Stock Option Probe Becomes Viral

Online security firm RSA Security  is the latest tech company to get caught in an expanding whirlwind surrounding stock options grants.

RSA, based in Bedford, Mass., is among some 40 companies that in recent weeks have revealed they are under investigation about options grants practices.

The company said it received a subpoena from the U.S. Attorney for the Southern District of New York for documents dating back to 1996.

RSA refused comment.

Job Web site reported earlier this week that the Securities and Exchange Commission has asked the online job posting service to preserve documents as federal regulators probe stock options provided by the company.

Employees are often offered the option of buying stock in a company as an enticement, especially with start-ups or younger companies. The issue, however, is about backdated options, which could run afoul of securities laws, especially if employees (usually executives) could profit from the prices in hindsight.

In the wake of accounting scandals at Enron and WorldCom, the Financial Accounting Standards Board (FASB) passed new rules requiring stock options to be counted against profits. The new rules took effect this year.

If problems have arisen regarding the practice, it was with companies not disclosing the “strike date” or date when the stock options are awarded, according to Roger Cochetti, public policy group director for CompTIA, the tech industry lobbying group.

But the tech industry relies on options as a necessary way to compete for talent, he added. So mend it, but don’t end it, goes the thinking of the lobby group.

Marc Siegel, director of research at the Washington-based Center for Financial Research and Analysis (CFRA), agreed that stock options play an important role in the tech industry.

In a May survey of 100 companies, the tech industry dominated the group of firms CFRA saw as possibly using backdated stock options.

“Stocks were flying high” before the 2002 Sarbannes-Oxley Act made it more difficult to back date stock options, according to Siegel. Before the SOX regulations, and the bursting of the dot-com bubble, “there was a war for talent.”

That heated atmosphere cooled as new regulations took hold, requiring companies to expense the stock options, which later resulted in financial restatements by many companies. Because of that, the use of stock options is not used as much, Siegel added.

However, an executive search agent said while many rank-and-file employees receive token amounts, options grants are still a key factor in pay packages of a CEO or CFO.

“It’s a huge part of the pay,” said Larry Ormsby of Korn/Ferry, an executive search and placement firm. Ormsby said at least two-thirds of an executive’s incentives package could involve options grants.

Stock options also allow smaller companies to hire higher quality people and retain employees, according to industry groups. “They can be a very important recruiting tool,” said CompTIA’s Cochetti.

They’re a kind of currency, Ormsby added. Many companies cannot compete without offering stock options to recruits. If it got to the point of not being able to offer options grants, it would be a huge strain, he said.

That strain can work both ways.

In May, Sycamore Networks said it restated financial results for fiscal years 2000 through 2004, along with the first half of 2005, as a result of its own internal investigation involving options grants. The company has also become the target of a SEC probe, as previously reported by

The CFRA’s Siegel said if anything, the government is likely to increase rules on transparency and disclosure of who receives them in order to address grey areas in the rules.

But the general practice of offering stock options in the tech industry is not likely to vanish, experts interviewed for this story said.

“It’s all play money, but they count on it,” Ormsby said.

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