When Manipulation Might Equal Fraud
The investigation of companies’ stock-options practices has the look of a regulatory free-for-all: The Securities and Exchange Commission, the Justice Department and the Internal Revenue Service all are interested in whether executives manipulated options contracts.
The companies may have violated SEC rules on accounting and disclosure. They may have violated criminal statutes if deception was deliberate. And they, and their executives, may have cheated the tax man in the process.
Many companies aren’t waiting for a prosecutor to knock on the door.
“Right now boards all over the country are hiring outside counsel and forensic accounting experts to look at their option practices,” said Kevin Cameron, president of shareholder advisory firm Glass, Lewis & Co.
“But that’s not something you can do quickly,” he said. Which means it could be a long second half of the year for investors who are worried that their companies could be implicated.
Prosecutors don’t announce their investigations, but many companies choose to disclose to shareholders if they’ve become a target of a civil or criminal probe. That is how most of the companies implicated so far have come to light -- firms such as Irvine-based semiconductor maker Broadcom Corp., computer hardware producer Brooks Automation Inc. and tax software giant Intuit Inc.
Yet it isn’t clear that some of the games played with options in the past actually broke any laws. Backdating of options, without public disclosure, may be cut-and-dried fraud. But simply timing option awards ahead of expected favorable company news makes good business sense, SEC Commissioner Paul Atkins said at a conference in Washington last week.
He suggested that such so-called spring-loaded option awards were in “the best interests of shareholders,” because the options would be worth more to the executives, and the companies therefore could issue fewer options to reach a desired level of capital gain for the executives.
Fewer option grants would mean that existing shareholders would face less dilution from additional shares in the marketplace, Atkins said.
