Thursday, October 12, 2006

How Deep the Options Scandal

It appears that even more corporate heads are rolling in the ongoing options scandal. Bloomberg's reporting that CNET and McAfee have been caught up in it.

McAfee, the No. 2 maker of anti-virus software, said Chairman and CEO George Samenuk resigned, fired President Kevin Weiss and announced plans to slash 10 years of previously reported profits by as much as $150 million. Cnet, the online publisher of technology news and reviews, said CEO Shelby Bonnie and two other executives stepped down after an internal probe found the company backdated some stock-option grants.

The toll from backdating continues to mount. More than 30 officials, including eight CEOs, have left companies under scrutiny for manipulating stock options to reward employees, and executives at two, Brocade Communications Systems Inc. and Comverse Technology Inc., face criminal charges. More than 60 companies -- from Apple Computer Inc. to Cablevision Systems Corp. -- have restated or plan to revise earnings.

"It's getting worse before it gets better,'' said Howard Silverblatt, an analyst at Standard & Poor's in New York. "The issue will become more widespread as more companies are coming forward voluntarily instead of waiting for official inquiries.''

At least 140 companies have disclosed federal investigations or internal probes of potential stock-option manipulation. The Justice Department, the Securities and Exchange Commission, the Federal Bureau of Investigation and the Internal Revenue Service are among the agencies running civil or criminal probes.

Scratching the Surface

Meantime, investors have filed more than 230 lawsuits seeking compensation for the profits that executives and other employees made from improper grants and the earnings misstatements that may have resulted. "I think we have scratched the surface,'' said Derek Meisner, a partner in the Boston office of Kirkpatrick & Lockhart Nicholson Graham LLP who's advising companies he declined to name on whether to terminate executives over stock-option manipulation. "You are going to see more of it as companies conclude internal investigations and the SEC completes its investigations. This is kind of the tip of the iceberg.''

Backdating, the most serious abuse, involves retroactively pegging options to an earlier day when a company's stock was trading at a lower price. When the stock rises, holders of backdated grants can buy shares at artificially low levels and pocket the difference. If not disclosed to shareholders, backdating can be considered fraudulent. The practice hides compensation costs, reduces income-tax payments and overstates earnings.

Yep, backdating is certainly a lousy thing to do to your shareholders, but it is also an exceedingly low and sleezy thing to do to the rank and file employees who got the plain vanilla options. Here they were, watching the stock price and their exercise date, trying to forecast whether they'd be able to buy a new car or a flat-panel TV or even a new raincoat on the big day...No doubt in most cases what they really needed to buy on exercise day was a snorkel, because those options that seemed so promising the day they got them were now well under the water. I've lost all track of how many loser-ama options I was granted over the years. Every once in a while I find some old file with an option granting letter in it. In the rare case where the company still exists, I might do a check to see whether they EVER would have been worth anything. I'm seldom re-disappointed.

But I know that if I found out that the executives in my company had been backdating or otherwise manipulating the game so that they could win even bigger time than they already were, I would have been colossally pissed off.

Blessedly, the only options I have now are in a very small company, run by very honest people, where there's actually a less than zero chance that they'll be worth the paper they're printed on at some point. And blessedly (I guess) I have few enough of them that I don't expend one iota's worth of time fantasizing about what I'll do if they pay-off (which was certainly not the case with some of the larger pots o' options I've had in the past. Hmmmm, early retirement? House in Maine? Life of philanthropy?)

Meanwhile, I'm just as happy I don't use McAfee, those weaselly bastards.

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