U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20950 / March 12, 2009
Accounting and Auditing Enforcement Release No. 2949 / March 12, 2009
Securities and Exchange Commission v. Quest Software, Inc., Vincent C. Smith, John J. Laskey, and Kevin E. Brooks, United States District Court for the Central District of California, Civil Action No. SACV 09-0315 (AG)
SEC Charges Quest Software and Three Executives With Stock Option Backdating
The Securities and Exchange Commission today filed a complaint in the United States District Court for the Central District of California against Quest Software, Inc., an Aliso Viejo, California-based software manufacturer, and three current or former officers: Vincent C. Smith, John J. Laskey, and Kevin E. Brooks.
The SEC's complaint alleges that Quest, its executive chairman Smith, its former chief financial officer Laskey, and its former controller and principal accounting officer Brooks, improperly granted undisclosed in-the-money stock options to executives and employees by backdating millions of options from 1999 through 2002. As a result of this misconduct, in September 2007, Quest reported a $113.6 million restatement of its operating income.
According to the SEC's complaint, Quest failed to accurately describe its stock option practices in its public filings and failed to properly account for the backdated options in its financial statements, resulting in false and misleading disclosures to Quest's shareholders in filings with the SEC from 1999 through 2005.
The complaint further alleges that Quest backdated 28 separate grants involving over 11 million shares of common stock. Quest's failure to properly record compensation expenses in connection with the backdated options resulted in the overstatement of Quest's operating income by 4 percent to 963.1 percent, and the understatement of its operating loss by 26.12 percent to 154 percent from 1999 through 2005.
Specifically, the SEC's complaint alleges that Smith and Laskey approved a policy by which Quest would pool stock option grants each month and backdate the grants to coincide with the lowest stock price of the month. The complaint alleges that the backdated grant dates bore no relation to when the grant was actually approved, resulting in artificially low exercise prices for the stock options. According to the complaint, although he knew about the use of hindsight to date stock option grants, Brooks failed to ensure the accuracy of Quest's financial statements and disclosures. The complaint also alleges that Smith, Laskey, and Brooks took steps to prevent Quest's independent auditors from discovering the backdating, including the use of false written consents by Quest's board of directors.
All defendants have agreed to settle this matter, without admitting or denying the allegations in the SEC's complaint, on the following terms:
Quest consented to an order permanently enjoining it from violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 (Securities Act) and Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 12b-20, 13a-1, 13a-13, and 14a-9 thereunder.
Smith consented to an order permanently enjoining him from violating Sections 17(a)(2) and 17(a)(3) of the Securities Act, and Sections 13(b)(5), 14(a), and 16(a) of the Exchange Act and Rules 13a-14, 13b2-1, 13b2-2, 14a-9, and 16a-3 thereunder, and from aiding and abetting Quest's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. Smith also agreed to pay a $150,000 civil penalty.
Laskey and Brooks, a certified public accountant, consented to orders permanently enjoining them from violating Sections 17(a)(2) and 17(a)(3) of the Securities Act, and Sections 13(b)(5) and 16(a) of the Exchange Act and Rules 13b2-1, 13b2-2, and 16a-3 thereunder, and from aiding and abetting Quest's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. Laskey and Brooks agreed to pay civil penalties of $50,000 and $60,000 respectively. Brooks also agreed to pay disgorgement of $34,775, representing half of the in-the-money value of backdated options he had exercised (the other half had previously been repaid to the company), and prejudgment interest of $5,808.29. In addition, Brooks agreed to a five-year suspension from appearing or practicing as an accountant before the SEC.
All settlements in the civil injunctive action are subject to the approval of the United States District for the Central District of California.