SEC: More Charges to Come in Stock Option Probe

October 31, 2006 ( - Securities and Exchange Commission (SEC) Chairman Christopher Cox said Monday new charges on suspicious timing of stock option grants can be expected in the near future, the Associated Press reports.

Cox noted that there have been an “unprecedented” number of companies that have voluntarily stepped up, investigating their own practices and reporting irregularities to authorities, the AP said. At least 135 public companies have announced internal investigations or investigations by the SEC or Department of Justice. Cox said the SEC’s enforcement team will consider companies’ cooperation when deciding actions.

The issue in many of the investigations is backdating of options, which can be legal as long as it is disclosed properly to investors and approved by companies’ boards. A small proportion of investigations are looking into a practice called “spring-loading” where options are purposefully granted ahead of good news that is certain to boost a company’s stock price.

SEC officials said the agency is focusing its investigations on serious fraud with instances of such things as deliberate lying, forging of documents, or deceit of directors or investors. Charges have already been filed against executives at Brocade Communications Systems Inc. (See Brocade Execs Among First to be Charged in Stock Option Probe ) and Comverse Technology Inc. (See Comverse Execs Face Fraud Charges for Options Backdating ). Cox said more can be expected in the days ahead, according to the AP.

As companies are being proactive in cooperating with investigations and disclosing irregularities, at least 39 executives or directors at 19 companies have been fired or resigned the AP pointed out. Apple Computer Inc.’s former chief financial officer, Fred Anderson, resigned from the company’s board after Apple reported irregularities it found in its stock option grant practices (See Apple Reports Irregularities in Stock Option Grants).

Cox said the stock options scandal “is the first major challenge to corporate governance that American companies have had to face” since the 2002 accounting scandals, according to the news report (See Stock Option Probe Biggest Since Abusive Fund Trading Cases ). He said the self-policing by many companies “is certainly a product of the changed environment after the scandals of the Enron era.”

The first settlement offer in the backdating probe has been made by Mercury Interactive Corp. and is expected to set a precedent for the other companies being investigated (See Mercury Makes $35M Settlement Offer for Options Backdating Fraud ).