Feds say: Monster Executives In Conspiracy to Commit Fraud

Feb 1, 2008
This article is part of a series called News & Trends.

When former Monster CEO Andrew McKelvey got a break from prosecutors last week, it came at a price. He had to admit to a federal judge that he and others at the company routinely backdated stock options over a seven-year period and that he had approved filing false company financials.

That much is widely known. But with the agreement to defer his prosecution, based on his terminal pancreatic cancer, a sealed criminal complaint was made public . The 17-page document offers a look at how the backdating of stock options came to become almost routine at Monster and a tool to cut costs and make budget.

While the criminal complaint names only McKelvey, it specifically alleges there was a conspiracy to commit fraud at the company and that “others known and unknown” participated. One of those “others” is Myron F. Olesnyckyj, the former general counsel of the company who pleaded guilty and is cooperating with prosecutors. Although no others are named, the complaint makes clear that prosecutors believe several Monster executives were involved in the backdating and that the Human Resources Department carried out the orders.

For example:

“On or about January 5, 1999 Andrew J. McKelvey, the defendant, drafted a memorandum to a long time Monster executive in which he promised that the executive would receive 50,000 options if he stayed at Monster and “the stock price should be the lowest stock price of December 1998.”

How much might that have been worth? On Dec. 9th Monster’s stock closed as $26.88, the low for the month. On the day McKelvey is alleged to have written the memo the stock had already risen to $39.94, meaning the option was worth $653,000 that day. We don’t know if the executive took the offer or not, but later in 1999 Monster’s stock hit $160.31 a share, making those options worth $6.67 million.

Ten days later, McKelvey told the Human Resources Department he wanted to grant options at $25 a share. Later, according to the criminal complaint, “McKelvey and his co-conspirators caused Monster to issue an option grant backdated ‘as of’ December 9, 1999.”

Several other such episodes are recounted in the court filing. On Nov. 13, 2001, McKelvey emailed HR and ordered that “a senior officer” get 100,000 options at the lowest price for the month. The lowest closing price that month was $27.50 on Nov. 1. By Nov. 13, the date of the e-mail, the stock had climbed to $36.02, making the grant already worth $852,000.

It wasn’t just executives who received these stock grants. By 2001 some company divisions saw options as a no-cost way to compensate workers. The Executive Search division, struggling in Oct. 2001 to make its numbers, got approval from McKlevey “to use in-the-money options instead of cash bonuses for several employees,” prosecutors wrote.

In 2000, 1.75 million options were granted to employees throughout the company backdated to Dec. 1, 1999 when the stock closed at $95. The next day, when Monster announced a deal with America Online, its stock shot up to $127.06. And later went even higher, until splitting in March 2000.

That wasn’t the first of the so-called broad-based grants, nor was it the last. But it was likely the most profitable for the workers awarded the options.

Granting stock options is a time-honored corporate practice based on the thinking that workers with a stake in the stock will work harder to grow its value. Securities laws don’t necessarily prohibit backdating options; they require disclosure and prohibit the falsification of records. In Monster’s case that meant the “in-the-money” options were to be reported as such and the company had to account for the difference in value as compensation. Neither occurred and, in fact, the criminal complaint points out that nearly all the company’s filings with the Securities and Exchange Commission and its annual reports claim it grants options at the fair market value on the date of the grant.

The significant of this failure is illustrated by what happened to earnings for 2001 when Monster, under threat from the SEC and delisting by the stock exchange, restated its financials to account for the grants. In 2001, Monster reported earning $69 million. In 2006, when it went back and fixed the numbers, the 2001 income dropped to $3.44 million. “Monster’s net income for 2001 was overstated by over 1,900 percent,” the criminal complaint says.

Investigations into the backdating are continuing. Officially, the U.S. Attorney’s Office for the Southern District of New York, which filed against McKelvey and Olesnyckyj, won’t discuss what it is doing. The SEC, however, said its independent investigation remains alive. One source told us it is likely that former Monster executives who knew they were getting backdated options and who were part of the alleged conspiracy would at the very least be made to give up their profits. Whether prosecutors will seek to criminally charge others, our source didn’t know.

This article is part of a series called News & Trends.
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