Contrary criminal

The Baltimore Sun

NEW YORK -- In his 30-year legal career, Judge Jed Rakoff had pretty much seen it all when it came to white-collar crime. He even taught a course on it at Columbia Law.

He had prosecuted countless fraud cases and spent 12 years on the federal bench.

But Rakoff couldn't seem to quite figure out what had corrupted the woman sitting before him on that January day in his courtroom, No. 14B, in the U.S. District Court for the Southern District of New York.

Carole Diane Argo was a 46-year-old mother of three, Cub Scout pack founder, volunteer, active church member and caretaker of her widowed sister's family. More than 100 people had written letters to the court in her behalf. "There is not a selfish or self-serving bone in her body," one read.

Behind her, the courtroom was packed with friends and family for her sentencing. Many of them had relied on Argo for financial or emotional support, like Jennifer Brown. Her daughter is gravely ill, and Argo has stepped in to care for Brown's son when needed, as well as tend to her daughter.

More than a dozen former colleagues at SafeNet Inc. also made the trip to back Argo, even though she had devastated their Belcamp encryption-technology company. Argo changed the dates on stock option awards to inflate their value, which by itself isn't illegal. But she broke the law by covering up the alterations, known as "backdating." It was the equivalent of using weighted dice, turning a game of chance - the stock market - into a sure winner.

Argo was one of the first executives in the nation to face criminal charges over backdating. But she had never gotten so much as a speeding ticket before, according to Maryland court records. And she wasn't even a very good criminal. She didn't pocket a penny from the options scheme, while co-workers netted millions.

Her family's home in Baltimore's Guilford neighborhood was certainly comfortable, but also one of the more modest on her street. She didn't wear flashy clothes or take lavish vacations.

A big chunk of her salary went to pay for grade-school tuition: Her three kids attend private schools that cost $20,000 apiece each year, and after her brother-in-law died in 2004, she began paying tuition for her sister's two children as well. But there were no signs of financial desperation.

This was a convicted felon? It all made no sense. Nothing explained the leap into criminal behavior.

"We have here a woman who has in so many respects led a more than admirable life. The many, many letters I received attest to this, but the unquestioned undisputed facts attest to it," Rakoff said.

Still, she had pleaded guilty to one count of securities fraud. Rakoff couldn't let her off the hook. Options backdating cases had become a top federal priority, and she had changed dates on thousands of options granted to multiple SafeNet employees.

"The nature of the crime is too serious, lasted too long, was too intentional to not require some punishment, and there [are] important general deterrence issues here as well," he began.

Her crime carried a maximum sentence of 20 years and a $5 million fine. A probation officer advocated 4 1/2 years.

Rakoff opted for a sentence he characterized as "extraordinarily low:" six months in federal prison and a $1 million fine.

It was now Argo's turn to speak. She rose from her chair.

Her composure would break only once.

A young company

In 1999, Anthony A. Caputo was 57 years old and had been at SafeNet - then known as "Information Resource Engineering" - for 13 years. The company was founded by a couple of security engineers in a Timonium basement. Caputo was its first investor and soon its chief executive.

He molded the business into his own and took it public in 1992, weathering the typical struggles of a young technology company, including an attempted shareholder coup in 1998.

The company's stock reached a high of $31.62 in 1999. It had grown to 135 employees - 100 more than five years earlier. Its focus had expanded beyond encryption to message authentication and communication security.

But Caputo needed help. He had tech people to design the products and marketing people to sell them. But he didn't have an executive on staff who could oversee the daily demands of a quickly expanding business.

Argo was working at Optelecom Inc., a publicly traded fiber optics company in Germantown, and had more than 15 years of business experience. She was the chief financial officer, but the title didn't carry the weight it does at many companies. Her salary didn't even rank in the top three.

At SafeNet, she would be number two.

"She is a tremendous asset to our team," Caputo said in a July 1999 news release announcing that Argo had been hired as CFO and would report directly to him.

They made an odd pair. He was 20 years her senior, wore impeccable suits and had a perpetual tan. His hair was always coiffed and shoe-polish black.

She had buzz and infectious enthusiasm, but skipped the fussed-with, made-up look. She was more casual and unaffected, the kind of woman who paid for business lunches out of her own pocket and flew 15 hours from Hong Kong in coach.

Argo declined to be interviewed for this article, as did most others contacted by The Sun, including those who vouched for her character in court. No one answered the telephone at Caputo's West Chester, Pa., home, and no voice mail was available. A letter sent by Express Mail to his house and signed for by his wife received no response.

