McKelvey Admits Conduct; Prosecution is Deferred In Light of Medical Condition
LAWFUEL – Legal Newswire – MICHAEL J. GARCIA, the United States Attorney for the
Southern District of New York, and PHILLIP BARTLETT, Acting
Inspector-In-Charge of the New York Division of the United States
Postal Inspection Service, announced today that ANDREW J.
McKELVEY, former Chief Executive Officer of recruitment services
giant Monster Worldwide, Inc. (“Monster”), was charged in a
Complaint with securities fraud and conspiracy in connection with
the backdating of millions of dollars’ worth of employee stock
option grants. In light of McKELVEY’s terminal medical
condition, the Government agreed to, and the Court approved, a
deferral of prosecution, meaning that the charges will be
dismissed after 12 months if McKELVEY abides by the terms of the
agreement. The agreement included a statement by McKELVEY
accepting his responsibility for his participation in the
backdating scheme. According to the Complaint filed yesterday
and unsealed today in Manhattan federal court:
McKELVEY conspired with other former senior executives
at MONSTER to systematically backdate stock option grants to
Monster employees between 1996 and 2003, in an effort to
fraudulently suppress Monster’s compensation expenses, and
falsely inflate its earnings. As a result, Monster’s public
filings with the Securities and Exchange Commission (“SEC”)
between 1997 and 2005 fraudulently understated the company’s
compensation expenses, and inflated its earnings, by over three
hundred million dollars.
Applicable accounting principles would have required
Monster to increase its compensation expenses, and reduce its
earnings accordingly, where employee stock options were issued
“in the money” — in other words, at a price lower than the fair
market value of the company’s stock on the date of the grant. In
an effort to grant “in the money” options without recording an
appropriate compensation expense, McKELVEY and other senior
executives at Monster backdated option grants by papering them as
if they had occurred at dates in the past — dates on which
Monster’s stock price was at a periodic low point. The resulting
backdated options were “in the money” as soon as they were
issued, but fraudulently appeared to have been issued at the fair
market price on the supposed date of the grant, and therefore
appeared not to require a charge to Monster’s earnings.
The co-conspirators backdated the vast majority of
Monster’s employee stock option grants from 1996 to April 2003,
including Monster’s broad-based annual options grants to its
employees in 1998, 1999 and 2001, and a number of “one-off”
grants — grants to new employees, or to current employees for
purposes of retention — during the same period. None of the
backdated grants resulted in the company taking a compensation
expense, even though every one of them had an immediate
compensatory component.
As a result, Monster’s form 10-K annual public filings
with the SEC from 1997 to 2005, which McKELVEY reviewed and
signed, or directed someone to sign on his behalf, falsely
understated the company’s compensation expense, and also falsely
claimed that the company followed applicable accounting
principles regarding options grants. For example, Monster’s Form
10-K for 2001 reported that Monster’s net income was $69,020,000,
but this was in fact an overstatement of more than 1,900 percent.
After Monster recorded the appropriate compensation expense for
the backdated option grants, the company’s net income dropped to
$3,439,000. In all, the backdating scheme resulted in an
understatement of compensation expense in the amount of $339
million, pre-tax, during the period 1997 through 2005.
McKELVEY and his co-conspirators also made false and
misleading statements about their options grant practices to
Monster’s outside auditors. For example, the Complaint charges,
McKELVEY signed management representation letters in which he
falsely represented that Monster’s financial statements were
presented in conformity with Generally Accepted Accounting
Principles, which they were not, and that there had been no fraud
involving management or employees who had significant roles in
internal controls.
McKELVEY, 73, of New York, New York, is charged with
one count of conspiracy to commit securities fraud, to make false
statements in SEC filings, to make false statements to auditors,
and to falsify corporate books and records; and one substantive
count of securities fraud.
Earlier today, McKELVEY appeared before United States
Magistrate Judge GABRIEL GORENSTEIN in Manhattan Federal Court.
By prior agreement with the United States Attorney’s Office,
McKELVEY entered into a deferred prosecution agreement because of
a terminal medical condition. Based on this condition, the
Government explained to Judge GORENSTEIN, the Government had
decided that deferral of prosecution of McKELVEY was appropriate.
In agreeing to accept the deferred prosecution,
McKELVEY made a statement accepting his responsibility in the
backdating scheme. Specifically, McKELVEY stated that between
1997 and 2003, 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. Thereafter, I signed and certified public filings with
the SEC that reported false and misleading financial results and
contained misleading descriptions of Monster’s options granting
process. These filings created the impression that Monster did
not grant in-the-money options and failed to disclose the
compensation expense resulting from the in-the-money options
grants.”
The SEC also announced today that it had filed a
complaint against McKELVEY, alleging civil violations of the
Federal securities laws based on the backdating scheme. The SEC
reported that it had reached an agreement with McKELVEY, under
which he committed to disgorge $275,989.72, including prejudgment
interest. McKELVEY will also be enjoined from violating
the anti-fraud, reporting and other provisions of the Federal
securities laws.
Mr. GARCIA, a member of the President’s Corporate Fraud
Task Force, praised the investigative efforts of the United
States Postal Inspection Service, and thanked the SEC for its
assistance in this matter.
Assistant United States Attorneys DEIRDRE McEVOY and
ANIRUDH BANSAL are in charge of the prosecution.
08-17 ###
