Former Vitesse Semiconductor Corp. Chief Executive Officer Louis Tomasetta and ex-Executive Vice President Eugene Hovanec were charged by the U.S. with securities fraud stemming from an options-backdating scheme.
Tomasetta, 62, of Ojai, California, and Hovanec, 60, of Westlake Village, California, were named in an indictment unsealed today in U.S. District Court in New York that also charged them with conspiracy, making false entries with the U.S. Securities and Exchange Commission in a scheme which prosecutors said ran between 2001 and mid-2006.
Prosecutors in the office of Manhattan U.S. Attorney Preet Bharara, whose office is prosecuting the case, allege that Tomasetta, who co-founded the company, and Hovanec “engaged in an illegal scheme to deceive Vitesse’s auditors, investors and others” concerning the company’s true financial condition.
Knowing that the company wasn’t going to meet its own goals for revenue or earnings, Tomasetta, Hovanec and others “devised a scheme to falsely inflate Vitesse’s revenues,” prosecutors said.
The two men also backdated numerous stock options granted to Vitesse employees from 2001 to 2004 by backdating the options, prosecutors said.
Fair Market Value
Tomasetta and Hovanec chose to exercise a price for the options that was less than the fair market value of the stock on the date that the company’s compensation committee granted the options, the U.S. said.
The two also signed SEC filings falsely stating that Vitesse hadn’t granted options to employees where the market price exceeded the exercise price, the U.S. said in the indictment.
“As this case demonstrates, we will use all of our resources to ferret out fraud in the board rooms and the executive suites,” Bharara said in a statement.
“We will prosecute corporate CEOs, CFOs and other high- level executives who use their positions of power to deceive investors, auditors and securities regulators,” Bharara said.
Both defendants pleaded not guilty today before U.S. Magistrate Judge Michael Dolinger in New York and were released on $1 million bond, said Ellen Davis, a spokeswoman for Bharara’s office.
“Dr. Tomasetta did not sign, receive or know of any side agreements with a Vitesse distributor, or know that revenues from sales were not reported properly,” his lawyers, Lawrence Gerschwer and Dan Marmalefsky, said in an e-mailed statement. “Dr. Tomasetta did not participate in any scheme, did not commit securities fraud, falsify books and records, or lie to auditors. We intend to contest these charges vigorously, and look forward to our client’s acquittal.”
Gary Lincenberg, a lawyer for Hovanec, didn’t immediately return a voice-mail message seeking comment.
Bharara’s office said that on Dec. 3, Yatin Mody, 47, the company’s former chief financial officer, of Westlake Village, California, pleaded guilty to securities fraud, making false entries on financial records and conspiracy before U.S. District Judge John Koeltl in New York. He is cooperating with the U.S., Bharara’s office said.
On Nov. 30, Nicole Kaplan, 39, of Agoura Hills, California, and Vitesse’s former director of accounting, pleaded guilty to securities fraud, making false entries in a corporation’s financial records and conspiracy before U.S. District Judge George Daniels in New York. She is also cooperating with prosecutors, Bharara’s office said.
The SEC filed civil fraud charges in federal court in New York against the company, Tomasetta, Hovanec, Mody and Kaplan, Vitesse’s former manager.
The civil suit alleges that Vitesse, through its former executives, “perpetrated a fraudulent and deceptive scheme” from 1995 to April 2006 to inflate revenue from shipments of Vitesse’s products and to backdate employee stock options.
As a result, the SEC said, all four defendants failed to record “millions of dollars in compensation.”
Tomasetta and Hovanec also engaged in a backdating scheme from 1995 to 2006, the SEC also alleged in the complaint “for their own personal benefit and the benefit of other Vitesse executives and employees.”
According to the SEC, the two men backdated or re-priced 40 option grants to “thousands of employees,” representing 60 percent of the total options that the company awarded between 1995 and 2006 to newly hired and existing employees and officers.
Tomasetta and Hovanec allegedly “reaped millions of dollars in illicit profits” from the options-backdating scheme, the SEC alleged. Tomasetta and Hovanec also engaged in a cover-up to hide some of their prior option backdating conduct, regulators said in the civil suit.
Tomasetta and Hovanec were fired in May 2006 during a company probe over backdating. In December 2006, Vitesse said former managers backdated stock-option grants and altered documents to cover it up. The settlement released the company from agreements to pay legal fees for Tomasetta, Hovanec and Mody, according to the statement.
The Camarillo, California-based company was delisted on June 28, 2006. In October 2007, Vitesse, maker of chips for telecommunications networks, agreed to pay $8.75 million to settle shareholder lawsuits over backdating of employee stock options.
Ronda Grech, a spokeswoman for Vitesse, didn’t immediately return a voice-mail message left at her office seeking comment.
The case is U.S. v. Tomasetta 10-CR-1205, filed in the Southern District of New York (Manhattan).