Marvell Pays Ex-CEO’s Taxes on Backdated Options He Exercised

(Bloomberg) -- Marvell Technology Group Ltd. said it will cover as much as $15.4 million of taxes and penalties incurred by former Chairman and Chief Executive Officer Sehat Sutardja when he exercised backdated options in 2006.

A payment of $8.4 million was already made, and the total could rise after California authorities determine how much state tax is still owed, the computer-chip maker said Sept. 16 in a preliminary proxy statement. 

Marvell Pays Ex-CEO’s Taxes on Backdated Options He Exercised

Sehat Sutardja

Photographer: David Paul Morris/Bloomberg

It’s the latest development in an options-backdating case embroiling the founding family and largest shareholder of Marvell, which is registered in Bermuda with headquarters in Santa Clara, California. The issue came to light in 2006, prompting an investigation and the demotion of Sutardja and his wife Weili Dai, co-founders of the company. The Internal Revenue Service and California’s tax board ruled that penalties were warranted.

The decision to cover Sutardja’s taxes and penalties is an expensive one for Marvell, said Barbara Baksa, executive director of the National Association of Stock Plan Professionals, which has almost 6,000 members across the U.S. who oversee equity plans for businesses.

“Marvell is paying the penalty for Sutardja, which results in additional income to Sutardja and additional tax, which Marvell is also paying, resulting still more income to Sutardja and more tax, and on and on,” Baksa wrote in an e-mail. “By the time all of the taxes are paid, the entire gain at exercise, possibly more, may have been paid over to the tax authorities.”

Sue Kim and John Ahn, spokesmen for Marvell, didn’t respond to e-mails and phone calls seeking comment. Federal privacy law precludes the IRS from commenting on the matter, said Bruce Friedland, a spokesman for the agency. Taxpayer confidentiality rules also preclude the California Franchise Tax Board from commenting on the matter, said spokesman Jacob Roper.

Earlier this year, Sutardja and Dai were fully ousted from executive roles when another investigation found that the company had prematurely recognized revenue under pressure from senior management. They left their positions after activist investor Starboard Value took a stake in the firm. Sutardja and Dai are still on the board.

Starboard didn’t return an e-mail seeking comment.

Sutardja is the largest shareholder in the company, with a 12.7 percent stake. His brother, Pantas Sutardja, owns 3.45 percent, according to data compiled by Bloomberg.

Marvell’s special committee also found that minutes from meetings between Sutardja and Dai in their roles as members of the options committee were falsified. Marvell restated its earnings for fiscal years 2000 through the first quarter of 2007, which showed it had understated the cumulative effect of its compensation expense by $331 million, according to court filings.