Judge tosses SEC suit against Shanahan - 12 Feb 210
A
federal judge this morning dismissed a Securities and Exchange
Commission lawsuit against Michael F. Shanahan Jr., the son of the
former CEO and co-founder of Engineered Support Systems Inc., before
the defense presented a single witness.
Lawyers for Shanahan had filed a motion Thursday arguing that the
SEC case, which began Feb. 1, was so weak that it should be tossed out
of court.
“This is why we went to trial because we knew they didn’t have
evidence and this was the only way we could show it,” lawyer Jim Martin
said.
SEC lawyers could not be immediately reached for comment.
The case stemmed from allegations that company executives backdated
stock options multiple times between 1996 and 2002, meaning that they
cherry-picked dates with low stock prices to almost guarantee stock
profits.
If the stock price fell, the options were sometimes canceled and
re-issued at a more beneficial date, called “double backdating.”
All the while, shareholders and the public were never told about the backdating, which is not illegal if disclosed.
SEC lawyers say Shanahan Jr. was in an unique position to know about
the backdating because he was a member of the compensation committee on
ESSI’s board of directors.
They were seeking roughly $300,000 of Shanahan Jr.’s profits, as
well as a civil penalty and a ban against him serving as an officer or
director of a public company.
In Shanahan’s motion, lawyers argued that the SEC’s witnesses “have
completely failed to show that Shanahan, Jr. knowingly backdated
options or engaged in any sort of intentional behavior. Contrary to the
allegations of the Complaint and the promises made in the SEC’s opening
statement – which were replete with claims of a “backdating scheme,”
“stealth compensation” and the like – the evidence has shown nothing of
the sort. Lacking any direct evidence of intentional conduct, the SEC’s
case has become a desperate effort to label Shanahan, Jr.’s lack of
knowledge as reckless or negligent. But even that effort has failed, as
the evidence has shown the difficulties inherent in determining the
proper grant date of options, making it impossible to impose those
labels as a matter of law.”
Michael
Shanahan Sr., former CFO Gary Gerhardt and former controller Steven
Landmann have all pleaded guilty in U.S. District Court to one criminal
charge each and paid more than $11 million in fines and restitution.
Landmann and Shanahan Sr. got probation. Gerhardt got 15 months in
federal prison.
Shanahan Sr. only admitted that he “knowingly and intentionally
signed stock option award letters falsely dated July 25, 2002, with
reckless disregard as to the false date.”
When Landmann pleaded guilty, he said “senior executives” told him to backdate.
Gerhardt admitted that he’d given Landmann dates to use for
backdated stock options, and that he’d received the information from
unnamed “others.”
As part of Shanahan Sr.’s plea, prosecutors agreed to drop all
criminal charges against his son, who received pretrial diversion, a
form of probation, and paid $92,000.
The SEC’s civil case was originally filed in 2007 by the Securities
and Exchange Commission against former Gerhardt. Other company
executives were added later.
Gerhardt settled his part of the civil suit in May 2009 for $400,000. Shanahan Sr. settled Jan. 4 for $750,000.
Engineered Support was based in Cool Valley until
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