Mather suit seen focused on Pixar option practices

By Gina Keating

LOS ANGELES (Reuters) - A former Pixar Animation Studios chief financial officer, expecting a stock options backdating suit by U.S. regulators, may argue that Pixar's board, outside lawyers and auditors approved backdating long before she was hired, a source familiar with the case said.

Ann Mather, who served as Pixar's chief financial officer through mid-2004 and now sits on Google Inc's board, on Monday divulged that the Securities and Exchange Commission may sue her for backdating at the animation company.

Mather's attorney said earlier this week that there was no basis for an SEC lawsuit against her.

She will have an opportunity to present a defense to the SEC, if she chooses, before the agency decides whether to file suit against her.

Options backdating, a practice in which option grant dates are changed retroactively to allow recipients to reap greater profit, is not illegal as long as it is properly disclosed and accounted for in financial statements.

Pixar is among more than 200 companies that have disclosed internal audits or government probes surrounding options practices. The Wall Street Journal reported Pixar had engaged in backdating as early as 1997.

"What (the policy) said was, 'We look back over the last few months and pick the date that has the lowest stock price. This is in an internal document and discussed very openly -- this is not a big secret what they were doing," said a second person familiar with backdating at Pixar but not approved to speak on the record about it.

An audit of Pixar conducted by new parent Walt Disney Co found backdating of options grants but cleared then-Chief Executive Steve Jobs and anyone then associated with the company of "any intentional and deliberate acts of misconduct," according to a securities filing.

Disney bought Pixar in 2006, a deal that made Jobs a board member and Disney's largest individual shareholder.

A Disney spokeswoman said this week that the company had no reason to believe that the SEC would bring enforcement action against anyone now associated with Disney. She declined to comment further on the matter.

Mather, 47, is the only Pixar executive who has been named as a possible litigation target in the government probe.

The first person familiar with the case said the SEC is likely to allege that Pixar's stock options granting process was set up by the company's 1996 proxy to allow routine backdating of options and that Mather, hired in 1999, should have alerted auditors KPMG that accounting charges needed to be taken.

The Pixar board, which included former CFO Lawrence Levy and outside legal counsel Larry Sonsini, was signing off on backdated options that were dated, in some cases, months earlier, via "unanimous written consent" forms, said the source, who has seen internal Pixar documents.

Pixar, which had no general counsel during much of Mather's tenure, turned to its outside law firm, Wilson Sonsini Goodrich & Rosati, which had vetted the policy, and to KPMG, to approve extraordinary stock grants usually to top executives, the source said.

The company's stock options administrator would occasionally forward to the board memos from managers requesting options for employees, as well as stock charts with the lowest price circled, the source said.

On grants that deviated from this practice, Mather requested advice from Wilson Sonsini and was "repeatedly assured that there was no problem," the source said.

The SEC regional office in Los Angeles did not return calls seeking comment. A spokeswoman for Wilson Sonsini had no comment on Pixar or Mather on Friday.

Unless the government can show that Mather misrepresented the backdating to Pixar's lawyers and auditors, she may have a shot at avoiding an SEC lawsuit, said Phillip Stern, a former SEC attorney and white collar defender at Neal Gerber Eisenberg in Chicago.

"If she obtained an opinion from Wilson Sonsini and disclosed all relevant information to them ...that would be a very strong defense to negating an allegation that she acted with... actual knowledge or reckless disregard," he said.

Reuters/Nielsen