Discussion in 'Wall St. News' started by Cdntrader, Jul 31, 2006.
POLL - Has the Option Backdating Scandal peaked?
Why options backdating is a big deal
A debate over its nuances misses the point: Incentive-based compensation is broken.
By Adam Lashinsky, Fortune Magazine senior writer
August 1 2006: 10:19 AM EDT
(Fortune) -- For the past several weeks I've been asking experts (to be precise: lawyers) if they think the options backdating scandal is a big deal with major ramifications, a medium-sized brouhaha that will fade after the egregious abusers have been punished, or a tempest in a teapot we'll have forgotten by Christmas.
Wishful thinking aside, almost nobody believes it's Door No. 3, a scandal-of-the-day wiped out by the next news cycle. The question on backdating then remains: pervasive rot in the system or technical malfunction that needs to be cleared up?
My conclusion is the former. So first let's dispense with the pooh-poohers, those who'd minimize the importance of this issue. And they are legion. Options backdating is something of a misnomer, as I've explained in this brief article in Fortune.
At its worst, the practice is called backdating because an executive manages to move the date of a stock option back in time, presumably to when the stock price was lower. Stock options grant the recipient the right to buy shares at the stated price after a certain period of time has gone by. If the market price is higher than the so-called strike price, the employee makes money. Find a way to lower the price of the grant - by moving back the grant date during a rising market, for example - and the option is worth even more.
The scandal, however, involves far more shenanigans, and deeper nuances, than mere backdating. Forward-dating in the event of good news, holding open a grant to see where the stock goes and systematically picking dates that represent a low point in the stock are all variations of how the game is played. Some of the practices could be outright fraud. Some are perfectly legitimate. Sometimes it's just not clear.
One of the few things that is clear is that regulators, prosecutors and companies' own audit committees believe there's a problem. More than 80 companies have disclosed investigations of one kind or another into options mispricing situations. Last month the U.S. Attorney in San Francisco charged Gregory Reyes, the former CEO of Brocade Systems (Charts), a computer hardware company, with fraud over alleged backdating practices.
And Monday, Brooks Automation (Charts) said former CEO Robert Therrien and two ex-directors - Amin Khoury and Roger Emerick, who were members of the company's compensation committee - signed a "false" document related to a stock-option grant.
If the subject is so complex, then why argue that the whole system is rotten? Consider this: Stock options were invented as a way to align the interests of employees with shareholders. The first time the system began to crack was in the 1990s, when companies with falling stock prices began to re-price their stock options in order to retain their employees.
With a righteous fury, arrogant Silicon Valley executives in particular glared at anyone who suggested shareholders would benefit by ending a practice that would lead to losing valued employees. Shareholders, of course, didn't get the opportunity to re-price their shares. The practice halted when rules changes required shareholder approval for re-pricing.
Since then, the system of awarding options has gone from an incentive program to an entitlement. Companies that can't or don't offer rich options are at a disadvantage to those that do. Executives - with the complicity of their accountants, lawyers, compensation consultants and boards of directors - game the system to ensure not that employees are working for the shareholders, but rather that employees will make extra money in all but the gravest of circumstances. Options were considered so sacrosanct that Silicon Valley bigwigs fought tooth and nail to avoid having them accounted for as a compensation expense.
So here's a radical proposal: Scrap the whole system. Pay employees a competitive and living wage. Pay them more when the company does well but only after shareholders have been rewarded. Do that in the form of transparent bonuses and profit-sharing plans. Outsized riches should be reserved for the company founders, not the hired help, which, let's face it, is what most executives are.
But stop gaming the system and then complaining that the rest of the world (capricious regulators, dopey journalists, and so on) just doesn't understand. True entrepreneurs, by the way, the kind that drop out of school, max out their credit cards, eat ramen noodles and risk everything for a dream, won't mind this at all. They don't need stock options to get stinking rich. They have the stock of the companies they start.
True entrepreneurs don't need to play games to become wealthy. It's the executives - the people the shareholders hire to look after their interests - who've been reaping entrepreneurial returns that need to be stopped.
Apple finds more evidence of options irregularities
Last Update: 6:59 PM ET Aug 3, 2006
SAN FRANCISCO (MarketWatch) -- Apple Computer Inc. has discovered additional evidence of irregularities related to its stock-option grants, company officials said Thursday evening.
In late June the company said an internal investigation had found irregularities related to the issuance of stock-option grants between 1997 and 2001. See full story.
At that time, Apple said one of the grants in question was given to Chief Executive Steve Jobs, but later cancelled and resulted in no financial gain for him.
