Former CFO indicted
on charge of tax evasion in backdating scheme

By Julia Cheever

April 23, 2008

The former chief financial officer of a Silicon Valley software company has been indicted by a federal grand jury in San Francisco on charges of tax evasion stemming from a stock options backdating scheme.

Sharlene Abrams of Los Gatos was chief financial officer of Mercury Interactive Corp. of Mountain View from 1993 to 2001. The company is now owned by Hewlett-Packard Co.

Abrams was indicted on April 17 on one count of evading her own income taxes for 2001 and two counts of aiding in false tax returns for former Mercury chief executive Amnon Landan and former chief operating officer Kenneth Klein.

The indictment charges that in 2001, “Abrams orchestrated the backdating of stock option exercise dates for herself, Landan and Klein in order to reduce the income taxes due on the gains realized by the exercises.”

U.S. Attorney Joseph Russoniello said the case is the first time in the Northern California court district that criminal tax charges have been filed in connection with options backdating.

U.S. Attorney Joseph Russoniello

Other executives have been charged with different backdating-related crimes such as securities fraud and falsifying company books.

Backdating is the practice of allowing company executives and employees to record their date of buying company stock at an earlier date when the price was lower. The practice is not illegal in itself, but it is illegal to fail to disclose it as a compensation expense or to evade taxes due.

Last year, Mercury Interactive agreed to pay a $28 million fine to settle a separate civil fraud lawsuit in which the U.S. Securities and Exchange Commission alleged that company officials falsified documents and failed to disclose $258 million in backdating-related compensation between 1997 and 2002.

Abrams’s case was assigned to U.S. District Judge Ronald Whyte of San Jose.

Douglas Young, an attorney for Abrams, said no date has been set yet for her to appear in court. Young decline to comment on the case.

Backdating stock options can affect taxes in either of two ways, according to the indictment.

In the case of options known as “non-qualified stock options,” employees must pay ordinary income tax on the gains stemming from the difference between the option price and the fair market value on the date the stock was actually bought.

Abrams is accused of evading her own taxes by failing to pay the full taxes due on these gains. The indictment doesn’t specify an amount, but alleges she used the backdating scheme to attempt “to evade and defeat a large part of the income tax” that she and her husband owed in 2001.

In the second type of tax treatment, options known as “incentive stock options” may be subject to long-term capital gains taxes and may trigger the imposition of an alternative minimum tax.

Abrams is accused of aiding Landan and Klein in reporting less alternative minimum taxable income than was required as a result of the backdating.

FCJ Editor

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