Options Backdating Net Snares More Suspect Firms

July 3, 2006 (PLANSPONSOR.com) - The ongoing probe into allegations of improper stock options backdating continues to snare increasing numbers of US firms in its expanding net.

According to an Associated Press report, at least 51 public companies are under scrutiny by the US Securities and Exchange Commission (SEC) or the Justice Department for possible manipulation of options grants to boost their value to the recipients.

Investigators are determining whether company insiders in effect rigged the system to increase the likelihood that executives would reap huge windfalls (See  SEC to Issue Stock Option Backdating Guidance ). Under the practice, the options are backdated to a low point in a company’s stock price instead of pegging the exercise price to the prevailing market value at the time of the award.

The key underpinning of the option backdating scandal is that shares become more valuable as the market price rises above the exercise price.

According to the AP, this week:

  • Foundry Networks Inc., a maker of computer network switches and routers, reported that its options awards had become the subject of an SEC inquiry and that it also had received a subpoena from Justice Department prosecutors.
  • Computer chip supplier Rambus Inc. warned that some of its previously reported profits might be erased because the timing of stock options granted to its employees wasn’t properly recorded.
  • Cnet Networks Inc., VeriSign Inc. and Cyberonics Inc. disclosed Tuesday that they had received subpoenas for information about their stock option awards from federal prosecutors.
  • A Wall Street analyst alleges that Cyberonics, a maker of medical devices, granted options to top executives in June 2004 shortly after it received positive news certain to boost the share price.
  • Macrovision Corp., Asyst Technologies Inc. and Linear Technology Corp. reported that they had received Justice Department subpoenas.

WorldatWork, national association for compensation and benefits professionals, recently released a new how-to book about stock options amid the ongoing backdating options probe (See WorldatWork Releases New Options Manual ). It examines issues impacting executive compensation and proposes new methodologies and techniques for better aligning stock options with corporate performance rewards and accounting.