The Securities and Exchange Commission last week charged Google, Inc. with failing to register the issuance of option grants to employees or provide required financial information to the option recipients.
According to the Commission, the Silicon Valley search engine technology company issued over $80 million in stock options to its employees in the two years preceding its IPO, yet failed to register the securities or make financial disclosures mandated by federal securities law. To settle the charges, Google and its General Counsel, David C. Drummond, agreed to cease and desist from violating the registration and related financial disclosure requirements.
The Commission found that between 2002 and 2004, Google issued over $80 million worth of stock options to its employees as part of their compensation. The federal securities laws require companies issuing over $5 million in options during a 12-month period either to provide detailed financial information to the option recipients, or to register the securities offering with the Commission and thereby publicly disclose financial and other important information. According to the Commission, Google far exceeded the $5 million disclosure threshold, yet failed to register the options or provide the required financial information to employees. According to the Commission, Google - which, at the time, was still a privately-held company - viewed the disclosure of the information to employees as strategically disadvantageous, fearing the information could leak to Google's competitors.
The Commission's order further finds that Google's General Counsel David Drummond, 41, of San Jose, Calif., was aware that the registration and related financial disclosure obligations had been triggered, but believed that Google could avoid providing the information to its employees by relying on an exemption from the law. According to the Commission, Drummond advised Google's Board that it could continue to issue options, but failed to inform the Board that the registration and disclosure obligations had been triggered or that there were risks in relying on the exemption, which was in fact inapplicable.
Stephen M. Cutler, Director of the Commission's Enforcement Division in Washington, D.C., said, "The securities laws exist to ensure full disclosure to investors, including employees accepting stock options as compensation. Companies cannot freely decide that they don't need to comply with the law."
Added Helane Morrison, District Administrator of the Commission's San Francisco District Office, "Attorneys who undertake action on behalf of their company are no less accountable than any other corporate officers. By deciding Google could escape its disclosure requirements, and failing to inform the Board of the legal risks of his determination, Drummond caused the company to run afoul of the federal securities laws."
The Commission's Order charges Google with violating Section 5 of the Securities Act of 1933, which imposes registration and disclosure obligations in the offer or sale of securities, and further charges Drummond with causing Google's violation. Without admitting or denying the Commission's findings, Google and Drummond consented to an order that they cease and desist from violating or causing violations of Section 5.
In a related matter, the California Department of Corporations announced that it had settled civil charges against Google for issuing certain stock options to Google's employees and consultants during 2003 without registering the offering and without providing financial information required to be disclosed under state securities laws in violation of Section 25110 of the California Corporations Code.