TechWeek: Mercury Played by Own Rules

If you've been following the sad saga of options backdating at Mercury Interactive(MERQ), you already know that something went seriously wrong at the business software maker.

But if you haven't read Mercury's recent regulatory filings, you have no idea how bad things got. Simply put, the former management team made up the rules as it went along -- and not just about options -- and the board of directors did exactly nothing to stop them.

Sure, those are harsh words. But consider these points made in the company's recent filings:

The special committee of the board that investigated the matter found 54 instances of backdated option grants.

Grants were made to people before they became employees, and in some cases after their employment status was unclear

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Exercise dates for options exercised by some executives were apparently reported incorrectly -- and "In each case, the price of our common stock was substantially lower on the reported exercise date than on the date the option was actually exercised."

That last point has a hidden catch for shareholders, according to the filings. The misdating had the effect of lowering taxable income for the executives, and that, in turn, results in a potential penalty to the company for failing to pay the right amount of withholding tax.

Then there's the little matter of a $1 million loan made to ex-CEO Amnon Landon that may not have been approved by the board. In any case, supporting documentation was lacking, although the loan has since been repaid.

There's also a tantalizing reference to "certain inappropriate expense reimbursements that were made to our former CEO." That phrase appears a number of times in the document, but nowhere is it explained. I called Mercury to find out, and a spokesman refused to comment. Isn't that something shareholders have a right to know? I guess not.

But wait, there more. Landan, former CFO Sharlene Abrams, who left in 2001, and possibly others (the filing is not clear on this point), overrode internal controls "to manage or influence the timing of quarter-end shipments and influence the timing and level at which certain expense items and accruals were recorded to achieve a desired consistency of reported financial results."