Marvell to pay up to $350M for backdating charges blamed on CEO, COO, CFO

By Colleen Taylor, Contributing Editor -- Electronic News, 5/7/2007

Marvell Technologies Group Ltd. today announced that a special committee has wrapped its months-long internal review of the company's stock option granting practices and is expecting significant fallout from its damning findings.

The wireless player said that several of its current and former management members are to blame for the now-apparent history of fraudulent backdating, for which Marvell said it could pay up to $350 million in compensation charges when it restates its financial records.

According to a statement made today by the Santa Clara, Calif.-based company, the special committee concluded that stock options were illegally backdated due to a "systemic failure of internal controls with respect to the stock option process and related matters, as well as a failure by certain members of current and former management to exercise sufficient oversight over the stock option process."

Due to the counsel's incriminating findings, Weili Dai, Marvell's co-founder, executive VP, COO and member of the board of directors, will no longer serve in those roles. He will, however, continue with the company in a significantly reduced role as the director of strategic marketing and business development, a non-management position.

Marvell also announced that it had accepted the resignation of George Hervey, the company's CFO. The company has appointed Mike Tate, its corporate controller and treasurer, to serve as interim CFO. In addition, Marvell announced that Matthew Gloss, the former general counsel of its U.S. operating subsidiary, previously had been terminated, as well, for his association with the backdating.

Not all the individuals who received the company's backdating blame are taking such major steps down. The special committee found that CEO Sehat Sutardja participated in "only a few instances" in grants with incorrect measurement dates, Marvell said. Sutardja will remain as CEO and as a member of the board of directors, but has been advised by the committee to step down as chairman of the board in favor of a non-executive chairman of the board.

Marvell said its board's governance committee has started a search for three new independent directors to fill existing vacancies. One of these independent directors will succeed Sutardja as chairman of the board.

According to Marvell, the guilty former and current execs have for the most part surrendered the spoils they received from the fraudulently dated options. Marvell said that in late December, Sutardja, Dai and Hervey each voluntarily agreed with the company to reform the outstanding stock option agreements for grants previously awarded to them that were determined to have measurement dates different from the recorded grant dates and the fair market values on those measurement dates were higher than those on the corresponding recorded grant dates—in other words, option grants that were illegally backdated. If an option has already been exercised, each executive gave back to Marvell the full amount of the difference between the exercise prices of the options as granted and the fair market values of the underlying common stock on the actual measurement dates, Marvell said.

However, the company's stock options saga is still not over. Marvell still has yet to restate its historical statements to compensate for the additional stock-based compensation expenses related to its shady stock options-related past. Marvell said it now anticipates recording a total cumulative, pre-tax, non-cash, stock-based compensation expense adjustment ranging from $325 million to $350 million for periods through fiscal 2006.

The company said it intends to file its tardy Forms 10-Q for the fiscal quarters ended July 29, 2006, and October 28, 2006, and its Form 10-K for the fiscal year ended January 27, 2007, "as soon as practicable" now that the internal stock options probe has wrapped.

As the U.S. government continues to crack down on the high-tech industry's accounting practices, Marvell is certainly not the only company paying a hefty price for a recently exposed history of stock options fraud. Last month, Atmel Corp. announced it would pay some $125 million in compensation charges for a decade-long history of backdated options that it blamed on its former CEO George Perlegos. Also last month, the Securities and Exchange Commission (SEC) filed formal charges against two former Apple Inc. executives for their participation in a backdating scheme that has cost the company $84 million in compensation expenses. And last week, Broadcom Corp. disclosed that the U.S. Attorney's Office had begun interrogations of present and former Broadcom employees as part of its own investigation into the company's stock options granting history, which has been found to be rife with backdating for which Broadcom has already paid a whopping $2.2 billion in compensation charges.*

*Editor's note: This story was updated to include this paragraph at 3:40 p.m. Eastern today.