SEC Investigation into Options Fraud of Former RIM Executives Illustrates Need for Robust Email Management

If the market needed any further reason to feel investor angst, Research In Motion (RIM) (NASDAQ: RIMM) seemed more than happy to step in and fill the gap. Already there are plenty of headlines to feed the pessimism in the economy ranging from Madoff Hedge Fund scandal a month or so ago to the more recent Stanford Group scandal. But when the SEC announced on February 17, 2009, that several current and former executives at RIM had reached a settlement involving an options fraud scheme, it is being to feel like greed and fraud knew no bounds.

RIM is not an unregulated hedge fund or a too good-to-be-true return on a certificate of deposit as was the case with Madoff Hedge Fund and Stanford Group. No, this was a well known and well respected tech company that helped to revolutionize and is still revolutionizing the mobile market. But when details about this scandal emerged and the SEC released details of the settlement, it showed a systematic fraud perpetrated at the expense of the company and its shareholders.

In the press release issued by the SEC, it alleged that Dennis Kavelman, RIM's former CFO, Angelo Loberto, RIM's former VP of Finance and James Balsillie and Mike Lazaridis, RIM's Co-Chief CEO's, "illegally granted undisclosed, in-the-money options to RIM executives and employees by backdating millions of stock options over and eight year period from 1998 through 2006."

The SEC release also stated "RIM and its highest level executives engaged in widespread backdating of options which provided them and other employees with millions of dollars of undisclosed compensation" All of the executives agreed to settle the matter without admitting or denying the allegations with several terms attached as well as fines levied for the fraud. The SEC contended this misconduct caused RIM to falsely disclose in its annual reports and file false and misleading financial statements. Balsillie and Lazaridis prepared, reviewed, signed and/or certified RIM's filings with the SEC.

As the SEC put this case together is appears that email played a large role in uncovering this fraud. Several examples emerged from the SEC complaint:

• Kavelman (former RIM CFO) asked a manager not to document improper pricing in email.
• On page 14 of the complaint was another example that showed in May 2001 an employee complained that her exercise price for her stock options was too high so her supervisor asked that the options agreement be changed. This was captured in e-mail as Kavelman acknowledged that the SEC reports had already been prepared but the employee was given a lower backdated exercise price.
• Page 15 Loberto copied Kavelman in e-mail stating the reports had been completed and their attorney had advised them to use the start date for pricing of the options as was the company's policy. Even with this advice, Loberto granted the backdated price that preceded the employee's hire date and agreed to fix the agreements.
• Page 19 showed Balsillie e-mailed Loberto (copying Kavelman) asking to process another 10,000 options for a RIM Vice President, and for them to pick a low point in the past 30-60 days.

The examples are all over the report and emails show top executives were well aware and actively participated in this fraudulent activity.

When top level executives are involved in this type of activity, who are the shareholders, employees, and board of directors to trust? Well, as these documents illustrate, one thing the SEC is trusting and putting its faith in is the email these individuals are sending. Email is the preferred communications medium in corporations and shareholders should insist a robust accounting of email communications from all levels of management be kept in accordance with federal standards. Products such as Estorian's LookingGlass are examples of third party products that directors, employees, and shareholders can look at to protect their interests to ensure executives act in the best interests of the organization.

If there is still reluctance by organizations to deploy this type of technology, RIM's management's breach of trust should help to alleviate these concerns. Today more than ever protecting a company's interest from fraud at all levels should be a top priority for governance. Products like LookingGlass enable companies to cooperate with any audit and compliance requirement whether it is internal or external and provides organizations the transparency that they need if faced with a situation such as this.

This SEC investigation shows that email will continue to play a huge role in ensuring corporate transparency. The continuing frauds that are being uncovered by the SEC such as the one perpetrated by RIM executives has the ability to shake companies to their core and, in the current economic environment, this can be devastating to a company.

There is much to learn from this since it is now apparent that expecting RIM's executives to operate within the bounds of ethics and laws was too much ask though through the SEC's use of email records, it was able to shine a light on RIM's fraud activities. However all organizations should expect if they are investigated for similar purposes to be put under the same type of scrutiny of their email to which RIM was subjected and ultimately found guilty, whether through negative inference during litigation proceedings or through documented wrongdoings in their email archives.