HP-Owned Mercury Settles Options Lawsuit

SAN JOSE, Calif. - Mercury Interactive, one of the first companies to reveal its financial records were faulty because of stock options tampering, has agreed to pay $117.5 million to settle a group of lawsuits accusing the business software maker of duping investors, the company and shareholder lawyers said Monday.

The settlement in U.S. District Court in San Jose is Mercury's latest effort to atone for its executives' mishandling of stock options awards dating back to the 1990s and smooth the company's integration into Hewlett-Packard Co. as part of a $4.9 billion acquisition completed last year.

HP confirmed the settlement but declined to comment further. The Palo Alto-based company, which inherited a federal securities probe with the Mercury acquisition and disclosed in March that the Senate was also looking into Mercury's bookkeeping, noted that it's no longer facing any pending stock options investigations.

Attorney Joel Bernstein, who represented the Mercury Pension Fund Group, said the parties that sued are satisfied and "confident that the award will provide fair recompense to the investors who lost money as a result of Mercury's improper practices."

Mercury makes software that helps companies test and analyze the performance of applications such as those that control functions like payroll and sales and supply chain record-keeping.

HP views the acquisition of Mercury - and the seamless absorption of it - as keys to boost its blossoming software division, which brought in $1.6 billion in sales for the first nine months of the fiscal year - just 2 percent of HP's $76.9 billion total, but still nearly double over the year-ago period.

HP is plunking down substantial resources to beef up its software segment, including the $1.6 billion acquisition announced in July of Opsware Inc., a company founded by Internet pioneer Marc Andreessen that cuts the cost of running increasingly complex data centers by automating management tasks.

HP's own software is primarily used to help companies ensure their computers run smoothly. The technology giant, which is on track to crack $100 billion in revenues this year for the first time in its history, hopes to pull in more profits by tapping a burgeoning market for software that helps companies manage mounting hordes of data and complicated computer setups.

HP executives assured investors at the time of the July 2006 Mercury acquisition that the company had a handle on Mercury's legal liabilities and that the stock option woes wouldn't matter to customers.

They had led to the ouster in 2005 of Chief Executive Amnon Landan and as well as Mercury's chief financial officer and general counsel.

Landan and the former executives were also hit with civil fraud charges by the Securities and Exchange Commission for allegedly enriching themselves and other Mercury employees with backdated stock options grants between 1997 and 2005 that were never properly recorded.

Tim England, assistant director of the SEC's enforcement division, said Monday that those cases are still being litigated.

Mercury also had to wipe out more than $530 million in previously reported profits and, in May this year, it agreed to pay $28 million to settle civil fraud charges brought by the SEC.

Backdating refers to selecting for stock options dates in the past when the company's stock price was lower than when the option actually was granted in order to boost the recipient's potential windfall. It isn't necessarily illegal as long as it's properly accounted for within the company's financial records.

Hundreds of companies have been investigated by law enforcement authorities or independent committees appointed by the companies, and more than 10 executives have been criminally charged in connection with stock option backdating schemes.

In August, Gregory Reyes, the former chief executive of San Jose-based networking equipment maker Brocade Communications Systems Inc., was convicted by a jury on 10 felony counts of securities fraud in U.S. District Court in San Francisco.

Reyes is scheduled to be sentenced Nov. 21. He faces up to 20 years in prison and a $5 million fine.

HP shares fell 31 cents Monday to close at $51.24.

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