Sycamore: Former employees falsified records

Sycamore Networks filed restated financial reports for the fiscal years 2000 through 2004 to increase net losses this week, after an internal investigation of stock option grants issued between 1999 and 2001 revealed that some employee records were deliberately falsified to affect the value of stock option grants.

According to documents filed by Sycamore with the U.S. Securities & Exchange Commission, that internal investigation showed that the start dates on six employee records were “deliberately modified” to yield a lower exercise price for their stock options, Sycamore said, and six existing stock option grants were deliberately cancelled and reissued to allow a lower exercise price.

The investigation also focused on options that were granted under an April 14, 2000 program in which the number of options granted was probably not determined until April 26, 2000. The company also failed to record accurate charges for three stock option grants that continued to vest after the owner’s employment status changed. And one stock option grant was improperly reported in an inadvertent accounting error.

“The employees directing the stock option program in the period from 1999 to 2001 are no longer employed by the company,” Sycamore said in the filing.

In June 2001, Sycamore offered its employees a chance to exchange their existing stock options for a tenth as much restricted stock. The company exchanged 17.6 million options for 1.7 million shares of restricted stock, recording $12.6-million in deferred compensation in the process. However, in the first and last quarters of its 2002 fiscal year, the company laid off a total of 464 employees, and some of that restricted stock was cancelled, as restricted stock was subject to forfeiture if an employee left the company before the stock vested. Therefore, the $12.6-million in deferred compensation was reduced to $7.3 million. Six months later, when the company expected to grant options to purchase 15.9 million shares, they instead granted 12.6 million, as a result of the workforce reductions.

When the original stock options were exchanged, the company stopped reporting compensation costs for them. The value of the restricted stock offered in exchange was calculated as of the dates they were granted and recognized over their vesting periods. “This treatment was incorrect since it failed to also include the unamortized stock compensation balance that remained on the original stock options,” Sycamore said.

As a result, the company restated its compensation expenses for 2004, 2003 and 2002 with increases of $94.4 million, $110.1 million and $187.5 million, respectively.

The restatement had a negligible effect on Sycamore’s earnings for the 2004 fiscal year (which ended July 31, 2004), but it increased the company’s net loss for the fiscal years 2001, 2002 and 2003 by $29.9 million, $1.6 million and $0.8 million, respectively.

Sycamore said it has taken several steps to correct the weaknesses in its accounting practices revealed by the investigation. It adopted a process to certify employee start dates, it revoked the stock administration group’s access to the stock option database and it rescinded the power of executive officers to authorize broad-based stock option grants. In addition, in July 2003, stock administration duties were placed under the direct supervision of the corporate controller.