But previous interviews, testimony, regulatory filings, public records and detailed court papers - which include excerpts from letters submitted on Argo's behalf - shed some light on her character and its contradictions.

She's a woman bound tight by relationships, the letters said. As a child, she became the glue binding her brother and sister to their parents. As a wife, she lent an ear to her sister-in-law, whose marriage was failing, and later a truck to move out. As a mother, she moved her boy to a new school to get him away from bullies, and became his best friend and running partner.

In an informal interview with The Sun in 2004, she talked about her admiration for Caputo. He had taken her in and promoted her. She was his right hand.

She was the one that Caputo asked to issue him stock options stamped with a date selected to earn him the most possible money. She was the one who chose not to account for the transactions.

And she was the one who would pay the price.

'Good character'

Argo came into SafeNet with a salary of about $69,000, and she got a bonus of $26,000 that first year. By the next year, 2000, her salary ballooned to $161,000, and her bonus tripled.

That year she and Stephen, her college sweetheart husband, moved into a 3,500-square-foot house in Baltimore with their three young children. They paid a half-million dollars, taking out a $350,000, 30-year mortgage.

She settled into the soccer-mom life and joined the Cathedral of Mary Our Queen in Homeland, where she would eventually begin a Cub Scout pack to please her middle son.

"She would have to be a saint to do that," Monsignor Robert Armstrong joked during a recent interview. He thinks of Argo, who also filled in as a substitute catechist teacher, as a "woman of good character."

"I know the positive things she has done in support of parish life and also her family life and as a mother," Armstrong said.

Argo organized snacks for her kids' sports teams and drove players around. And she continued to impress her boss and SafeNet's board of directors.

"She rarely complained or asked anything for herself. Success of the company and its people and satisfaction of customers were always her primary concern," former board member Shelley Harrison wrote in a letter to the court.

"Early on I expressed to Carole and then Caputo, on her behalf, that she was underappreciated in compensation and recognition of accomplishments."

But 2001 was a rough year. Customers had slowed information-technology spending. Executives lowered first-quarter financial estimates in late March, which sent the stock tumbling nearly 62 percent in one day - to $12.81 from $33.38. No executives would get bonuses that year.

On top of the day-to-day business challenges, Caputo's employment contract was set to expire at year's end, and he and the compensation committee were hashing out the details of a new one. Before long, it was December, and talks weren't going well.

He wanted 200,000 stock options and wanted them backdated to Oct. 1, according to the SEC and a statement Argo made during her arraignment. That happened to be the day SafeNet's stock reached its second-lowest point for the year, $5.85. The committee offered Caputo 50,000 options. He refused to sign.

At that point, he had been leading the business for 15 years - he was the business. With little leverage, the committee met him most of the way. In December, it approved an additional 100,000 options - 150,000 total -for Caputo, all backdated to Oct. 1. The group also rewarded Argo with 45,000 backdated options.

Backdating the options inflated their worth by more than a half-million dollars for Argo and nearly $2 million for Caputo.

As CFO, Argo made the option arrangements, but she never made arrangements to account for their expense. She also altered the minutes of the committee meeting at which the added options were approved, to further cover up the backdating, according to the SEC and the federal indictment against her.

Court documents claim that she made handwritten changes to the minutes, so they read "As a signing incentive, the Committee previously approved a stock option grant for 100,000 options" instead of "as a signing bonus, the Committee recommended 100,000 options."

The revisions made it appear that the options had been granted earlier than they had, prosecutors said.

While Argo has said the backdating wasn't her idea, it has never been made clear whether the cover-up was her inspiration or someone else's.

Backdating options is not illegal by itself; not disclosing the action to investors or accounting for it is. By not reporting the true cost of option awards, a company understates its expenses - and makes its profits look larger than they really are.

That's where the crime was committed, then repeated, as Argo kept changing option dates for herself and colleagues, hiding her actions all the while. She "fell into a pattern," her attorney said, driven by a desire to attract and retain talented employees.

Awarding options with dates associated with dips in the stock price meant she could ensure better rewards for her colleagues. And hiding the changes meant the company didn't have to take a hit to its expenses. Nobody gets hurt, right?

But it was a crime. As a former auditor at a major accounting firm, Argo could hardly claim ignorance. Nor did she try to.

Big promotion

Argo became the second face of SafeNet, touring the country at Caputo's side to talk to investors.

In 2004, she was promoted to president and chief operating officer, a new position for the company. SafeNet's clients included Bank of America, Samsung, Cisco, the Departments of Defense and Homeland Security and the Internal Revenue Service.

