Administration July 5, 2007

Six Companies Feel Heat From NY US Attorney's Office Over Stock Options Timing

May 19, 2006 (PLANSPONSOR.com) - Federal prosecutors in New York are prying into potential stock options abuses by at least six US companies.
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According to the Wall Street Journal, the Securities and Exchange Commission (SEC) has been pursuing an investigation into the options dating practice by large companies for more than a year and has so far investigated about 20 such potential targets.

The Journal identified the six companies subpoeaned by the US Attorney in the Southern District of New York as:

  • Caremark Rx Inc.
  • SafeNet Inc.,
  • Affiliated Computer Services Inc . (ACS) – ACS said that it has received a federal jury subpoena demanding it to turn over documents on all of the stock options it has granted since 1998. The subpoena followed an announcement the week before that the SEC was investigating the matter (See ACS Gets Fed Grand Jury Info Demand
  • Vitesse Semiconductor Corp . – Vitesse Semiconductor Corp announced that it has fired its chief executive officer and chief financial officer after an internal probe in to the possible improper dating of stock options turned up doubt as the “integrity” of the documents (See Executives Fired over Stock Option Dating Issue ).
  • UnitedHealth Group  –UnitedHealth Group also said it is the target of an informal SEC prod over the “significant deficiency” of its controls relating to the options, and might have to pay additional taxes for compensation tied to particular stock options which were previously exercised (See   UnitedHealth Under Fire for Stock Options). The company said it may restate results that could decrease its net earnings by $150 million in 2005, $84 million in 2004, and $52 million in 2003.According to the Journal five public pension plans filed Thursday a federal suit in Minneapolis against UnitedHealth to try and block the company’s top two executives from exercising about $1.5 billion in options the plaintiffs claim were back-dated.

  • Nyfix Inc. – Nyfix, which provides financial trading and communication technologies, said it also had gotten an information demand from the same New York prosecutor. The subpoena calls for the production of all documents referring to, relating to or involving the granting of stock options for the time period from 2000 to the present. Nyfix said it intends to cooperate fully.

Also, according to the Journal, American Tower Corp. said it may need to restate some of its financial statements after it conducted an internal stock options probe. The company, which operates broadcasting towers, also said it received a letter of informal inquiry from the Securities and Exchange Commission, and said it plans to cooperate fully with the SEC.

According to the Journal, Mercury Interactive Inc., which previously acknowledged “misdating” options, disclosed in a filing that a special board committee determined that the company’s former CEO “should be treated as having been terminated for cause.” The committee concluded there was a “material breach” of fiduciary obligations, based on the former CEO’s “actions and omissions in connection with option grants, option exercises and loans to him while he was at the company.”

The Journal reported that some executives have benefited from extraordinary timing by getting grants dated at times when their company’s share prices are low. The strike price – the price at which the option is granted – is generally equal to the market price on the day it is granted by the company’s board. But back-dating stock options when a grant price is set lower, increases the chance for future profit.

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