article back in june Many companies give executives, and in some cases lower-ranking workers, options to purchase company stock at a fixed price, known as the exercise price. If the market price goes higher than the exercise price, employees can buy shares at the exercise price, sell at the market price and make a profit. Companies can set the exercise price wherever they want, as long as they follow rules set forth in their option plans. Historically, companies had a compelling reason to set the exercise price equal to the stock's market price on the date of the option grant. That's because, before an accounting rule changed last year, companies did not have to deduct stock options as a compensation expense as long as the exercise price was at least equal to the market price on the measurement date. The measurement date is the date that both the number of shares and the exercise price was fixed, says Bear Stearns. For all intents and purposes, it's the same as the grant date. The grant date is generally assumed to be the date the board of directors authorizes the options. If a company issued options with an exercise price that was lower than the market price on the date of grant -- making it a so-called in-the-money-option -- it would have to record the difference as a compensation expense. Before this year, virtually no companies recorded stock-option expense on their financial statements, implying that they set exercise prices equal to the market price on the date of grant. A few years ago, academics started noticing that grant dates at many companies uncannily coincided with low points in their stock charts. At first, it was thought that some companies were doling out grants just ahead of major announcements that were likely to propel the stock higher. If the company possessed material nonpublic information at the time of the grant, this could be viewed as illegal insider trading. More recently, academics have hypothesized that some companies might be backdating their option grants, in effect pretending they were granted on an earlier date when the stock price was lower than the actual grant date. This would not guarantee a profit because most options vest, or become available to the employee, over a number of years. But it would greatly increases the odds. Former SEC Chairman Harvey Pitt likened it to "shooting fish in a barrel." Before Sarbanes-Oxley, option grants were only disclosed once a year in proxy statements and in forms that could be filed up to 45 days after the end of the company's fiscal year. "The gap was so long, it may have encouraged people to say, 'Well, since we are not going to report this for a year, what if we backdated it by eight days,' " says Patrick McGurn, executive vice president with Institutional Shareholder Services, a proxy advisory firm. Now, with only a two-day window to report option grants, there is much less room for manipulation, assuming a company files its insider-trading reports on time. If a company backdated options, it could be charged with filing false financial statements and tax returns. If the misstatement was intentional, it could constitute fraud, and the responsible parties could face criminal charges. None of the 33 companies that disclosed inquiries into options practices have been charged. To see where such cases might lead, some securities lawyers are looking at Analog Devices, a chipmaker in Norwood, Mass. In late 2004, Analog disclosed that the SEC was investigating its granting of stock options to officers and directors during the previous five years. "Each year, we grant stock options to a broad base of employees (including officers and directors) and in some years those grants have occurred shortly before our issuance of favorable annual financial results," the company said in its annual report. "We believe that other companies have received similar inquiries," it added. Analog did not say which grants were under investigation, but press reports focused on 920,000 options granted to executives on Nov. 10, 2000, when the stock closed at $44.50. Four days later, the company reported better-than-expected earnings and the stock closed at $63.25. An Analog spokeswoman said the timing of the two events was irrelevant because no options vest until at least three years from the grant date. Analog also disclosed that the Internal Revenue Service was auditing it for 2001, 2002 and 2003, but did not give reason. In November 2005, Analog said it had reached a tentative settlement with SEC staff over the options issue. "The contemplated settlement addresses two separate issues," it said. The first issue related to options granted to employees (including officers) on Nov. 30, 1999, and to employees and directors on Nov. 10, 2000. The settlement would conclude that Analog should have disclosed in its proxy statement that it had priced these stock options prior to releasing favorable financial results. The settlement also would conclude that the company used incorrect dates for grants to employees (including officers) in 1998, 1999 and 2001. For example, instead of using July 18, 2001, when the stock closed at $39.06, the company should have used July 26, when it closed at $48.27. Analog said it would agree to a cease-and-desist order, pay $3 million in civil penalties and reprice options granted to President and CEO Jerald Fishman and to other directors in certain years. Notably, options granted to all other employees would not be repriced. Fishman would pay a $1 million civil penalty and disgorge unspecified profits. Neither the company nor Fishman would admit or deny guilt. The settlement awaits approval by the SEC. But the company's problems might not be over. Analog said last week that the U.S. attorney for the Southern District of New York has subpoenaed documents related to its grants of stock options since 2000. It believes the federal investigation covers the same ground as the SEC inquiry. It's impossible to say which, if any, companies will be charged and who, if anyone, will be held responsible. It could be board members who knew or should have known what was going on, it could be executives, or it could be poorly trained clerks in the human relations department. Five companies implicated in the scandal have announced executive or director departures. One of them, Comverse Technology, announced the resignations of its CEO, chief financial officer and general counsel. "I think they are going to find smoking guns," says Kevin Cameron, president of proxy advisory firm Glass Lewis. "I think a lot of boards right now are hiring outside counsel to review their option practices. Last week's Enron verdicts, combined with the unfolding options scandal, illustrate how "management teams are treating the corporation as their own piggy bank," Cameron adds. "It only underscores how important Sarbanes-Oxley is."