Meanwhile, the push for corporate reform was gaining momentum in the wake of accounting fraud at places like WorldCom Inc. and Enron Corp. Many businesses were pulling back on their stock option issuance, but SafeNet continued to consider them a tool to attract talent. The company couldn't afford the huge salaries and pensions of its larger competitors.

"A lot of people say people don't value options that much. Well, that's absolutely not the case here at SafeNet," Argo told The Daily Record in April 2004.

A month later, she first exercised some of the backdated Oct. 1, 2001, stock options, acquiring 8,500 shares for $5.85 apiece. She could have sold the shares that day for a profit of nearly $139,000. Instead, Argo held on to the stock - richer only on paper.

Around that time, a study about stock option pricing was making the rounds in academic circles.

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.

A week later, the SEC filed a civil suit, asking for financial penalties and the return of any gains she made illegally. It also asked that Argo be barred from ever serving as an officer or director of a public company. A settlement is expected to be reached this month, according to court filings.

Argo was arraigned in New York on the criminal charges in October, having paid a $500,000 bond to remain free. There, before Judge Rakoff, she pleaded guilty to one count of securities fraud.

"The CEO asked me to report October 1, 2001, as the date on which his options had been approved ... even though I knew this was untrue," she told the court. "In causing these filings to be inaccurate, I acted willfully and with intent to defraud."

Argo went home knowing she had only a few months of assured freedom left to organize her affairs. She hadn't even told her widowed mother about the indictment.

She still hadn't told her by the time of the January sentencing.

No explanation

After Rakoff announced Argo's punishment, the courtroom took a collective breath. She stood to speak.

She would offer no explanation to supplement those she had given in court, leaving unanswered the question, Why?

She began: "I 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. ...

"I especially want to apologize to my family and my friends for letting them down and causing them so much pain," she said, choking on the words. "I've tried to set a good example for my children, and I'm trying to do so here also, and really teaching them that when a person makes a mistake that you have to accept responsibility, and I'm definitely doing that."

Argo's sister, Cynthia Jones, who relied on her sister for financial support after her husband died, shepherded Argo out of the courtroom, her arm protectively wrapped around her.

Caputo and several others are being sued by shareholders, but no one other than Argo has faced either criminal or civil charges. Argo was just the fourth executive nationwide to receive a felony conviction for backdating and the third to receive jail time. Her colleagues took in $4 million from the backdating, according to court filings.

Argo reported to Alderson Federal Prison Camp, the same West Virginia facility where Martha Stewart was imprisoned, in late February, earlier than ordered. That assured she'll be home before the start of the next school year.

She turned 47 there last week.


1983 - The company that later became known as SafeNet is founded by two security engineers in Timonium.

1986 - Anthony A. Caputo invests, becomes CEO a year later.

1992 - SafeNet goes public.

1999 - Carole Argo is hired as SafeNet's chief financial officer.

2000 - Argo and her family move into Baltimore's Guilford neighborhood.

2001 - Argo backdates stock option grants for herself, Caputo and another individual, but never records a compensation expense, an illegal act.

2004 - Argo is promoted to SafeNet's chief operating officer. She cashes in some of her backdated options, though she holds on to the shares, richer only on paper.

2005 - Management Science publishes a study that shows a pronounced pattern of companies' awarding of stock options at cyclical dips in their stock prices, causing federal agencies to grow suspicious.

March 2006 - The Wall Street Journal publishes "The Perfect Payday," which outlines multiple instances in which CEOs were awarded options when the stock price was historically low.

May 2006 - SafeNet says it has received a federal subpoena and the SEC is inquiring about backdating.

October 2006 - Argo and Caputo resign.

July 2007 - Argo is indicted on charges of securities fraud and conspiracy.

August 2007 - The SEC files a civil suit against Argo.

October 2007 - Argo pleads guilty to one count of securities fraud.

January 2008 - Argo is sentenced to six months in federal prison.

February 2008 - Argo reports to the Alderson Federal Prison Camp in West Virginia.

Backdating 101

What's a stock option?

The right to buy stock in the future at today's price. Options are often given to executives as incentives to improve company performance and raise share value.

How do you backdate it?

By marking the award as being granted on an earlier date than it actually was (the opposite of post-dating a check). The older dates are typically chosen because the stock price was particularly low that day.

Is it always illegal?

Not by itself. Shareholders don't like it when companies backdate because the boost in compensation expense eats into revenue.

What makes it a crime?

Not recording the backdating as an accounting expense and falsifying documents to cover your tracks.

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