Task Force Formed in Options Probe

From the Associated Press and Reuters

Northern California’s top federal prosecutor said Thursday that he has formed a task force to investigate whether companies in Silicon Valley committed fraud by improperly issuing employee stock options.

The statement by U.S. Atty. Kevin Ryan in San Francisco came after disclosures from more than 65 companies that they were under investigation for retroactively changing the date stock options were granted. About a dozen of those companies, including CNet Networks Inc., KLA-Tencor Corp., and Mercury Interactive Corp., are located in Northern California.

“We just want to be sure that if there’s criminal conduct that hasn’t been addressed properly, we address it,” Ryan said at a news conference. “This task force will charge ahead and we’ll see what’s out there.”


Ryan said his office was investigating several companies but declined to say which ones or give other specifics.

Companies under investigation are suspected of backdating, a practice in which company insiders pin the issuance of stock options to a low point in their stock price. Because the options become more valuable as the price of shares rises above the exercise price, backdating to a low point can fatten profits.

The practice can run afoul of federal laws governing accounting and taxes if the benefits aren’t properly reported to investors.

Also Thursday, an influential finance professor said as many as 1,000 companies appeared to have manipulated stock option grant dates.

University of Iowa Professor Erik Lie said his latest research, examining 8,000 companies, suggested that “at least 1,000 ... at some point manipulated or backdated their option grants.”

He spoke on a conference call briefing held by Institutional Shareholder Services, which provides proxy voting and other corporate governance services for clients.

Lie is the author or co-author of several key academic studies that helped expose questionable options timing now at the center of a fast-spreading probe by federal authorities.