A dab (of disclosure) will do you…

July 13, 2007

images3.jpegIn January 2006, I footnoted about how it seemed odd that Engineered Systems (old ticker: EASI) was disclosing a formal SEC investigation over a year after the fact and that the investigation seemed to (though it was never spelled out in the filing) focus on the company’s former Chairman and CEO, Michael Shanahan Sr., who upon exiting, was offered $62,500 a month in the very demanding job of non-executive chairman. The K was filed shortly before DRS Technologies (DRS) completed its acquisition of Engineered Support and had been disclosed in an S-4 filed by DRS, but was MIA from Engineered Support’s filings.

Well, yesterday, the SEC announced that Shanahan, and his son, Michael Junior, who happened to be on EASI’s compensation committee had been charged in an options back-dating scheme. According to the SEC’s complaint, the father and son team were skilled at back-dating options, netting $20 million “in unauthorized and undisclosed compensation”. An attorney representing the elder Shanahan told the WSJ that “At no time did the Shanahans, either Shanahan, ever intend to defraud anyone.” Back in March, a grand jury indicted EASI’s former CFO and the company’s former controller pled guilty in a deal with prosecutors.

It should go without saying that the Shanahans are innocent until proven guilty. But when a company drags its feet on disclosing a formal investigation, who knows what else they’re hiding. It’s also another reminder that having relatives on the compensation committee is usually one of the biggest red flags that exists.

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