U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 19990 / February 6, 2007

Accounting and Auditing Release No. 2551 / February 6, 2007

SEC v. Steven J. Landmann, United States District Court for the Eastern District of Missouri, Civil Action No. 4:07-CV-270 (E.D. Mo. February 6, 2007)

SEC v. Gary C. Gerhardt, United States District Court for the Eastern District of Missouri, Civil Action No. 4:07-CV-271 (E.D. Mo. February 6, 2007)

SEC Files Actions Against Former CFO and Former Controller of Engineered Support Systems, Inc. Relating to Options Backdating Scheme; Former Controller Consents to Permanent Injunction, Officer-and-Director Bar, and Payment of $886,557

On February 6, 2007, the Securities and Exchange Commission filed civil injunctive actions against Gary C. Gerhardt, the former Chief Financial Officer of Engineered Support Systems, Inc., and Steven J. Landmann, the company's former Controller, alleging that they participated in a six-year fraudulent options backdating scheme in which they granted undisclosed, in-the-money stock options to themselves and to other Engineered Support officers, employees, and directors. According to the complaints, Engineered Support employees and directors received approximately $20 million in unauthorized compensation as a result of the backdating, $15 million of which was received by top executives and directors. Gerhardt and Landmann personally profited by $1,906,300 and $518,972 respectively. Landmann has consented to settle the action.

The complaints allege that, from 1997 through 2002, Gerhardt instructed Landmann to backdate company stock option grants to coincide with historically low closing prices of Engineered Support's common stock. The company's stock options vested at the time of grant, allowing the option recipients to obtain immediate cash profits. In addition, the complaints allege that, on at least two occasions, Gerhardt ordered Landmann to cancel previously issued Engineered Support stock options that had fallen out-of-the-money and to reissue them with new backdated grant dates and exercise prices, to bring them back in-the-money. The complaints also allege that Gerhardt directed Landmann to issue additional Engineered Support stock options to nonemployee directors in excess of authorized amounts, from which these directors received a total gain of approximately $6 million.

As part of the scheme, Gerhardt and Landmann allegedly caused Engineered Support to misrepresent in its Forms 10-K and proxy statements filed with the Commission that all stock options were granted at the fair market value of the stock on the date of the award. Engineered Support also failed to report the additional compensation its executives had received through in-the-money option grants. In addition, the company failed to disclose the repricing of options that had fallen out-of-the-money, or the granting of stock options to nonemployee directors in excess of authorized amounts.

The complaints also allege that Gerhardt and Landmann caused Engineered Support to file materially misstated financial statements with the Commission in its Forms 10-K and 10-Q that did not recognize compensation expense for the company's stock option grants, as required by generally accepted accounting principles. As a result, Engineered Support overstated its aggregate pretax operating income by approximately $26 million, or 21%, for fiscal years 1997 through 2002.

The Commission's complaint against Gerhardt alleges that he violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b), 13(b)(5), and 14(a) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5, 13a-14, 13b2-1, 13b2-2, and 14a-9 thereunder, and aided and abetted violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 13a-1, 13a-13, and 12b-20 thereunder. The Commission is seeking a permanent injunction, disgorgement of ill-gotten gains, including prejudgment interest, civil penalties, and a bar from serving as an officer or director of any public company against Gerhardt.

Without admitting or denying the Commission's allegations, Landmann has consented to a permanent injunction from violating and/or aiding and abetting violations of the antifraud, proxy statement, reporting, record-keeping, and the false statements to auditors provisions of the federal securities laws. Specifically, Landmann has consented to be enjoined from violating Section 17(a) of the Securities Act, Sections 10(b), 13(b)(5), and 14(a) of the Exchange Act, and Rules 10b-5, 13b2-1, 13b2-2, and 14a-9 thereunder, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 13a-1, 13a-13, and 12b-20 thereunder. Landmann has also consented to pay disgorgement of $518,972, prejudgment interest of $108,099, and a civil penalty of $259,486, and to be permanently barred from serving as an officer or director of a public company. The settlement is subject to approval by the United States District Court for the Eastern District of Missouri.

As part of the settlement, Landmann has also consented to be permanently suspended from appearing or practicing before the Commission as an accountant, pursuant to Rule 102(e)(3) of the Commission's Rules of Practice, based on the anticipated entry of a permanent injunction against him.

The Commission's investigation in this matter is continuing.

SEC Complaints in this matter:
Gary C. Gerhardt
Steven J. Landmann

http://www.sec.gov/litigation/litreleases/2007/lr19990.htm