Risk & Compliance

Director Ties Linked to Options Scandal

The notion of backdating "may have been spread by word of mouth, through the conduit of directors sitting on the boards of more than one company," ...
Stephen Taub and Sarah JohnsonOctober 19, 2006

Editor’s note:
This story has been corrected and updated to reflect information brought to CFO.com’s attention by Novellus Systems Inc. in an October 25 response to The Corporate Library’s study, “The Spread of Options Backdating.”

A company mired in the options backdating scandal is likely to have something in common with other companies caught in the scandal: a director who sits on the board of at least one other implicated company.

That’s the finding of a new study by The Corporate Library, which concludes that “the practice of backdating stock options may have been spread by word of mouth, through the conduit of directors sitting on the boards of more than one company.”

Since the governance information company’s first study on the subject in June 2006, the number of companies implicated grew from 51 to 120 as of the end of September, the governance consultancy reported. (The Washington Post reported this week that that number had swelled to 135.) Through the end of last month, the number of companies being probed that have director-based links has grown even faster, from 11 to 51, according to the study, “The Spread of Options Backdating.”

Twenty-seven of the 120 companies, in fact, have more than one dual-board director. Just three such companies popped up in the Corporate Library’s earlier study. The director group comprises a total of 49 board members, with 43 sitting on the boards of two implicated companies and six sitting on three of them. In all, the 120 companies have 1,440 directors.

The Securities and Exchange Commission is apparently on the case. In fact, the SEC is investigating whether directors who sit on more than one company board may have spread the practice of backdating stock-option grants, Bloomberg reported.

“We are looking at the interrelationship between directors on boards of companies that may have problems,” Timothy England, an SEC assistant director of enforcement, told the wire service in an interview.

While SEC spokesperson John Nester told CFO.com that the quote was accurate, he downplayed its importance. “This is not unique to backdating,” he said, noting that the commission routinely looks at the interrelationships among boards during its investigations. “We would look to see where else a board member has served,” he added.

The study also found that three companies have six directors who sit on more than one implicated company board—Comverse, Verint Systems, and Ulticom. Comverse is the controlling stockholder of Verint, the Corporate Library notes.

Verisign has five dual-board directors, while Juniper Networks and Xilinx have four. According to the study, two directors in the network of option-scandal boards—William H. Kurtz and Scott G. Kriens—connect the most boards. The Corporate Library’s study incorrectly reported, however, that Kurtz is a member of the board of Novellus Systems Inc.

It also incorrectly reported that Kevin Royal is a member of Novellus’s board. The two errors trigger other errors in the study, which presents tables listing numbers of directors with multiple board memberships that the Corporate Library considers to be implicated in the options-backdating scandal.

“Novellus has not been implicated in any wrongdoing with regard to stock options backdating. Novellus has always filed its financial reports on time. In addition, Novellus reviewed its processes with two legal firms, internal and external auditors and its Board of Directors. The company issued a press release on May 22, 2006 stating that the company reviewed its process of granting options and did not find any irregularities,” the company stated in an E-mailed response to The Corporate Library’s report sent to CFO.com on October 24.

Declaring that it “strongly disagrees with the premise and findings of the report,” Novellus noted that Kurtz, who has been Novellus’s CFO since September 2005, is a member of the boards of Redback Networks and PMC Sierra (which were both named in the report) and chairs the audit committees of both companies. “He is not on the compensation committees of either of these companies, and therefore is not responsible for oversight of the compensation practices at these companies. As a result of concerns expressed earlier this year by several analysts, Mr. Kurtz, as Audit Committee Chair, led an independent investigation of stock option practices at both companies. The results of the independent investigation concluded that there was no evidence of stock option backdating at either company,” the company said.

Kevin Royal, the current finance chief of Blue Coat Systems, was the CFO of Novellus from January 2002 to April 2005. The company noted that he was not CFO of Novellus during the period between the late 1990s and 2001 during which the bulk of the backdating problems were widely acknowledged to have happened, according to the Novellus’s response.

Although Neil Bonke was correctly identified in the report as a current Novellus director, he ” could not have brought any option techniques to Novellus, since he joined the Board in 2004, long after the time period in question,” the company said.

According to the Corporate Library, Juniper Networks directors Kriens and Stratton Sclavos are responsible for the central position of the company within the network of linked companies, and between them sit on four other implicated boards. (Kriens is chief executive officer of Juniper Networks). But a spokesperson for the company dismissed the relevance of the directors’ interlocking roles to the backdating scandal. “It’s irrelevant as it relates to this matter,” Juniper Networks’ Brendan Hayes told CFO.com. “Neither executive sits on the compensation committee or audit committee of these boards.”

To the suggestion that the report had to do with word-of-mouth communications and the sharing of ideas, not so much which committee the directors sat on, Hayes said: “Beyond that, we have no comment.” Through a spokesperson for Novellus Systems, where Kurtz is a director, Kurtz said he had no comment.