So, what happened at Mercury Interactive Corporation (Nasdaq: MERQ)? The company's management, headed by chairman, president and CEO Amnon Landan -- the man who led the company to greatness over the past 20 years, and considered one of the most talented managers around -- appointed a special, independent committee in June 2005. The special committee was changed with the task of investigating suspicions of irregularities in the distribution of options to company employees. This came in the wake of suspicions raised by the US Securities Exchange Commission (SEC), which launched an unofficial inquiry into the matter in November 2004. Mercury's special committee was asked by management, with Landan at its helm, to examine if there were indeed irregularities.
Yesterday, the results of the special committee's investigation were released. The committee members, who included experts in law and accounting, reached their interim, though not final conclusions. It seems that what they had found so far was so significant for shareholders, that they had no choice but to release an interim report.
The committee discovered that, "From 1995 to the present, there have been 49 instances in which the stated date of a Mercury stock option grant is different from the date on which the option appears to have actually been granted. In almost every such instance, the price on the actual date was higher than the price on the stated grant date. These instances represent the overwhelming majority of the grants between January 1996 and April 2002. The misdating occurred with respect to grants to all levels of employees".
The committee stated that Landan, together with CFO Douglas Smith, and general counsel Susan Skaer were "each aware of and, to varying degrees, participated in the practices discussed above". While each of the three said they "did not focus on the fact", the special committee concluded that they "should have known the practices were contrary to the options plan and proper accounting".
The SEC did not question these people; it was concerned with the tax problem. Because the company, and the options-holders were obligated to pay withholding taxes, the SEC feared that the US Internal Revenue Service might not have received its due. The committee learned that some employees, Landan included, exercised their options, which would have turned the alleged crime from theory into action. In addition, unconnected to the options and the investigation, the committee discovered that in September 1999, Landan received a $1 million loan from Mercury. There was no record that the loan, (which was since repaid), had been approved in advance by the board of directors.
The committee wrote: "The loan was referred to in some of the company's public filings, but was not clearly disclosed." The committee also accused management of misleading members of Mercury's compensation committee -- including Igal Kohavi, Yair Shamir and Dr. Giora Yaron -- about whether the options were accounted for properly. Apparently the compensation committee did eventually recognize the problem, and instituted changes in procedure before the investigation ever began.
In short, the special committee recommended that, for the meanwhile, Landan, Smith and Skaer leave the company, and the recommendation was acted upon. Anthony (Tony) Zingale was named CEO. David Murphy was named CFO. Zingale came to Mercury a year ago from Clarify, where he was president and CEO; he is a very excellent manager. Dr. Giora Yaron was elected chairman of the board. He too, is a professional of the highest caliber.
Published by Globes [online], Israel business news - www.globes.co.il - on Thursday, November 03, 2005