Comms chips

Marvell's Options Drama

Marvell Technology Group Ltd. (Nasdaq: MRVL) filed its restated earnings Monday, revealing a dramatic trail of firings, demotions, and legal intervention.

Like dozens of other companies, the chip vendor has been under investigation for backdating stock options. In addition to getting pinged by the Securities and Exchange Commission (SEC) , Marvell ran an internal investigation that revealed evidence of backdating. As a result, the company announced in October it would likely have to restate earnings. (See Feeling Less Marvell-ous.)

Those figures came in Monday, with Marvell saying it made a cumulative pre-tax adjustment of $327.4 million, affecting its net income but not its cash reserves. The resulting 10-K, for the fiscal year ended January 27, 2007, got filed today, along with quarterly statements for parts of its fiscal 2007. (See Marvell Files 10-K.)

Table 1: Marvell's Net Income
Year ending Originally reported Restated (July 2007)
Jan. 2003
($72.2 M)
($0.15) per share
($107.3 M)
($0.23) per share
Jan. 2004
($45.5 M)
$0.08 per share
($18.3 M)
($0.04) per share
Jan. 2005
$141.7 M
$0.24 per share
$62.8 M
$0.11 per share
Jan. 2006
$331.4 M
$0.53 per share
$199.5 M
$0.32 per share
Source: Marvell SEC filings
Per-share figures adjusted for a 2:1 stock split in 2006.

Marvell shares were up 6 cents (0.3%) at $18.14 in after-hours trading yesterday.

The restatements weren't close to the $2.2 billion that Broadcom Corp. (Nasdaq: BRCM) racked up. But Marvell's options issues had a bigger effect than Broadcom's on top management, as CEO Sehat Sutardja and then-COO Weili Dai -- the husband-and-wife team at Marvell's helm -- paid back gains of $5.4 million and $3.4 million, respectively. (See Broadcom's $2.2B Confession and Options Antics.)

The options issue also created some carnage in the top ranks, which had been announced previously, but not in the level of detail provided in the 10-K filing.

CFO George Hervey resigned in May 2007. The 10-K says he "failed to establish a system of proper controls despite being on notice of repeated concerns raised by others regarding the stock option process."

Dai, who "played a central role in all Stock Option Committee grants," according to the 10-K, stepped down as COO in May but remained with the company. The audit committee had suggested Dai should be fired, the 10-K adds, but the board turned down that recommendation, saying it wouldn't be in shareholders' best interests. (See Marvell Completes Review.)

Sutardja, meanwhile, was found to have only "limited" involvement in the options process. But Marvell's internal audit gave him some blame for the lack of internal controls, also noting that "certain individuals involved in the process to some extent did not feel able to provide him with frank advice," according to the 10-K.

Then there's the saga of general counsel Matthew Gloss, who was fired in March. The 10-K says he falsified minutes of the board's executive compensation committee, but that's just the start.

Gloss was in charge of minutes for Marvell's stock options committee, which consisted solely of Sutardja and Dai. Those minutes "were found to be false" as well, the 10-K says. For example, in nearly all cases, he got just one of the two to sign off on meeting minutes, implying the committee hadn't actually met.

That might not be why he was fired, though. A story yesterday in The Recorder, which covers California's legal community, says Gloss brought allegations that Marvell's internal-investigation committee -- then consisting solely of board member Arturo Krueger -- was showing bias in favor of Sutardja and Dai.

According to the article, Gloss was fired not for giving that opinion, but for waiting so long before relaying his concerns to Marvell's board. Gloss has enlisted counsel for what The Recorder says might be a whistle-blower lawsuit.

Gloss's allegations led Marvell's board to investigate Krueger's investigation, as if things weren't complicated enough. The former judge who did this meta-investigation didn't rule that Krueger's investigation was biased, but he did suggest Krueger should be replaced on the investigation committee, which he was, by two non-board members, according to the article.

— Craig Matsumoto, West Coast Editor, Light Reading

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