Sycamore Networks Inc. employees discussed how they could manipulate the dates of stock-option grants to make them more lucrative while keeping their actions hidden from the company's auditors, according to an internal memo attached to a recent lawsuit.

The memo provides evidence that backdating and other altering of options was common at Sycamore, and that employees believed the changes could get the company in trouble. More than 50 companies, including Sycamore, are being investigated by the Securities and Exchange Commission and federal prosecutors in a growing scandal related to options-timing practices.

Stephen Landry, a former human-resources director at Sycamore, revealed the existence of the memo, which has been turned over to the SEC. He contends in a lawsuit, filed last month, that the company terminated his employment agreement because he told executives about the memo and complained about the company's stock-option practices.

Scott Larson, a Sycamore spokesman, said the company has a policy of declining to comment on pending litigation. In a recent filing revealing Mr. Landry's suit, Sycamore said it believes it has "meritorious defenses to the complaint, intends to vigorously contest this action and intends to file counterclaims, as appropriate."

A stock option generally grants an employee the right to buy shares in the future at current prices. Federal prosecutors and the SEC believe companies may have backdated options or otherwise altered them to a time when shares were selling at lower prices, which could have significantly inflated executives' pay.

The internal memo, which was included in Mr. Landry's suit, carried a marking suggesting that it was faxed from a Sycamore office in January 2001. The suit says an employee sent it to Robin Friedman, Mr. Landry's successor in the human-resources department. Ms. Friedman couldn't be reached for comment.

The memo discusses options grants to six Sycamore employees in late 2000, at a time when its once-highflying stock was plunging. Most were new hires and some were promised they would receive options at the lowest price of the quarter, the memo says. The document also discusses ways to alter employees' start dates so they could get lower-priced options, then evaluates the risk that each of the individual changes would be discovered by auditors.

The memo says that Ed Zaval, a vice president of customer service, "was promised his stock option grant would be issued at the low of the quarter price." It said his actual start date was Jan. 2, 2001, but the low for the quarter was Dec. 21, 2000, at $29.125. Under the category, "action," the memo says to "change Ed's date of hire to reflect 12/21/00 and his stock option should be granted 12/21/00." Under "risk assessment," the memo reads: "Low risk. Senior level employee and the risk of exposure to this agreement is low. No audit risk." Mr. Zaval declined to comment.

Sycamore hired a human-resources employee on Dec. 18, 2000, while the stock closed at $50.125, the memo says. After the stock dropped considerably, the employee asked that her options be granted on Dec. 21, 2000, when the stock closed at $29.125. That was the stock's low for the entire year. The memo says the company should change the offer letter to the date with the lower stock price.

The memo assessed the risk of the maneuver as "low" in part because the employee had a "relationship" with the chief executive of another company in the same field and "that could work to our advantage should the risk of exposure of this agreement surface." From the memo, the nature of the relationship or how it might benefit the company wasn't clear. The document says payroll and medical records would remain unaltered but said there was a "low audit risk" because "auditors never reference these documents in their audits."

The memo states that Jinendra Ranka, a former design engineer for Sycamore, was issued options on 50,000 shares in the company's first fiscal quarter. When the shares fell, Mr. Ranka asked for his options to be given in the second fiscal quarter so that they would have a lower strike price, the memo says. The memo states that a decision was made to issue a grant at "the low of Q2" and that the original grant "has been deleted from the system in its entirety."

The memo added that "there is an audit risk" since the cancellation of the original grant occurred after an audit and records would no longer match.

Mr. Ranka, who no longer works at Sycamore, said he didn't have a clear memory about the grants, but said that he believed that they had been reissued at the lower price as part of a repricing for all employees. "They were just trying to make sure that everyone was fairly compensated," Mr. Ranka said.

The memo has surfaced because of a longstanding dispute between Sycamore, a Chelmsford, Mass., optical-networking firm, and Mr. Landry, whom the company hired as human-resources director in October 1999 and replaced one year later, according to his suit.

Mr. Landry, now 57, claims that shortly after he was hired, he was instructed by Frances M. Jewels, then Sycamore's chief financial officer, to change the employment start dates of various employees so that they could receive stock options with lower exercise, or strike, prices. He says he refused and was replaced.

Ms. Jewels resigned as chief financial officer in 2004. Ms. Jewels's lawyer, Michael Gardener, declined to discuss the lawsuit's details. "We will not dignify the incendiary allegations in the complaint by public comment," Mr. Gardener said. "This matter will be determined in the only appropriate forum: a court of law where all the evidence can be fairly heard."

In the suit, filed in state court in Cambridge, Mass., Mr. Landry says he was allowed to stay on at the company as an adviser after losing his human-resources position, and promised a $10.8 million employment agreement and severance package. In June 2005, he says, the company terminated the agreement, in part because he brought up improper activity at the company. He alleges breach of contract and wrongful termination.

Kevin G. Powers, Mr. Landry's attorney, said a colleague of his client's found the 2001 memo on a fax machine, then made a copy and gave it to Mr. Landry. Mr. Landry's suit claims that in January 2005, he discussed the memo with Sycamore President Daniel Smith and another top official. His suit says the company then turned the information over to the SEC. Mr. Landry, who says in his suit that he is in poor health, is also asking for the reinstatement of his health benefits.

Source: Wall Street Journal, July 12, 2006