Stock option
backdating scandal could grow -report
Sun Oct 29, 2006 1:25 PM ET
By Emily Chasan
NEW YORK, Oct 29 (Reuters) - The stock
options timing scandal, which has already implicated at least 140
companies, could include hundreds more, according to a new analysis that
found lax enforcement of corporate governance reforms that should have
prevented the practice.
Investors have widely discounted
companies' misconduct over stock options timing because they believe
most of it pre-dates the Sarbanes-Oxley reforms on corporate governance
of 2002 that were implemented in the wake of the Enron scandal.
But a report released over the weekend
from proxy advisory firm Glass Lewis & Co. showed that many firms may
not have filed properly options timing paperwork as recently as 2005.
"We believe the backdating scandal may be
entering its second act," Glass Lewis analyst Todd Fernandez said in the
report.
Backdating involves changing the day that
stock options were granted to an earlier date when a company's stock was
trading at a lower price, potentially allowing company executives to
lock in higher profits when they exercise their options.
Beginning in August 2002, the U.S.
Securities and Exchange Commission required companies to disclose their
stock-option awards in Form 4 filings within two days of options grants
to comply with Sarbanes-Oxley. Before that, companies did not have to
report option grants for several weeks.
The new regulations should have removed
most opportunities for backdating. But Glass Lewis, in the report, said
the SEC has not enforced the two-day filing rule, possibly leading to
many more instances of backdating.
More than 140 companies have launched
internal reviews or are under government investigation over possible
manipulation of stock option grant timing.
But that number may grow as Glass Lewis
said an analysis of late Form 4 filings showed "hundreds" of companies
may have, intentionally or mistakenly, backdated grants after the 2002
reforms.
"When rules are not enforced
consistently, they often are not followed," Fernandez said. "When we
find late Form 4 filings where the price of the underlying stock
increased materially between the purported grant date and the day the
Form 4 was filed, we believe this raises legitimate questions about
whether the grant was backdated."
The SEC could not be immediately reached
for comment.
Companies have said that many of the late
Form 4 filings were unintentional -- a result of sloppy paperwork-- and
their options grants have been accounted for correctly.
The chairman of one of the companies
mentioned in the Glass Lewis report, Medis Technologies Ltd. <MDTL.O>,
told Reuters that Medis had been late in some of its Form 4 filings but
did not engage in backdating of options.
"For some reason they fell through the
cracks," Robert Lifton, chairman and chief executive officer, of Medis,
a fuel cell technology company, said of several late Form 4s the company
filed from 2004 through 2005.
"Our attorneys and our auditors have
checked it and rechecked it and there was no backdating," Lifton told
Reuters. "We filed them late and we, ourselves, disclosed it in our
proxy statement."
Glass Lewis also raised concerns about
late Form 4s that could have resulted in higher profits for executives
at Hansen Natural Corp. <HANS.O>, O'Reilly Automotive Inc. <ORLY.O>,
Digital River Inc. <DRIV.O>, American Home Mortgage Investment Corp. <AHM.N>,
Websense Inc. <WBSN.O>, Silicon Image Inc. <SIMG.O>, and Keryx
Biopharmaceuticals Inc. <KERX.O>.
A spokesman for Websense, Cas Purdy,
said, "The late filings were unintentional and we filed the appropriate
forms when we became aware of it."
The other companies could not immediately
be reached for comment.
Children's Place Retail Stores Inc. <PLCE.O>
was also mentioned in the report as having been late in filing Form 4s
after August 2002. The company earlier this month said it expects to
restate financial results for the past three fiscal years and the first
quarter of the current year due to errors in the dating of stock
options.
In several cases Glass Lewis said the
Form 4s were repeatedly filed late, raising questions about the quality
of internal controls over financial reporting at those firms.
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