September 6, 2006 12:02 PM PDT

Feds: Expect more stock option cases

WASHINGTON--Expect to see more legal action in the coming months against executives suspected of stock option mischief, federal officials told U.S. senators on Wednesday.

At a hearing here convened by the Senate Finance Committee, top officials from the Securities and Exchange Commission, Internal Revenue Service and Department of Justice's corporate fraud unit said they couldn't be sure how many of the companies suspected of "backdating" stock options for financial gain will face full-blown enforcement proceedings or new charges.

"Like other forms of corporate fraud, the Department of Justice takes stock option backdating seriously, and we will continue to use our best efforts to uncover criminal conduct where it occurs," said Deputy Attorney General Paul McNulty.

Stock option backdating

Some Bay Area companies have announced that they've been contacted by the U.S. Attorney's office in Northern California. Typically the contact comes in the form of a grand jury subpoena. They include:

Altera
Applied Micro Circuits
Asyst Technologies
CNET Networks
Equinix
Foundry Networks
Intuit
Linear Technology
Marvell Technology Group
Maxim Integrated Products
Openwave Systems
Power Integrations
Redback Networks
VeriSign
Zoran

Source: Wall Street Journal database

The IRS, too, "will follow up on every company and the relevant executives for each case where it is determined that abuses have occurred," said IRS Commissioner Mark Everson.

Currently, more than 100 companies, largely from the technology sector, are under investigation by the SEC for possible fraudulent reporting of stock option grants to their top executives, said Linda Thomsen, director of the SEC's enforcement division. So far, the Justice Department and the SEC have filed civil and criminal charges against former top executives from two technology companies: Brocade Communications Systems and Comverse Technology. Two former Brocade executives pleaded not guilty to those charges last week.

Stock option backdating refers to the practice of retroactively changing the date of a stock option grant to make it appear it was granted on a date when its value was lower, thereby multiplying the payoff when the options are exercised. While not necessarily illegal, the practice could run afoul of tax laws, securities regulations and fraud statutes if concealed from shareholders.

Senate committee leaders voiced disgust at the allegedly fraudulent practices and urged the enforcement officials to advise them if changes in the law are necessary.

"It is behavior that ignores the concept of an 'honest day's pay' and replaces it with a phrase that we hear all too often today, 'I'll get mine,'" said Sen. Chuck Grassley, the Iowa Republican who serves as committee chairman.

Montana Sen. Max Baucus, the committee's Democratic co-chairman, said the stock option scandal is indicative of a broader problem--overpaid executives. "It is high time that we tried to close the loopholes (in tax laws)," he said.

The senators indicated they were weighing a number of legislative options, including changes to--or even a repeal of--a section of the tax code that puts a $1 million cap on the amount of employee compensation that firms can deduct from their income taxes. The measure, enacted in 1993, had been intended to stave off "excessive" executive pay, "but it really hasn't worked," said Grassley, who said he voted against the bill containing that provision. "Companies have found ways to get around it, and frankly it has more holes in it than Swiss cheese."

The federal officials said they didn't see the need for additional congressional action right now. New SEC rules that go into effect next year, for instance, would require more detailed reports of executives' compensation and a broader discussion and analysis of a company's compensation practices, and are designed to foster increased transparency, Thomsen said.

"These issues cannot be reformed by Congress," said the IRS' Everson. "They're going to have to be reformed by American business."

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2 comments

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Shame and scandal
Shame and scandal, when will it all end?

Or will Gordon Gecko, continue to smile, as fiction becomes fact?

Will this so called housekeeping, merely sweep the bad hats under the carpet, so that they will plague us another day?

Only time will tell!
Posted by heystoopid (691 comments )
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corporate raiders
I remember when the term corporate raider meant someone doing a hostile take over for profit. Now it means the executives managing the company raiding the cookie jar. It's my opinion that board compensation members should be held just as liable as the executives they are supposed to be overseeing. Maybe there would be real oversight instead of a wink and a nod.
Posted by drfez (15 comments )
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