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Judge Dismisses SEC Backdating Lawsuit

ST. LOUIS (CN) - A federal judge dismissed an SEC lawsuit against Michael F. Shanahan Jr., the son of the former CEO and founder of Engineered Support Systems. Engineered Support Systems executives were accused of backdating stock options between 1996 and 2002.

Shanahan Jr.'s lawyers claimed the case was so weak it should be tossed out of court. U.S. District Judge Gene Hamilton agreed, and dismissed the case without the defense calling a single witness.

"After eight days of trial testimony, the SEC's witnesses have completely failed to show that Shanahan, Jr. knowingly backdated options or engaged in any sort of intentional behavior," Shanahan Jr.'s motion stated. "Contrary to the allegations of the complaint and the promises made in the SEC's opening statement - which were replete with claims of a 'backdating scheme,' 'stealth compensation' and the like - the evidence has shown nothing of the sort. Lacking any direct evidence of intentional conduct, the SEC's case has become a desperate effort to label Shanahan Jr.'s lack of knowledge as reckless or negligent. But even that effort has failed, as the evidence has shown the difficulties inherent in determining the proper grant date of options, making it impossible to impose those labels as a matter of law."

The SEC sought $300,000 of Shanahan Jr.'s profits, a civil penalty and a ruling prohibiting him from serving as an officer or director of a public company.

Michael Shanahan Sr., former Engineered Support Systems CFO Gary Gerhardt, and former Controller Steven Landmann all pleaded guilty in Federal Court to one criminal charge each in the backdating and paid more than $11 million in fines and restitution. Shanahan Sr. and Landmann got probation, while Gerhardt got 15 months in federal prison.

Prosecutors agreed to drop all charges against Shanahan Jr. as part of Shanahan Sr.'s plea deal. Shanahan Jr. received a pretrial diversion, a form of probation, and paid $92,000.

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