The Securities and Exchange Commission today charged BlackBerry maker Research in Motion, Ltd., and four of its senior executives for stock option backdating.
The SEC's complaint alleges that Ontario, Canada-based RIM, its former CFO Dennis Kavelman, former VP of Finance Angelo Loberto, and Co-CEOs James Balsillie and Mike Lazaridis illegally granted undisclosed, in-the-money options to RIM executives and employees by backdating millions of stock options over an eight-year period from 1998 through 2006.
"As alleged in our complaint, RIM and its highest level executives engaged in widespread backdating of options which provided them and other employees with millions of dollars in undisclosed compensation," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement. "This enforcement action underscores the SEC's resolve to assure full and accurate disclosure to U.S. investors by foreign issuers."
Antonia Chion, Associate Director of the SEC's Division of Enforcement, added, "Companies and executives who attempt to conceal their fraudulent conduct from investors and regulators will be held accountable."
The SEC's complaint alleges that RIM and its execs made false and misleading disclosures about how RIM priced and accounted for options. In addition, according to the complaint, the backdating violated the terms of RIM's stock option plan and a listing requirement of the Toronto Stock Exchange.
(RIM's stock is listed on both the NASDAQ Stock Market and the Toronto Stock Exchange.)
Specifically, the SEC's complaint alleges that Kavelman, Loberto, Balsillie and Lazaridis backdated option agreements and offer letters, which concealed the fact that the options were granted in-the-money. The complaint also alleges that Kavelman and Loberto took steps to hide the backdating from regulators, RIM's independent auditor and outside lawyer.
For instance, Kavelman and Loberto usually picked low strike prices within reporting periods and in some instances avoided the lowest price so regulators would not detect the backdating. On one occasion, Kavelman asked a manager not to document improper pricing in e-mails. Kavelman wrote, "FYI, it is a major breach of protocol to be discussing (and documenting via email) using option pricing other than that allowable by the Ontario Securities Commission and the SEC in the US."
The complaint further alleges that after all four executives were aware of backdating issues that had come to light at other companies, they attended RIM's July 2006 annual shareholder meeting where Kavelman misled investors by denying that RIM was backdating options.
All defendants have agreed to settle this matter, without admitting or denying the allegations in the SEC's complaint, on the following terms:
RIM consented to the entry of an order permanently enjoining it from violating the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. The settlement with RIM takes into account RIM's cooperation during the SEC's investigation.
Kavelman and Loberto consented to an order permanently enjoining them from violating the antifraud, internal controls, books and records and misrepresentation to auditors provisions and from aiding and abetting RIM's violations of the reporting, books and records and internal controls provisions of the federal securities laws. Kavelman also consented to an order permanently enjoining him from violating the certification provision of the federal securities laws. Kavelman and Loberto agreed to be barred for a period of five years from serving as officers or directors of any issuer that has a class of securities registered with the SEC or that is required to file reports with the SEC. In addition, Kavelman and Loberto agreed to resolve an anticipated administrative proceeding by consenting to an SEC order prohibiting them from appearing or practicing before the SEC as accountants for five years.
Balsillie and Lazaridis consented to the entry of an order permanently enjoining them from violating certain antifraud provisions (specifically Sections 17(a)(2) and (3) of the Securities Act of 1933), and the internal controls and books and records provisions and from aiding and abetting RIM's violations of the reporting, books and records and internal controls provisions of the federal securities laws.
The individual defendants will pay penalties in the following amounts: $500,000 for Kavelman; $425,000 for Loberto; $350,000 for Balsillie; and $150,000 for Lazaridis. The individual defendants also agreed to disgorge the in-the-money value of backdated options they had exercised ($132,914.60 for Kavelman, $47,950.56 for Loberto, $334,250 for Balsillie and $328,300 for Lazaridis) plus interest. Their disgorgement will be deemed satisfied by their previous payment of these amounts to RIM.
On Feb. 5, 2009, the Ontario Securities Commission brought a related settled action against RIM, Balsillie, Lazaridis, Kavelman, Loberto and certain other directors which included the total payment in Canadian dollars of $76.85 million and other sanctions.