Sept. 3 (Bloomberg) -- Former Monster Worldwide Inc. Chief Operating Officer James Treacy must serve two years in jail for improperly accounting for backdated stock options, a judge said, rejecting a U.S. request for a term of as much as 12 1/2 years.

U.S. District Judge Jed Rakoff in New York also ordered Treacy, who lives in Glen Rock, New Jersey, to pay $6.3 million in restitution. Treacy, who has been free on bail, denies wrongdoing and says he will appeal.

“I don’t have any doubt the jury’s verdict was correct,” Rakoff said in court yesterday. “It is appalling, it is disgusting that this practice went on.”

Treacy’s sentence came two weeks after an appeals court in California reversed the backdating conviction of Gregory Reyes, the former chief executive officer of Brocade Communications Systems Inc. Reyes, who was sentenced to 21 months in prison, was the first CEO convicted by a jury in a U.S. crackdown on stock options manipulation.

Through backdating, companies retroactively change grant dates to increase a recipient’s gains. At least 225 companies have disclosed internal or federal probes involving options irregularities, and more than 140 have said they would restate financial results. It isn’t a crime to backdate options. It is a crime to fail to disclose the backdated options.

Four-Hour Verdict

Jurors in Treacy’s case returned their verdict in four hours in May. Prosecutors said Treacy backdated options at New York-based Monster, the world’s largest online-recruiting company, by treating them as if they were granted on dates when Monster’s stock price was at or near a periodic low. None of the grants resulted in a compensation expense, as the law requires, prosecutors said.

Prosecutors said Treacy earned at least $14.5 million from the scheme, including profits from his exercise of backdated options and bonus payments after he reached company financial targets.

Monster reported in 2001 that its net income was $69 million when it was really $3.4 million after options expenses were recorded, prosecutors said. The company said in December 2006 that it had overstated earnings by $271.9 million in the previous nine years because of improperly recorded option grants. Prosecutors said the company understated compensation by $339 million.

‘Integrity, Accomplishment’

Defense attorney Evan Barr called for leniency for his client, citing in a legal brief the “abstract nature of this accounting offense” and Treacy’s “long history of integrity, accomplishment and generosity.” Barr said Treacy, the father of three young girls, shouldn’t be sent to prison.

“The people I love have been emotionally bludgeoned by this process,” Treacy, who didn’t testify at the trial, told Rakoff before he was sentenced. “Possibly not taking the stand was a mistake.”

Treacy’s lawyers said during the trial that he relied on his boss, Andrew McKelvey, and other executives to decide when to award stock options and how to account for them. McKelvey and former General Counsel Myron Olesnyckyj “cherry-picked” prices at which options were awarded and Monster’s finance staff was responsible for accounting for the awards, the lawyers said.

McKelvey, Monster’s founder and former CEO, died in November. Before that, he entered into a deferred prosecution deal with prosecutors. Olesnyckyj pleaded guilty to fraud and cooperated in the government’s case against Treacy.

More than 200 friends and colleagues wrote letters in support of Treacy. Dozens in court applauded after he finished his statement to the judge.

“Mr. Treacy is a good man who made very serious errors,” Rakoff said.

Small Scandal

Another defense lawyer, Reid Weingarten, told Rakoff that no executive convicted of backdating options in the U.S. has received a sentence of more than 21 months, a factor the judge noted in sentencing Treacy.

“He did not have a very large role in what will turn out to be not a very large scandal,” Weingarten said in court.

Prosecutors initially sought a sentence of as much as 34 years in prison, citing U.S. sentencing guidelines that called for such a term. They modified their request to about 12 years after the judge said the guidelines recommended a sentence of 121 months to 151 months.

Treacy must surrender to prison on Oct. 20, the judge said.

The case is U.S. v. Treacy, 08-cr-366, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: David Glovin in New York federal court at dglovin@bloomberg.net.

Last Updated: September 3, 2009 00:01 EDT