Securities watchdog pursues record fine for RIM execs

JACQUIE MCNISH and JANET MCFARLAND AND PAUL WALDIE

From Thursday's Globe and Mail

January 22, 2009 at 2:00 AM EST

The Ontario Securities Commission is seeking a record penalty — one that could be as high as $100-million — from the top two executives of Research In Motion Ltd. [RIM-T] to pay for their role in a stock option accounting controversy dating back to 1996.

According to people familiar with settlement discussions, the OSC's staff is in advanced discussions with lawyers representing RIM's co-chief executive officers, Jim Balsillie and Mike Lazaridis. The OSC's investigation began in 2006 and sources said the regulator began negotiating a potential settlement last fall.

It is understood that the OSC has pushed for Mr. Balsillie to pay the bulk of any penalty and relinquish his seat on RIM's board of directors for a period of time. Although one person familiar with the talks said the parties are nearing a potential agreement, nothing has been finalized, including how much each executive may have to pay.

Reached last night at his home, Mr. Balsillie declined to comment on what he described as "rumours." Neither Mr. Lazaridis nor his lawyer could be reached. A spokeswoman for the OSC said: "We can't comment on enforcement cases."

In 2007, a special committee of RIM's board investigated the back-dating issue, and determined the company had backdated more than 40 per cent of stock options granted to employees since 1996. It also concluded that 12 of the 16 option grants made to Mr. Balsillie and Mr. Lazaridis between 1996 and 2006, to acquire a total of two million shares, were priced using an incorrect date.

The committee estimated the value of benefit to the two men was about $1.6-million (U.S.) each, gains that they have already repaid, along with full legal costs, to the company.

Before the release of the report, RIM notified the U.S. Securities and Exchange Commission and the OSC that it had uncovered evidence of backdating.

If a full $100-million penalty were approved, it would rank as the largest penalty paid by individuals to the OSC. The largest individual payment ever made to the OSC came from former Laidlaw Inc. chief executive officer Michael DeGroote, who agreed to pay $23-million in 1993 to settle allegations of illegal insider trading.

Mr. Balsillie and Mr. Lazaridis have been hailed as technology and business visionaries for revolutionizing wireless communications with the introduction of RIM's BlackBerry in 1999. The popular BlackBerry transformed the company into one of Canada's biggest global success stories.

The RIM board review occurred at a time when U.S. regulators were unveiling a flurry of investigations of major U.S. companies for stock option backdating. Many companies announced voluntary reviews of their past option practices as the SEC signalled it would treat companies more favourably if they came forward voluntarily.

The U.S. Securities and Exchange Commission investigated more than 100 companies over allegations of stock options backdating, including Apple Inc. It reached several backdating settlements, the largest coming in 2007 with a $468-million payment from former executives of United Health Group Inc.

Stock options give company employees the right to buy shares at a set price — typically the price at the end of the trading session on the date a grant is made. Backdating happens when companies set the grant date retroactively to align with a stock's low point, creating an instant paper gain.

According to the RIM special committee report, all option grants, except those to the company's co-CEOs, were made by or under the authority of Mr. Balsillie "including grants that have been found to have been accounted for incorrectly."

The company subsequently restated its financial statements back to 1999, recording a $248-million (U.S.) after-tax expense related to improper accounting over a variety of option granting issues.

The initial report, issued in March, 2007, also included a statement that the special committee "did not find intentional misconduct on the part of any director, officer or employee responsible for the administration of the company's stock option grant program."

At the time the special committee report was released, RIM said all employees and executives agreed to repay any benefit they received from options that were incorrectly priced. Mr. Balsillie and Mr. Lazaridis additionally agreed to pay $5-million (Canadian) each to defray the company's costs of its investigation and financial restatement.

The two men later agreed to pay an additional $2.5-million (Canadian) each to the company to compensate it for its investigation costs as part of a settlement RIM reached in a class-action lawsuit brought by Canadian shareholders over the option backdating. The settlement included no admission of wrongdoing.

RIM also announced in March, 2007, that Mr. Balsillie would step down as RIM's chairman, but remain co-CEO and a director on the board. Two long-serving directors also agreed to resign and two new directors were appointed: Royal Bank of Canada chief operating officer Barbara Stymiest and IBM Canada chief executive officer John Wetmore.