Capital Markets

Molex Challenges Backdating Assumption

Company insists options were "misdated," not backdated, and challenges press reports as incorrect. Meanwhile, Clorox, The Cheesecake Factory, Pedia...
Stephen Taub and Tim ReasonAugust 3, 2006

Molex Inc. announced in a filing on Wednesday that a number of executive officers will repay a total of $685,000 of gains realized as a result of “misdating” stock option grants over a 12-year period. On Thursday, the company issued a second 8-K filing intended to distance itself from the ongoing backdating scandal by challenging “certain media articles,” and stressing that the options were “misdated . . . to dates either before or after the date the options were approved.”

The grants were discovered after the company voluntarily launched its own inquiry of its options practices in light of the growing backdating scandal, according to a company statement. By some estimates, at least 80 companies are now under investigation for backdating or have announced backdating problems.

Although “no such officer should benefit from misdated options, whether exercised or unexercised,” Molex said in its filing, the company concluded that the aggregate expense related to the misdating of executive options — approximately $6 million, pre-tax, over 12 years — was not material and did not require a financial restatement.

The company said it would not make any changes to options held by non-executive employees, saying it was “impracticable” to determine the actual measurement dates for their options. Even if it could determine the dates, the company said, the impact on expense would be immaterial.

In related news, Clorox announced that it took a $25 million pre-tax charge associated with historical stock option compensation expense dating back to the third quarter of fiscal 1996.

The Molex and Clorox announcements — similar in that both companies had investigated their option practices without prompting from regulators or investors — may be the beginning of a trend, suggested Jack T. Ciesielski, publisher of the Analyst’s Accounting Observer. In his blog, written for securities analysts, Ciesielski noted that Clorox began its investigation last June, when media reports of backdating first began to swell. The timing, he says, suggests that many more companies may soon make similar announcements. “The drone might get pretty loud in the third quarter earnings season,” Cieselski wrote.

In other option timing news, The Cheesecake Factory announced that the SEC launched an informal inquiry into its historical stock option granting practices and the Pediatrix Medical Group announced that it is reviewing its historic stock option practices and related accounting.

VeriSign announced that Len J. Lauer and Gregory L. Reyes, both members of the board’s compensation committee, have resigned from the company’s board. The move could “indicate an escalation with the informal SEC inquiry and grand jury subpoena into stock options practices,” at the company, Jefferies analyst Katherine Egbert wrote in a research note, according to the Associated Press.

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