Rim owners fined for backdating options

Stone19 · February 5, 2009

OSC approves multimillion-dollar settlement with RIM's Lazaridis and Balsillie

Thu Feb 5, 6:21 PM

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(The Canadian Press)By David Friend, The Canadian Press

TORONTO - The leading executives who helped create the internationally renowned maker of the BlackBerry smartphone will pay the brunt of about $77 million in fines and restitution to settle allegations they participated in a practice known as stock option backdating.

The settlement Thursday is one of the biggest in the history of the Ontario Securities Commission, and marked a rare occasion where some of the country's most prominent executives appeared before the commission for wrongdoing.

Under the settlement, Jim Balsillie and Mike Lazaridis, co-CEOs of BlackBerry-maker Research in Motion Ltd. (TSX: RIM.TO), as well as former chief financial officer Dennis Kavelman will contribute the bulk of the fines.

Also included are several other executives and directors from one of the most successful companies in the history of Canada.

The allegations surround stock option backdating, a practice that was once commonplace in the technology sector. The provincial stocks regulator said the executives were negligent in overseeing the option backdating, but did not commit fraud.

"The sanctions send the right message that the conduct we saw here won't be tolerated by anyone," OSC litigator Sasha Angus said after the record-high settlement was announced.

"We're not going for records, we simply thought that this was the right one under the circumstances."

Stock options are like a ticket to ride for shareholders - they give holders the option to buy shares in a company further down the road at a locked in price, quite like a raincheque would offer a special sale price on an item later on.

However, backdating takes the stock option practice a step further by creating an option on a certain day, but pricing the stock option at a price sometime in the past when shares were even cheaper - making the potential profits higher.

The practice theoretically rips off the company's existing shareholders because it's offering an undisclosed, artificially created price to an exclusive group of shareholders, often executives at the company.

Backdating has been pegged to tech industry leaders like Apple's Steve Jobs, and captured the attention of the OSC, which began investigating RIM's accounting practices for wrongdoing, leading to the settlement.

The OSC accused Balsillie, Lazaridis and other RIM executives of receiving backdated stock options over the 10-year period ending in July 2006.

Lazaridis, who founded the Waterloo-based company and is the technical whiz behind the successful BlackBerry products, will pay a $1.5-million penalty to the commission, and $150,000 toward the OSC's investigation costs.

Balsillie, who has already stepped down as chairman of the BlackBerry mobile device maker, will pay $5 million in a so-called administrative penalty, plus $700,000 to the OSC.

The two men and another senior RIM executive, Dennis Kavelman, must also repay a total of $38.3 million, including $5.3 million in interest to RIM. And they must pay $44.8 million to cover the company's investigative costs, of which they have already contributed $15 million.

Lazaridis and Balsillie said after Thursday's hearing that the settlement enables them and the company to put the issue into the past and move on.

"We are very pleased to put this behind us, for the employees and for the shareholders, and really get back to work 100 per cent," Balsillie told reporters.

"I think it's highly inappropriate for me to talk about specifics of the settlement and so I just won't," he added.

"But I really want to re-emphasize that we take this very seriously."

The OSC declined to reveal how the two payments will be divvied up between the executives, saying that they had asked the commission to fine them as a group.

However, the settlement is virtually pocket change to both Balsillie and Lazaridis - two of the country's richest men. According to the latest disclosure, Balsillie holds about $2.4 billion worth of shares of RIM, while Lazaridis has about $2.5 billion.

As part of the settlement Balsillie will also be prevented from being a director of any company for a year - although he'll be allowed to remain an executive of RIM.

"The fact that they get to retain their positions of leadership ... that is really what people were looking for," Carmi Levy, a telecom analyst at AR Communications Inc. in London, Ont.

"Both of them have been absolutely critical in getting the company to where it is today ... and they have stayed the course despite some challenges that probably would have derailed a lesser company."

Over the past decade RIM has grown from a virtually unknown technology company to a household name, helped by the success of its BlackBerry, which combines a mobile phone with email and other features.

The product took off in the consumer market and has shown resiliance in a tough economy, expanding its handsets into foreign territories and trumping analyst's sales expectations.

The success has helped the Canadian company sell more than 50 million BlackBerrys, grow its operations exponentially, and grow its workforce to more than 12,000 people around the world.

In the last year, RIM has added 4,000 people to its workforce, at a time when most Canadian companies have cut jobs and shut down plants or streamlined their operations.

The settlement hits former chief financial officer Kavelman the hardest. He was RIM's CFO from 1995 to 2007, the period when the backdating occurred.

Kavelman left the role of CFO and has been chief operating officer since then. As part of the decision he is prohibited from acting as a director or officer of any Canadian reporting issuer for five years.

He also sold most of his shares in RIM last October.

One of the OSC panelists said the commissioners were shocked that the backdating occurred for a decade, and the settlement calls for a comprehensive review of RIM's policies and procedures.

RIM's lead director, John Richardson, said the company "is pleased that the parties have resolved matters with the OSC and looks forward to resolving matters with the SEC."

The company's statement also said the staff of the U.S. Securities and Exchange Commission has reached settlements with RIM and its senior executives, which remain subject to final approval.

A RIM internal investigation found accounting errors for all options granted before Feb. 27, 2002, causing it to revise past net earnings by US$250 million. However, the company didn't find any executive misconduct.

Backdating isn't necessarily illegal if disclosed, but the practice is against the rules of the Toronto Stock Exchange, where RIM's shares are listed. Also, RIM didn't disclose its backdated options until recent years.

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