First American restates earnings

First American Corp., the second-largest U.S. title insurer, restated earnings for the first quarter of 2006 and the prior five years after an internal review showed that it incorrectly accounted for stock options over the last decade.

First American will take a charge of $35.7 million against 2001 to 2006 earnings, the Santa Ana-based company said late Thursday. It said it would avoid a material reduction in 2006 earnings by spreading the charge over more than five years.

“The company used incorrect measurement dates for financial reporting purposes with respect to a number of stock-option grants made between 1996 and 2006 and improperly accounted for the mispriced options,” First American said in a statement. The errors were not fraudulent, it said.

More than 190 companies, including Apple Computer Inc. and Home Depot Inc., have disclosed internal or federal investigations into the backdating of stock option grants to inflate returns for option holders. The probes have led to at least $7.9 billion in restatements, revisions and charges to reflect costs that should have been recorded.

Options allow holders to buy shares at a future date, usually at the price on the day they were granted. Investigations at other companies have focused on whether the grants were backdated or carefully timed to coincide with days when the stock price was low, building in a paper profit for recipients.

First American said in August that it asked independent directors to review its stock option grant policies. That made it the first insurer outside the health industry to disclose an investigation into the timing of its option grants.

Shares of First American, which published its restatement after the close of trading Thursday, rose $1.12 to $42.20 on Friday.

In November, First American said its preliminary review found that “actual measurement dates of certain stock-option grants differed from the recorded dates of such grants.” The company said at the time that it would post noncash charges for the stock-based compensation expense.

The restatement will cut 2005 earnings by 1% to $4.92 a share, 2004 by 1% to $3.79, 2003 by 1% to $5.17, 2002 by 2% to $2.86 and 2001 by 3% to $2.20.

First-quarter 2006 earnings will be lowered by 3% to 69 cents a share. The correction would have materially lowered earnings had the company booked it all in 2006, but it will mean a negligible reduction in shareholder equity for the prior five years, First American said.

First American delayed posting final results for the second and third quarters of 2006 pending the option review. It plans to report those figures, including noncash compensation and tax expenses related to stock option grants, by Monday.