Former Monster CEO Admits Stock Fraud; Says Others Involved

Jan 23, 2008
This article is part of a series called News & Trends.

Today’s admission by former Monster chairman and CEO Andrew McKelvey that he participated in a stock backdating scheme that cost the company $340 million is only the first act curtain in a criminal investigation that appears likely to ensnare other executives from as far back as 1996.

In federal court in New York this morning, McKelvey admitted he “along with others at Monster Worldwide, Inc. routinely selected prices for stock options grants based on historical dates when Monster’s stock price had closed at, or near, a low point, resulting in grants of in-the-money stock options.”

Stock options allow employees to participate in a company’s financial success. But in Monster’s case, prosecutors charged that McKelvey and others backdated options so they would be immediately profitable when granted. The price difference represented compensation to the employee and should have been reported. But it was not.

A spokeswoman for the U.S. Attorney in New York City, which prosecuted McKelvey, declined to discuss the status of the case or to say whether other company executives were being investigated. However, a statement by the Securities and Exchange Commission said its investigation into the stock backdating continues.

In court papers prosecutors detailed numerous instances where McKelvey ordered stock grants to specific executives be issued at the lowest price during a certain month or even a quarter. According to the criminal complaint against McKelvey, he discussed backdating with the executives who would be getting the stock grant and even approved use of back dated options as a way to reduce expenses in certain Monster departments.

No Monster executives are named, other than McKelvey and Myron F. Olesnyckyj , the company’s former general counsel who is cooperating with the prosecution as part of a plea deal for a reduced prison sentence.

McKelvey’s admission came in a deal with the U.S. Attorney to defer his prosecution because of an undisclosed terminal illness, widely believed to be cancer.

McKelvey also today settled a lawsuit brought against him by his former company, agreeing to pay it $8 million and to reduce his voting power. McKelvey’s 4.76 million shares are worth 10 votes each versus those of ordinary shareholders. That effectively gave him control of 31 percent of the votes. Now he will control about 7.4 percent.

The change in his voting power could ease the way for the long-rumored sale of the company. When he still headed the company he company he founded, the 73-year-old McKelvey rebuffed potential suitors. Even after retiring in 2006, his voting strength made a buyout difficulty without his support. Now with his voting power diminished and his health failing, speculation about Monster’s possible sale has already begun.

McKelvey also settled a civil action brought against him by the Securities and Exchange Commission and agreed to pay $275,989.72. Although McKelvey is not personally believed to have benefitted from backdating stock options, he had Monster issue options to four personal employees of his. The SEC payment is the value of the options plus interest.

The terms of his deal with the U.S. Attorney include nine conditions. Not among the requirements to remain in the jurisdiction, not commit further offenses and report to a supervising officer is any requirement that McKelvey cooperate with investigators or agree to testify.

The spokeswoman for the U.S. Attorney would not say what that means or if he is assisting in the investigation. She also said she couldn’t say how common deferred prosecution agreements are.

Professor David A. Harris at the University of Pittsburgh School of Law told us, “It’s a fairly unusual situation. It’s not something you see a lot.”

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