ACS Reaches Settlement With SEC On Stock Fraud Charges

The company Mayor Greg Ballard wants to entrust with the City of Indianapolis' parking meter business for the next 50 years reached a settlement with the Securities and Exchange Commission this past week to charges it backdated stock options for its officers and employees and made false disclosures to investors. A statement on the matter released by the SEC on September 9, 2010 reads:

The Securities and Exchange Commission today charged Affiliated Computer Services, Inc. ("ACS"), a former Fortune 500 company in the business of providing business process and information technology services, alleging that during the period 1995 to 2006, ACS backdated stock option grants to its officers and employees and falsely denied that officers at the company had engaged in intentional backdating. ACS was later acquired by Xerox Corporation on February 5, 2010.

The SEC's complaint, filed in federal district court in Washington, D.C., alleges that from 1995 to 2006, ACS engaged in a fraudulent and deceptive scheme to provide executives and other employees with undisclosed compensation. ACS, through its former CEO and its former CFO, backdated the grant dates of ACS stock options to coincide with the dates of low closing prices for the company's stock and then filed periodic reports with the SEC that omitted necessary expenses for backdated options.

The SEC's complaint alleges that as a result of the undisclosed backdating, ACS materially understated the company's compensation expenses in financial statements contained in public reports filed with the Commission. Additionally, ACS did not have adequate internal controls relating to the granting of stock options and did not maintain accurate books and records concerning its stock option grants.

The SEC's complaint also alleges that while the company was conducting an internal investigation of the backdating ACS, through its former CEO and former CFO, made false denials that intentional backdating by officers had occurred at ACS. As alleged in the complaint, the former CEO read a statement during an April 27, 2006 earnings call for investors denying "the intentional granting of look-back stock options to executive officers and directors in order to achieve lower option exercise prices." ACS made similar false disclosures in its May 10, 2006 Form 12b-25 and in Note 3 to its May 15, 2006 Form 10-Q stating that, "ACS does not believe that any director or officer of the Company has engaged in the intentional backdating of stock option grants in order to achieve a more advantageous exercise price." Both the former CEO and the former CFO reviewed drafts of the filings and the former CFO signed the filings. On August 7, 2006, ACS filed a Form 8-K with the Commission attaching a press release, which stated that information set forth in Note 3 to its May 15, 2006 Form 10-Q concerning its stock option investigation "can no longer be relied upon."

In January 2007, ACS restated its historical financial statements. ACS's restatement recorded $51 million in compensation expenses for 72 of the 73 option grants it awarded between 1994 and 2005.

Without admitting or denying the SEC's allegations, ACS consented to a permanent injunction against violations of Section 17(a) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder. The settlement is subject to court approval. The Commission took into account the cooperation that ACS provided the Commission staff during its investigation.