Michael F. Shanahan, Sr., et al.

U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 21362 / January 6, 2010

Securities and Exchange Commission v. Michael F. Shanahan, Sr., et al, United States District Court for the Eastern District of Missouri, Civil Action No. 4:07-cv-270-JCH (E.D. Mo.)

Michael F. Shanahan, Sr., Former Engineered Support Systems, Inc. Chairman and CEO, Agrees to Settle SEC Charges in Option Backdating Case; Relief Includes Permanent Injunction, Officer-and-Director Bar, and $750,000 Civil Penalty

On January 5, 2010, the United States District Court for the Eastern District of Missouri entered a final judgment by consent against Michael F. Shanahan, Sr., the former Chairman and CEO of Engineered Support Systems, Inc. ("Engineered Support" or the "Company"), resolving the Securities and Exchange Commission's ("Commission") charges against Shanahan Sr. for options backdating filed in July 2007. According to the Complaint, from 1997 through 2002, Shanahan Sr. participated in a fraudulent scheme to grant undisclosed, in-the-money stock options to himself and other Engineered Support employees by backdating Company stock option grants to coincide with historically low closing prices of Engineered Support's common stock. In addition, the Complaint alleged that Shanahan Sr. cancelled previously issued Engineered Support stock options that had fallen out-of-the-money and reissued the options with a new backdated grant date and exercise price, bringing those options back in-the-money. The Complaint also alleged that Shanahan Sr. improperly issued additional Engineered Support stock options to nonemployee directors beyond what they were authorized to receive under the Company's shareholder-approved stock option plans. The Complaint further alleged that Shanahan Sr. and others caused Engineered Support to make material misrepresentations and to omit statements of material fact regarding Engineered Support's stock option grants in its filings with the Commission.

According to the Complaint, Engineered Support employees received approximately $20 million of improper in-the-money benefit from the backdating, $15 million of which went to top executives and directors.

Without admitting or denying the Commission's allegations, Shanahan Sr. has consented to a permanent injunction from violating Section 17(a) of the Securities Act of 1933, Sections 10(b), 13(b)(5), and 14(a) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5, 13a-14, 13b2-1, and 14a-9 thereunder, and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. Shanahan Sr. has also consented to pay a $750,000 civil penalty, and to be permanently barred from serving as an officer or director of a public company.

In a separate criminal matter brought by the United States Attorney's Office in the Eastern District of Missouri, which arose out of similar factual allegations, in July 2008 Shanahan Sr. pled guilty to knowingly and willfully falsifying company records in violation of Sections 13(b)(2) and (5) of the Exchange Act. The District Court sentenced Shanahan Sr. to three years probation, and ordered him to pay restitution of $7,871,662.50 and a $40,000 criminal fine.

The Commission's litigation continues against Michael F. Shanahan, Jr., a former Engineered Support director.