U.S. News

SEC Charges Ex-ESSI CEO and Son with Options Fraud


The former chairman of defense contractor Engineered Support Systems and his son were charged with stock options fraud on Thursday in a widening U.S. securities investigation.

The Securities and Exchange Commission charged Michael F. Shanahan Sr., who led ESSI's rapid rise as chairman and CEO, and his son, Michael F. Shanahan Sr., a former director at the St. Louis-based company.

The men are accused of approving backdated stock option grants, allowing company executives and directors to receive $26 million in unauthorized pay.

Lawyers for the Shanahans were not available for comment.

Among the group of directors who served on ESSI's board during the time of the alleged stock options fraud was William H.T. "Bucky" Bush, an uncle of President George W. Bush.

William Bush has not been accused of wrongdoing.

From 1995 to early 2005, when Shanahan Sr. retired from day-to-day activities, ESSI's stock climbed nearly 900 percent on consistent double-digit profit and revenue growth from supplying the U.S. military with trailers, aircraft cargo loaders and generators. The war in Iraq also boosted orders for ESSI's equipment.

The SEC said the investigation continues. Earlier this year, the SEC charged ESSI's former Chief Financial Officer, Gary C. Gerhardt, and former ESSI controller, Steven Landmann with options backdating fraud.

Landmann settled his case with the SEC after paying a fine.

He also has pleaded guilty in a criminal backdating case being prosecuted by the U.S. Attorney in St. Louis. He is expected to be a key government witness. Gerhardt has denied any wrongdoing in the SEC matter and the criminal case against him.

ESSI, which supplies the U.S. military with aircraft cargo loaders and generators, was sold last year to DRS Technologies of New Jersey for about $2 billion.

The SEC alleged that from 1997 to 2002, Shanahan Sr. and his son approved the issuance of backdated stock options that coincided with historically low closing prices of the company's stock.

The complaint also said Shanahan Sr. granted additional Engineered Support stock options to nonemployee directors in excess of authorized amounts, from which these directors profited by about $6 million.

The SEC alleged Shanahan Sr. was the biggest beneficiary of the backdating scheme, collecting nearly $9 million. His son, who runs a St. Louis-based insurance brokerage, profited by $379,738 from the receipt of unauthorized stock options, the complaint alleges.