Friday, May 19, 2006

Options Backdating Probe Deepens

In the latest development in the evolving options backdating story, the May 19,2006 issue of the Wall Street Journal contains a report (via wsj.com, subscription required) that federal prosecutors have launched criminal probes of at least five companies involved in potential stock-option backdating abuses. The article reports that Caremark RX, SafeNet, Affiliated Computer Services, Vitesse Semiconductor and United Health Group have received subpoenas from the U.S. Attorney from the Southern District of New York. Caremark and SafeNet also reported that they received informal SEC inquiries. United Health group also announced that it had received a request from the Internal Revenue Service for documents from 2003 to the present relating to stock options and other compensation for company executives.

Affliliated Computer Services has publicly taken the position that its processes legally involved backdating. In a May 10, 2006 Form 12b-25 filing with the SEC, the company presented a detailed explanation of its stock option practices, explaining that options were granted as a specified date after all compensation committee members' consent were obtained, often after the specified grant date.

An increasing number of companies are announcing the formation of special litigation committees to look into options grant practices. For example, American Tower today announced that a special committee of independent directors will be conducting a review of the company's stock option practices. The company's announcement also reported that it had received a document request from the SEC.

The media are definitely taking this story and running with it, and it is not just the Wall Street Journal pursuing the story. On May 14, 2006, the St. Louis Post-Dispatch carried a story examining in great detail the stock options practices of Engineered Support Systems. (Most of Engineered Support's top management retired after the company was sold in January to DRS Technologies for nearly $2 billion.) Engineered Support is separately under SEC investigation in connection with alleged insider trading.

The May 19 Journal article also reported that five pension funds had filed a lawsuit against United Health Group on May 18, 2006 in federal Court in Minneapolis, seeking to prevent the company's two top executives from exercising about $1.5 billion in options.

wsj.com is now maintinaing a detailed, company-specific ledger of the key companies involved in the options probe and the status with respect to each company. The posting identifies 13 companies by name. (The list does not include American Tower or Engineered Support Systems.)

Update: On Monday May 22, 2006, the Wall Street Journal ran another front page article (via wsj.com, subscription required) naming five additional companies whose option grant dates and stock price graphs seem to suggest the existence of options backdating. The five additional companies were identified using the same analytical technique used to identify the companies named in the Journal's original March 16, 2006 article about options backdating. The May 22 article notes that the phenomenon of options backdating seems to have disappeared after mid-2002, following the enactment of the Sarbanes-Oxley Act.

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