U.S. Securities and Exchange Commission
LITIGATION RELEASE NO. 20710 / September 9, 2008
Securities and Exchange Commission v. Stephen R. Wong, Case No. CV 08 4239 CW (N.D. Cal.)
Securities and Exchange Commission v. Raj P. Sabhlok and Michael C. Pattison, Case No. C 08 4238 BZ (N.D. Cal.)
SEC SUES FORMER EXECUTIVES OF EMBARCADERO TECHNOLOGIES, INC. IN STOCK OPTION BACKDATING SCHEME
The Securities and Exchange Commission today charged three former senior executives of Embarcadero Technologies, Inc., alleging that they fraudulently backdated stock option grants to employees at the San Francisco business software company and reported false financial information to shareholders.
The Commission alleges that the former CEO, President and Chairman, Stephen R. Wong, the former CFO, Raj P. Sabhlok, and the former Controller, Michael C. Pattison, concealed millions of dollars in compensation expenses associated with valuable, “in-the-money” options secretly granted to company employees.
The Commission’s complaints, filed in federal district court in San Francisco, allege that Embarcadero routinely provided valuable options priced at below market prices to its employees. The Commission alleges that the three executives allowed Embarcadero to avoid reporting expenses for these options by backdating paperwork to make it appear as if the options had been granted on an earlier date, when the stock was trading at a lower price. According to the Commission’s complaints, Embarcadero made hundreds of backdated stock option grants during 16 consecutive quarters. As a result, the company significantly overstated its net income (or understated its net loss) from 2000 through 2005. In the year with the largest percentage impact, Embarcadero understated its net losses by more than 500 percent.
The Commission’s complaints also allege that all three executives participated in backdating grants, each playing a role in falsifying paperwork, selecting false grant dates, and filing false financial statements. Moreover, according to the Commission, Sabhlok and Pattison used false documents to support large option awards to themselves that were collectively “in-the-money” by almost $1.5 million—a potential windfall hidden from Embarcadero’s shareholders.
Wong, without admitting or denying the Commission’s allegations, consented to a permanent injunction against violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5) and 14(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13a-14, 13b2-1, 13b2-2, and 14a-9 thereunder. Wong also agreed to pay a $250,000 civil penalty.
The Commission’s litigated action against Sabhlok and Pattison charges both with violating Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-1 thereunder, and with aiding and abetting violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-11, 13a-13 and 14a-9 thereunder. Sabhlok is also charged with violating Section 16(a) of the Securities Exchange Act of 1934 and Rules 16a-3, 13a-14, and 13b2-2. The Commission seeks permanent injunctions, civil monetary penalties, and disgorgement against both Sabhlok and Pattison, and forfeiture of bonuses and stock sales pursuant to Section 304 of the Sarbanes-Oxley Act and an order barring against acting as an officer or director of a public company against Sabhlok.