RealTime IT News

Sympathy For Stock Option Backdaters?

Some are calling it a witch hunt. Some are calling it the latest and greatest scandal in the relatively short history of high tech.

Whatever you want to call the chowder pot of stock option backdating cases, it still boils down to sketchy accounting.

Granting options below market value is legal if it's fully disclosed to the public and properly accounted for.

But stock option backdating is the practice of granting shares at prices below the market price on the day of the grant, virtually ensuring the recipient a better price for their shares down the line.

For example, say an executive is given stock at an exercise price of $5 per share, when the company's real stock price on the grant date is $15 per share.

That's a potential $10 profit for the exec, whereas a shareholder who bought the stock in the market on the same day would have had to pay $15 per share.

Now, that's not much of a difference when we're talking about one share of stock. But try multiplying it by hundreds, thousands or millions.

We're talking about a multi-million-dollar payday here.

In a nutshell, the executive gets an unfair advantage over investors who are gambling that the stock will perform well.

When the Securities and Exchange Commission finds something askew in the numbers, it can be a royal headache for the companies.

It could mean millions of dollars in financial restatements if the SEC comes asking for the real numbers for the years in which option dating was fudged.

Just ask Mercury Interactive, which recently claimed that the backdating practices of three directors could cost the company $70 million in financial restatements and legal fees.

If that kind of toil and trouble doesn't induce a debilitating migraine, how about having execs shipped off to jail?

Just ask companies like Brocade Communications Systems, who just watched a former CEO and vice president get slapped with multiple charges related to backdating.

Ask three former Comverse Technology executives, who are facing criminal and civil charges for fraudulently backdating millions of stock options.

Sometimes clerical mistakes happen.

But for the companies who did intentionally alter option grant dates to generate profits, shame on you for getting overtaken by hubris and greed.

While other accounting scandals exploded, your backdated option grants simmered and boiled over after the SEC and other regulators had already fired off various compliance laws to force greater accountability from companies.

I asked Jill Fisch, securities professor at Fordham Law School and former trial attorney with the Justice Department, how this backdating situation could have gotten so out of control.

Fisch told me the late '90s were a great time to backdate stock options because the market was volatile, there was a lot of money to be made in stock options, and basically, no one was paying attention.

Fisch explained that before the dot-com implosion, people thought it was fine for the executives and the high-level employees to get paid a lot of money.

But when the markets began to sour in late 2000, 2001, the public became more skeptical of options and began to see that options don't really pay CEOs and other high-level execs for performance.

"We didn't have the same kind of disclosure of options-based compensation we do now, so it was harder to figure out what was going on then," Fisch said.

Okay, fair enough. There is greater accountability for options-based compensation now, and some folks are afraid of leaving something out of the mix that could affect earnings per share.

But why do we see it in high tech so much compared to other lines of businesses? Fisch said high-tech vendors traditionally feel further a field from typical business.

"[They thought] it's so modern and new. 'The [accounting] for these standard, nuts-and-bolts companies doesn't really apply to us in the same way'" Fisch said.

So perhaps some high-tech vendors felt their work is a little different than the rest of the business world, and therefore they could get a little leeway with the SEC.

Somehow, I don't think the SEC is biting; the slew of investigations bears that out.

But here's what really blows my mind. Apparently, there are some whispers afoot that the SEC is merely out to get companies.