Mercury directors may face charges

The accountancy scandal surrounding IT governance software vendor Mercury took a new twist this week when the company revealed the US Security and Exchange Commission (SEC) may pursue civil charges against three current directors and its former CFO in relation to the stock option backdating practices that emerged last year.

The company said board members Igal Kohavi, Yair Shamir, and Giora Yaron have received "Wells Notices" from the SEC signaling potential civil charges. The men are expected to contest any charges after claiming in a statement from Mercury that "they did not violate the federal securities laws, that they did not participate in or know of option backdating and that the charges under consideration are legally and factually without basis".

Meanwhile, it was revealed that former-CFO Sharlene Abrams, who is currently CFO at IT management software specialist Opsware, has also received a notice concerning her time at Mercury. Opsware said in a statement that "the proposed action against Ms Abrams relates to practices at Mercury involving the timing of stock option grants and the apparent timing of quarter-end shipments and certain expense items and accruals".

The news was revealed as Mercury restated financial results for fiscal years 2002, 2003, and 2004, reporting around $566m less income. The company said the changes were mainly due to adjustments to stock-based compensation expenses and a number of related tax adjustments. It also said the legal and accounting bill for the accounting clean-up was expected to be around $70m.

Financial results for the quarter to 31 March 2005 are expected to be filed later this month, the company said. Those should be followed with the results for ensuing quarters in the autumn and the company aims to "become current in its SEC reporting in as timely a fashion as possible thereafter".

The company is expected to then try to regain its stock listing on a major exchange, following its delisting from the Nasdaq at the start of this year.

Tony Zingale, president and chief executive at Mercury, said in a statement that the company remains in a strong financial position. "I am particularly proud of Mercury’s continued ability to execute against our strategic business plan and our focus on customer success, technology innovation and expansion of our capabilities through our acquisitions," he said.

Zingale’s comments reinforce Mercury's claims that the accountancy scandal has had little or no impact on customers. The firm’s problems emerged last year when the company's CEO and CFO resigned amid questions about the backdating of stock options.

But the SEC’s consideration of charges against senior directors will still come as a blow to the vendor as it attempts to distance itself from the events.