Securities Regulation Daily Wrap Up, ENFORCEMENT—Former Mercury Interactive CFO Ordered to Pay Hewlett-Packard $2.8 Million Under Final Judgment, (Feb 22, 2013)

By John Filar Atwood

The former chief financial officer of Mercury Interactive, LLC has been ordered to pay Hewlett-Packard Co., Mercury’s parent company, more than $2.8 million under a final judgment entered on February 21, 2013. Douglas Smith and three other senior Mercury officers were charged with awarding themselves backdated stock options without disclosing the compensation or recording the compensation expense. The SEC’s complaint also alleges that the executives backdated stock option exercises, made false disclosures concerning Mercury’s backlog of sales revenues to manage its reported earnings, and created fraudulent loans for option exercises by overseas employees to avoid recording expenses. (SEC v. Mercury Interactive, et al., February 21, 2013).

Without admitting or denying the allegations, Smith consented to the final judgment which permanently enjoins him from violating 1933 Act Section 17(a)(2) and (a)(3). Smith will disgorge $451,200, representing the “in-the-money” benefit from his exercise of backdated option grants, and pay a $100,000 civil penalty.

Smith also will reimburse Hewlett-Packard for cash bonuses and profits from the sale of Mercury stock that he received in 2003. Under the terms of the settlement, all of Smith’s disgorgement and all but $250,000 of his reimbursement to Hewlett-Packard will be satisfied by his prior repayment to Mercury of $451,200 and his foregoing the right to exercise vested options with a value of $2.11 million.

Smith neither admitted nor denied the allegations in the SEC’s complaint. The settlement is subject to the approval of the U.S. District Court for the Northern District of California.

This is Case No. 07-cv-02822 WHA/JSC.

Attorneys: Alvin David Williams for SEC. James Neil Kramer (Orrick, Herrington & Sutcliffe, LLP) for Susan Skaer. Amitabh Chibber (Davis Polk & Wardwell) for Mercury Interactive, LLC.

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