Risk & Compliance

Option Issues Raise SEC Eyebrows

Earlier this week, SEC chairman Christopher Cox said that the commission's proposed executive-compensation rule may be revised to take backdating i...
Stephen TaubJune 8, 2006

Maxim Integrated Products is the latest company to be targeted by an informal Securities and Exchange Commission investigation of its prior stock-option grants. The manufacturer of analog and mixed-signal integrated circuits, which has a market capitalization of about $10 billion, stated that it intends to cooperate with the SEC.

Nearly three dozen companies are undergoing a federal investigation or internal probe into their options practices, but the scandal is almost certainly more widespread.

Erik Lie, the University of Iowa finance professor partly credited with sparking the investigations, has said that as many as 10 percent of all stock options granted before the rules were tightened in 2002 were backdated, according to Bloomberg. The wire service also pointed to a Merrill Lynch study, which found that 40 companies in the Standard & Poor’s 500 may have backdated their option grants.

Earlier this week, SEC chairman Christopher Cox said that “the apparently widespread nature of the problems is of serious concern to the commission,” Bloomberg also observed. “We have already learned that the problems are more than episodic,” he reportedly added.

Cox also reportedly stated that the regulator may require better disclosure of how companies grant options because of the scandal, and that the SEC’s proposed executive-compensation rule may be revised to take backdating into consideration. “I may have more specifics on that shortly,” he told reporters.

On May 30, in fact, The CFA Center for Financial Market Integrity called on the SEC to improve disclosure requirements regarding the dates of stock-option awards. In a letter to the commission, the CFA Center recommended that companies be required to disclose dates for all prior-year compensation committee meetings; dates on which the committee approved share-based awards; and, if different, the effective grant dates. The center also reiterated its support for civil sanctions against executives and board directors who have post-dated options awards and for criminal prosecution in egregious cases.

“Our proposals would enable shareowners to hold boards accountable for improper behavior and require senior executives to attest to the accuracy of the dates companies report for granting stock-option awards,” said Kurt Schacht, executive director of the CFA Center, in a statement. “Shareowners’ interests must come first and foremost in determining when executive compensation is granted and how it is disclosed.”

In related news, earlier this week Moody’s Investor Services issued a report asserting that evidence of backdated stock options could negatively affect a company’s credit rating. The report listed several credit risks associated with backdating, including financial and reputational risk.

Meanwhile, Reuters reported that federal authorities are looking into the role that outside auditors may have played in the timing of option grants. “As these cases shake out, I wouldn’t be surprised if we saw that there were auditors who were familiar with some of the details,” George Stamboulidis, partner at the law firm of Baker Hostetler and a former federal prosecutor, told the wire service.