Thursday evening, Apple, home of the nearly ubiquitous iPod music player, said it will delay filing its report for the July quarter with the Securities and Exchange Commission.
Also, the company said it will likely need to restate its historical results to record non-cash charges for stock-option grants.
Apple added that it has yet to determine the amount of such charges, and that all earnings issued by the company relating to periods beginning Sept. 29, 2002 should not be relied upon.
Apple shares closed Thursday at $69.59, up 2.1%.
Report: Stock Option Probes Top 100
The widening scandal has forced many of the companies to delay their quarterly reports for June.
Stephen Taub, CFO.com
August 11, 2006
The number of companies that have disclosed internal or federal probes of their stock option grants has reportedly hit triple digits. At least 102 companies are now under some sort of scrutiny, according to Bloomberg.
The latest to report investigations are HCC Insurance Holdings Inc., ViaSat Inc., Moldflow Corp. and Alkermes Inc., the wire service reported.
Stock option backdating scandal could grow: report By Emily Chasan
Sun Oct 29, 1:29 PM ET
NEW YORK (Reuters) - The stock options timing scandal, which has already implicated at least 140 companies, could include hundreds more, according to a new analysis that found lax enforcement of corporate governance reforms that should have prevented the practice.
Investors have widely discounted companies' misconduct over stock options timing because they believe most of it pre-dates the Sarbanes-Oxley reforms on corporate governance of 2002 that were implemented in the wake of the Enron scandal.
But a report released over the weekend from proxy advisory firm Glass Lewis & Co. showed that many firms may not have filed properly options timing paperwork as recently as 2005.
"We believe the backdating scandal may be entering its second act," Glass Lewis analyst Todd Fernandez said in the report.
Backdating involves changing the day that stock options were granted to an earlier date when a company's stock was trading at a lower price, potentially allowing company executives to lock in higher profits when they exercise their options.
Beginning in August 2002, the U.S. Securities and Exchange Commission required companies to disclose their stock-option awards in Form 4 filings within two days of options grants to comply with Sarbanes-Oxley. Before that, companies did not have to report option grants for several weeks.
The new regulations should have removed most opportunities for backdating. But Glass Lewis, in the report, said the SEC has not enforced the two-day filing rule, possibly leading to many more instances of backdating.
More than 140 companies have launched internal reviews or are under government investigation over possible manipulation of stock option grant timing.
But that number may grow as Glass Lewis said an analysis of late Form 4 filings showed "hundreds" of companies may have, intentionally or mistakenly, backdated grants after the 2002 reforms.
"When rules are not enforced consistently, they often are not followed," Fernandez said. "When we find late Form 4 filings where the price of the underlying stock increased materially between the purported grant date and the day the Form 4 was filed, we believe this raises legitimate questions about whether the grant was backdated."
The SEC could not be immediately reached for comment.
Companies have said that many of the late Form 4 filings were unintentional -- a result of sloppy paperwork-- and their options grants have been accounted for correctly.
The chairman of one of the companies mentioned in the Glass Lewis report, Medis Technologies Ltd. (Nasdaq:MDTL - news), told Reuters that Medis had been late in some of its Form 4 filings but did not engage in backdating of options.
"For some reason they fell through the cracks," Robert Lifton, chairman and chief executive officer, of Medis, a fuel cell technology company, said of several late Form 4s the company filed from 2004 through 2005.
"Our attorneys and our auditors have checked it and rechecked it and there was no backdating," Lifton told Reuters. "We filed them late and we, ourselves, disclosed it in our proxy statement."
Glass Lewis also raised concerns about late Form 4s that could have resulted in higher profits for executives at Hansen Natural Corp. (Nasdaq:HANS - news), O'Reilly Automotive Inc. (Nasdaq:ORLY - news), Digital River Inc. (NasdaqRIV - news), American Home Mortgage Investment Corp. (NYSE:AHM - news), Websense Inc. (Nasdaq:WBSN - news), Silicon Image Inc. (Nasdaq:SIMG - news), and Keryx Biopharmaceuticals Inc. (Nasdaq:KERX - news).
A spokesman for Websense, Cas Purdy, said, "The late filings were unintentional and we filed the appropriate forms when we became aware of it."
The other companies could not immediately be reached for comment.
Children's Place Retail Stores Inc. (NasdaqLCE - news) was also mentioned in the report as having been late in filing Form 4s after August 2002. The company earlier this month said it expects to restate financial results for the past three fiscal years and the first quarter of the current year due to errors in the dating of stock options.
In several cases Glass Lewis said the Form 4s were repeatedly filed late, raising questions about the quality of internal controls over financial reporting at those firms.
