Human Capital & Careers

Pediatrix Blames Ex-Exec for Options Mess

DOJ continues its probe into the company's option granting practices, while officials issue make-good payments to affected employees.
Stephen TaubFebruary 28, 2007

Pediatrix Medical Group said on Wednesday that it will restate prior financial statements due to “documented instances of intentional backdating” by a former executive that occurred in the granting of stock options prior to 2001. The company, which provides newborn, maternal-fetal, and pediatric physician subspecialty services, did not identify the executive in its announcement.

However, in early December, the company announced that one-time Chief Financial Officer Lawrence M. Mullen resigned from the board following an audit committee’s preliminary determination that there were deficiencies in the stock options granting process, including instances of backdating of option grants as well as inadequate procedures which resulted in or permitted the misdating of option grants.

The company explained at that time that Mullen, a member of the audit committee, had “recused himself” from its independent stock option review. Bob Kneeley, the company’s director of investor relations, declined to confirm whether Mullen was involved in backdating grants.

Mullen served as CFO from 1995 to 1998. He was chief operating officer from August 1998 to May 2000, and was vice president in charge of special projects until his retirement in April 2001. The company added that Mullen had “a significant role” in the administration of the company’s stock option program and practices.

The company’s stock option granting practices are already being investigated by the Department of Justice. In January, Pediatrix announced that the U.S. Attorney’s office in Miami was looking into its granting practices, and that officials intended to cooperate fully with the investigation.

In its recent announcement, Pediatrix said the restatement is expected to include charges relating to backdating in periods prior to 2001, and misdating in those and subsequent periods of certain other option grants as a result of process deficiencies. The company still has not determined the amount of the charges or which periods may require restatement. Based on its analysis to date, however, the company said it believes that total additional non-cash compensation expense will not exceed the previously announced tentative calculation of $28 million on a pre-tax basis for the 1995 through 2006 period.

Separately, Pediatrix announced that its board has approved the company’s participation in an Internal Revenue Service program to pay certain individual tax obligations for employees, other than executive officers, who exercised certain stock options during 2006. The program will cover non-executive officer employees who are subject to adverse income tax consequences. That includes any IRS interest and penalties related to options that the audit committee believes were issued at exercise prices that are lower than revised prices.

Pediatrix also said it intends to implement a separate program that would increase the exercise prices on stock option grants that remain outstanding, and has revised measurement dates to protect employees from any adverse tax consequences. In addition, the company will provide make-whole payments to employees as compensation for the increased option prices and tax gross-ups. The IRS program and other efforts will result in a pre-tax charge that will not exceed $7 million, noted the company.

As a result of the ongoing review of its stock option practices, Pediatrix will delay the filing of its 2006 annual report.