Government Probe of Options Widens

Staff Reporter -- Electronic News, 9/7/2006

The Securities and Exchange Commission widened its probe of companies backdating stock options, raising the total to more than 100 companies in a variety of fields.

SEC Chairman Christopher Cox told a Senate panel this week not all of the investigations will lead to enforcement actions. But regardless of the outcome, the SEC investigations,  internal corporate investigations and a steady flow of subpoenas from the U.S. Department of Justice for more information have heightened tensions across the entire high-tech industry where options were once considered as indispensable as health insurance.

“The SEC’s division of enforcement is currently investigating over 100 companies concerning possible fraudulent reporting of stock option grants,” Cox said this week in a statement to the Senate Banking Committee. “The companies are located throughout the country, and include Fortune 500 companies as well as smaller cap issuers. They span multiple industry sectors.”

In his statement to the Senate panel, Cox described recently implemented policy and legislative changes that have been designed to prevent stock options backdating. Cox named the 2002 Sarbanes-Oxley financial disclosure law, which requires that stock options grants for top execs be reported to the SEC within two days. A good deal of stock options backdating is alleged to have occurred before Sarbanes-Oxley, Cox said.

In 2003, the SEC approved changes to the listing standards of the New York Stock Exchange and the Nasdaq Stock Market that for the first time required shareholder approval of almost all equity compensation plans. Since these standards were enacted, companies have to publicly disclose the material terms of their stock option plans in order to obtain shareholder approval.

In January, the SEC proposed that public companies be required to more thoroughly disclose their awards of in-the-money options to certain executives and the fair value of the option on the grant date. These new rules will soon be complemented by more accounting guidance, Cox said, noting that the real key was to make executive compensation at public companies transparent to investors.

“Each of these steps by itself is an important contribution to preventing backdating abuse,” Cox told the panel. “In combination, they have effectively slammed the door shut on the easy opportunities to get away with secretive options grants.”

This is just the latest sign that the growing stock options probe in Silicon Valley is not ending any time soon. In Northern California, U.S. Attorney Kevin Ryan has formed a task force to investigate allegations that Silicon Valley companies and individuals participated in illegally backdating stock options.

Dozens of companies have been the subject of inquiry by the feds, while execs at a few companies, such as Comverse have been hit with actual charges from the SEC.