of those charged, most reach settlements.

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