SEC Investigates Stock Option Backdating
The SEC is expanding its previously disclosed probe of stock-options backdating by numerous publicly held companies. According to a May 6, 2006 Wall Street Journal article, at least ten companies are involved in multiple investigations by the SEC and the U.S. Attorney’s Office for the Eastern District of New York. Several of these companies have admitted that back-dating did in fact occur.
San-Jose, California based Power Integrations Inc. has disclosed the resignation of its former chief executive and chief financial officers in connection with options-granting issues. The article states that that a total of eight officers, and at least two corporate general counsels, have resigned in connection with such issues.
The article notes that boards of directors typically grant stock options, which should have exercise prices equal to the fair market value of the company’s stock. However, an earlier Wall Street Journal investigation showed that grants to top executives were frequently dated just before significant share price increases, and at or near the bottom of a steep decline. This suspicious pattern apparently led to the SEC probe.
Options backdating could result in a material understatement of expenses, and the need to restate financial results. The authorities could also charge the companies with fraud on the basis of inaccurate statements about executive compensation.
The extent to which the companies are cooperating with the SEC is unclear. By means of an appropriately drafted confidentiality agreement, disclosing the results of the companies’ internal investigations to the government could both expedite resolution of the matters under review, and enable the companies to obtain “cooperation credit.” The departure of executives from the companies may reflect an attempt to curry favor with the SEC, which has noted that it will consider whether “persons responsible for any misconduct” remain employed by the company under investigation.[1] It is to be hoped that counsel for the companies are aware of the SEC’s cooperation policy, which could allow the companies to escape liability altogether, or seek a reduction in civil penalties.
[1] See “Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions,” Exch. Act Rel. No. 44969 (Oct. 23, 2001).
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