Risk & Compliance

Enforcement on Backdating Cools Off

For the third time in a week, the SEC drops an investigation into the manipulation of stock-option award dates.
Alan RappeportNovember 7, 2007

Electronic Arts, the video-game creator, announced Tuesday that the Securities and Exchange Commission dropped its probe into the company’s stock-option backdating practices and would not take any action. The halted investigation is the third in the last week, marking a decline in enforcement activity over backdating.

Last week, NVIDIA Corp., a Santa Clara, Calif.-based chipmaker, said the SEC had dropped its investigation into the company’s stock-option practices, almost a year after the firm said it would restate a number of financials over the issue.

The SEC also declined to take action against PMC-Sierra, a semiconductor provider. The company had previously revealed that an internal investigation had uncovered irregularities in the measurement dates for some of its stock option grants awarded between 1998 and 2001.

The number of companies facing SEC scrutiny or undertaking internal investigations of possible backdating was estimated earlier this year to be around 200. Now, according to John Despriet, litigation department chairman at Smith, Gambrell & Russell, LLP, that number has fallen below 120.

“They must be thinking that those cases were not that strong,” Despriet says. “I would expect those numbers to drop some more. Backdating has become old news.”

The SEC, however, contends that it continues to take backdating seriously, but that investigations that find errors due to sloppiness or other unintentional mistakes are more likely to be dropped.

“I think the commission made it clear early on that we weren’t planning on filing hundreds of enforcement actions,” Marc Fagel, assistant regional director of the SEC in San Francisco, told CFO.com. “Some of the factors we’ve looked at have been how high up the misconduct goes and how deliberate it appears to be.” He added that the SEC is especially concerned with cases involving forged documents or “egregious facts.”

Executives have faced severe fallout from backdating scandals during the last several years. Those found guilty of the practice — which involves manipulating the award dates of stock options — have paid a heavy price. Speaking at a convention in Boston last month, Erik Lie, the University of Iowa professor credited with uncovering the backdating issue, said more than 2,000 companies manipulated stock-option grants. “We only see the tip of the iceberg,” Lie said.

For Electronic Arts, the pass from the SEC comes at a tenuous time. The Redwood City, Calif.-based company lost $195 million in the last quarter, is closing its Chicago offices, and plans to trim its work force by 4 percent.

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