Investigation Widens into Stock Option Backdating

May 22, 2006 ( - The list of companies under investigation for backdating stock option grants continues to grow with internal probes by the firms involved as well as investigations by the US Securities and Exchange Commission (SEC) and federal prosecutors.

According to the Wall Street Journal, several more companies have been added to the tally, including semiconductor-equipment maker, KLA-Tencor Corp, which the newspaper found granted its top executives two batches of stock options that paid off handsomely and happen to be dated on days where stock prices were at record lows.

Analysis of options grants at some companies has shown that executives benefited from extraordinary timing, getting grants dated at times basically bottomed out. The “strike price” on options generally is equal to the market price on the day they are granted by a company’s board. The lower the strike price, the greater the chance for future profit.

The WSJ also found thatgrants at Trident Microsystems Inc.,a California chipmaker, also preceded sharp spikes in prices. Each of seven grants between 1995 and 2001 to chief executive Frank Lin were dated ahead of a double-digit rise in share price over the next 20 trading days, according to the newspaper.

The most recent addition to the expanding list of companies entangled in the probe included Juniper Networks, Inc, which said it received a request for information from the office of the US Attorney for the Eastern District of New York.The WSJ also said that California software provider Openwave Systems Inc. said it received a letter of informal inquiry from the SEC over its stock-option grants and stock-option practices.

Earlier in the month UnitedHealth said the SEC was conducting an informal inquiry into these practices (See UnitedHealth Under Fire for Stock Options ). The Minnesota-based insurer said it will likely have to restatethree years of financial results, pulling down net income by as much as $286 million over the period, according to the newspaper.

At the end of last week, federal prosecutors in New York subpoenaed records from at least six companies, including Caremark RX, Inc., SafeNet Inc., Affiliated Computer Services (ACS), Vitesse Semiconductor Corp., UnitedHealth Group and Nyfix Inc. (See  Six Companies Feel Heat From NY US Attorney’s Office Over Stock Options Timing ).

According to the newspaper, 10 executives or directors at some of the companies being scrutinized for these practices have left their posts recently. In fact, it has lead to ousting of several high profile executives in the past few weeks, including another semi-conductor company, Vitesse Semiconductor Corp (See Executives Fired over Stock Option Dating Issue). The company terminated Executive Vice President Eugene Hovanex, CEO Louis Tomasetta and CFO Yatin Mody after an internal probe into possible improper dating of stock options.

The chairman and the chief finance chief resigned at Power Integrations Inc. and at Brooks Automations Inc., two directors stepped down. The CEO and two other officials of Comverse Technology Inc. also resigned during a board probe of possible backdating.