Memo Alleges Sycamore Options Scheme

A former employee accusing telecommunications equipment maker Sycamore Networks of illegal stock-option practices has given a Massachusetts court what he says is an internal memo to back up those allegations.

Stephen Landry is suing the Chelmsford, Mass., company for allegedly breaching a “special employment” contract under which he did work for the company after he was removed as director of human resources in 2000. He was squeezed out of the company because he refused to participate in illegal backdating of stock options, according to the suit.

Sycamore is one of many high-tech companies embroiled in investigations of backdating, in which the dates when employees joined a company or were granted stock options are changed to provide a lower “strike price” and therefore a bigger profit if they later sell the stock. The company, which rose and fell with the telecommunications boom of the late 1990s, faces both a U.S. Securities and Exchange Commission probe and a criminal federal grand jury subpoena.

The memo lays out what the company should do for several employees who wanted a better strike price for their options. It calls for changing start dates for some and options issuance dates in others. In some cases, it says employees were promised options issued at the stock price’s low point for the quarter. The memo also discusses the risk that each of the tactics will be exposed or discovered by the company’s auditors.

“Change Samia’s start date to 12/21/00 and issue her stock options on 12/21/00. Requires change to offer letter for commencement date of employment,” one section of the memo reads. The move is classified as “low risk” because even though some paperwork would need to be altered, “auditors never reference these documents in their audits,” the memo says.

A copy of the memo and the court document it accompanies were provided to IDG News Service by Landry’s attorney. The top of the memo has what appears to be a fax date stamp on it of Jan. 29, 2001.

Landry’s lawsuit paints a grim picture of Sycamore and of its former chief financial officer, Fran Jewels. When Robin Friedman, a Sycamore attorney, told Landry that Jewels wanted him to resign, “Friedman informed the Plaintiff that his life would be a living hell if he continued to work for the company,” the suit alleges.

In addition to backdating options, Sycamore executives manipulated trading of the company’s stock after its initial public offering and told the public and employees in late 2000 that Sycamore’s growth prospects were still strong even though they knew that major customers were cutting back their spending, according to the suit.

Unfortunately for employees who may have had their options backdated to Dec. 21, 2000, the low point for that quarter, they were too late to cash in on the riches of a company that in late 1999 nearly reached US$300 per share. From its price of about $29 that day, Sycamore (SCMR) rose for a while and passed $50 in January 2001, but then plummeted.

On Wednesday it closed at $3.76, down $0.18.

-Stephen Lawson, IDG News Service (San Francisco Bureau)

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