June 22, 2006

More, More, More on Option Misdating

The articles just keep coming as the media is loving this backdating scandal. And it looks like the plaintiff's bar is gonna love it too according to this Red Herring article, which quotes a lawyer from Lerach's firm observing: "He sees the damages to investors reaching billions of dollars and plans to press for the replacement of board directors who allowed the backdating of options to go on." The D&O Diary Blog contains some good "food for thought" on possible statutes of limitations defenses.

And according to this article and this article (and this WSJ article from Tuesday), D&O insurers might refuse to renew policies with implicated companies.

In addition, members of Congress are calling for the SEC and the DOJ to step up with their enforcement actions on this issue - see this article - which is now approaching 50 companies under investigation. As the accounting industry begins to come under fire, the SEC's acting Chief Accountant, Scott Taub stated last week that the PCAOB needs to give guidance to auditors on when a grant of options may be considered suspicious.

And the Council of Institutional Investors has sent this letter to 1500 companies, asking them to disclose whether they are under investigation (and the AFL-CIO and CalPERS are doing something similar - here is a copy of CalPERS' letter, which was sent to 24 companies).

Coming soon! We provide more guidance on the issues implicated by options misdating in the May-June issue of The Corporate Counsel, which just went to the printers (this nicely complements what we wrote in the March-April issue) - and we continue to upload articles and research reports about option timing unto our "Timing of Stock Option Grants" Practice Area on CompensationStandards.com.

A Different Kind of Backdating Witch Hunt

In his op-ed yesterday, the WSJ's Holman Jenkins joins me in using the term "witch hunt" to describe some of the attention being paid to the options backdating scandal. The source of this op-ed is curious given that the WSJ has been running at least one article per day on the topic (e.g. yesterday's article was about Microsoft).

But Holman's rationale for using the term is a far cry from my rationale. I am just worried that innocent companies might be caught up in the sweep to find out who the next culprit might be. Holman thinks that backdating in itself is no big deal. He thinks that folks are caught up in bunches because of "ever-shifting accounting, regulatory and tax standards." In other words, I think he is saying that those standards shouldn't really matter - instead, he believe that "overseeing CEO incentives is among the most important board responsibilities, and boards should keep control of it and do it clearheadedly."

I obviously agree with Holman's point - who doesn't? - but I would argue that Holman contradicts himself somewhat because if a board doesn't realize that options were backdated (or that proxy statements were misleading because they erroneously disclosed that boards granted options with exercise prices set on the grant date), that might illustrate that the board wasn't in control and was lacking that whole "tone at the top" thing that is so easy to say, but so tough to do...

The Shrinking SEC

While Congress is asking the SEC to do more investigating about options backdating, Congress also is cutting the SEC's budget from total program costs of $917.7 million (for the year ending September 30, 2005) to $888.1 for this year - with a budget request of $904.8 for the next fiscal year. The SEC staffing levels for the Division of Enforcement are down to 1216 this year from 1232, with a budget request of 1187 for fiscal 2007 (see page 53 of the SEC's 2005 Annual Report - and pages 1-3 of the 2007 budget request).

As has been happening in Corp Fin for nearly two years, I understand that quite a few enforcement positions are not being filled as staffers leave. Given Chairman Cox's connections on the Hill, I imagine that trend could be reversed if he pushed hard for more money...

Mavs Owner Invests in Stock Fraud News Website

Given that the Dallas Mavs just tanked, I thought it was appropriate to blog about their owner's - Mark Cuban - latest adventure: ShareSleuth.com (not yet launched) that will employ investigative journalists to ferret out and blow the whistle on corporate fraud. For those that don't follow sports, Mark is the most zany sports owner since Bill Veeck, who hired a midget to play baseball as a gag in the '50s. And Mark maintains his own blog - "blog maverick" - and even allows fans to e-mail him. Clearly a New Age sports team owner, who has already accrued over $1.5 million in fines from the NBA for his conduct. Bruce Carton blogged at length about this new development recently in his "Securities Litigation Watch."

Posted by broc at 06:58 AM
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