Backdating of stock options takes on scandal proportions
WASHINGTON — The newest intrigue in corporate America, the apparent backdating of stock options to boost top executives’ compensation, is rapidly taking on the dimensions of a major scandal.
The number of public companies under investigation by the Securities and Exchange Commission or federal prosecutors has grown to more than 30 and executives at several companies have been fired.
Optical switch maker Sycamore Networks Inc. disclosed this week that it received a subpoena from federal prosecutors in Massachusetts, high-tech firm Rambus Inc. said it had launched an internal investigation and Quest Software Inc. reported an SEC inquiry. Antivirus software maker McAfee Inc. fired its general counsel for misconduct involving company stock options.
Yet to be determined is whether federal prosecutors will bring criminal charges against any of the companies or executives. Subpoenas have been issued by U.S. attorneys’ offices in several cities including New York which led off the wave criminal investigations.
“The sheer number of cases that are out there makes it much more likely that somebody is going to be charged” in a criminal case, said Tim Coleman, a former federal prosecutor who is an attorney at Dewey Ballantine in Washington. The flock of company executives and directors being ousted, he added, “increases the likelihood that somebody’s going to be prosecuted.”
At issue is whether company insiders manipulated the timing of stock option grants to bring big payoffs to executives by improperly backdating the grants to coincide with low points in stock prices. As first noted in a series of groundbreaking articles in The Wall Street Journal, these patterns of almost too-good-to-be-true timing took place in the late 1990s and early years of this century.
Stock options become more valuable as the market price rises above the exercise price, so backdating fattens the spread — and executives’ payoff when they eventually sell their stock.
Among the companies that have disclosed receiving subpoenas or SEC requests for documents are big, well-known names like UnitedHealthGroup Inc. and Caremark Rx Inc. Many are from the world of high-tech, where stock options have long been a prized perk and incentive for executives and employees alike: Affiliated Computer Services Inc., Juniper Networks Inc., KLA-Tencor Corp., OpenWave Systems Inc., Vitesse Semiconductor Corp., McAfee, Quest Software, Rambus, Sycamore Networks and others.