Backdating Is Revealed by 28 Companies to Avoid Taxes (Update2)
By Miles Weiss
Jan. 5 (Bloomberg) -- At least 28 companies now under investigation for stock-options backdating, including Staples Inc. and KLA-Tencor Corp., named executives who received improper grants as part of an effort to shield them from millions of dollars in tax penalties.
The grants, detailed in filings with the U.S. Securities and Exchange Commission over the past three weeks, show 15 chairmen and chief executive officers, as well as dozens of other senior managers, were awarded options to buy shares at below-market prices. Companies had until Dec. 31 to correct the prices to keep their top brass from paying a 20 percent surtax on potential profits from the options.
``The tax is draconian,'' said Richard Susko, a partner at the New York law firm Cleary, Gottlieb, Steen & Hamilton. ``For companies with a large spread for their options, it became an issue that had to be dealt with by Dec. 31.''
Some documents name for the first time executives who may have benefited from backdating, a practice that has embroiled almost 200 companies in one of the most sweeping probes of business practices in America.
Vincent Smith, the chairman and CEO of Quest Software Inc., is one. Aliso Viejo, California-based Quest disclosed earlier this week that it increased the exercise price for Smith's options on 785,000 shares. The changes reduced his potential profit on the options by about $10 million.
Quest, a maker of database-management programs, last year formed a special board committee to conduct an internal investigation into the company's option-pricing procedures. Spokesman Joe Horine said Quest won't comment until the committee completes its review and issues a report.
Four companies, Staples, Medarex Inc., CNET Networks Inc. and Asyst Technologies Inc., disclosed that they repriced options grants in SEC filings on Dec. 22, the Friday before Christmas. Filings by Marvell Technology Group Ltd., Corinthian Colleges Inc., Microtune Inc., Bed, Bath & Beyond Inc., KLA-Tencor and Cyberonics Inc. and UTStarcom Inc. arrived on Dec. 29, the last business day of the year.
Framingham, Massachusetts-based Staples is the world's largest retailer of office supplies. KLA-Tencor, based in San Jose, California, is the No. 2 U.S. maker of equipment for the semiconductor industry.
UnitedHealth Group Inc., which ousted CEO William McGuire in October over his role in options backdating, said in an SEC filing yesterday that it repriced some grants on Dec. 29 so executives won't be liable for the surtax. McGuire's options are among those affected by the change, meaning he may face a lower tax bill. Minnetonka, Minnesota-based UnitedHealth is the second- largest U.S. health insurer.
Lower Prices, Higher Profits
Employee stock options typically give recipients the right to purchase company stock at the price on the day they're granted. Because options increase in value as the underlying shares rise, backdating the grants to earlier dates when the stock price was lower makes them worth even more.
The recent filings don't offer an explanation for why the original grants were improperly priced, how the backdating took place or whether the executives named had any role in it.
Section 409A of the Internal Revenue Code imposes a levy of as much as 55 percent on personal profits from backdated stock options. That includes a penalty of 20 percent on top of a maximum personal income-tax rate of 35 percent.
The IRS in October said companies that previously issued backdated options would have until the end of 2006 to correct the grants and avoid the surtax. While that benefits recipients by eliminating a potential penalty, raising the exercise prices on the options also reduces their potential gains.
``The IRS is just being unmerciful to backdaters,'' said Mark Poerio, who co-chairs the executive compensation practice at the law firm Paul, Hastings, Janofsky & Walker LLP. ``Because the penalties are so extreme, companies are just being extra conservative,'' he added.
Under SEC rules, the senior officers of public companies must disclose any changes to their stock option grants. The filings by the 28 companies, received between December 15 and today, not only identify executives who may have received backdated options, but also disclose for the first time how much of a gain they stood to receive.
The filings aren't necessarily an admission that laws were broken when options were issued at the wrong price; McAfee Inc., in a Form 4 filed December 27 on behalf of Director Leslie Denend, said that awards he received between 2002 and 2006 had ``incorrect'' grant dates that resulted from ``a clerical error in administering'' the option plan.
American Tower Corp., Affiliated Computer Services Inc., Sharper Image Corp. Broadcom Corp., and Trident Microsystems Inc. also disclosed that they had increased the exercise price of previous grants to their CEOs or other executives.
The SEC received similar filings since December 15 from insiders at Cheesecake Factory Inc., L-3 Communications Holdings Inc., J2 Global Communications Inc., SPSS Inc., Jabil Circuit Inc., VeriSign Inc., Power Integrations Inc., Equinix Inc. and Sycamore Networks Inc.
To contact the reporter on this story: Miles Weiss in Washington firstname.lastname@example.org .
Last Updated: January 5, 2007 17:54 EST
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