Options: The Noose Tightens

CONTROVERSIES REGARDING BACKDATING stock options continue to pick up speed. Not only have the first criminal charges been filed, but marquee-name companies are being drawn into the fray, notably Apple Computer.

As of mid-August, at least 80 companies had received subpoenas from regulators or law enforcement agencies or had voluntarily begun in-house probes. Of 73 such investigations, notes The Wall Street Journal, 25 have involved the possibility of restating earnings. That should be enough to give directors a chill, since forced earnings restatements open the door to shareholder lawsuits. Among the 73 investigations, directors or corporate officers have been forced out of their positions in eight cases—not something good for a director's résumé.

Securities and Exchange Commission Chairman Chris Cox has made it clear that enforcement will continue unabated. Underlining his point, the SEC and the U.S. Department of Justice have brought criminal and civil fraud charges against Brocade Communications, a California technology firm.

Meanwhile, Apple Computer has announced that an internal probe found "irregularities" in the dates of options granted from 1997 to 2001. On several occasions during those years, several Apple executives, including CEO and founder Steve Jobs, received options just before the stock spiked dramatically.

  The SEC weighed in heavily on options accounting in its new disclosure rules on executive compensation. Companies are now required to list the value of the options when they are granted and the exact grant date, then the exercise date (if the instruments have been exercised) and their value at that time.

Directors should watch options matters very closely, warns Ken Raskin, a partner specializing in executive benefits law at White & Case in New York. The new SEC rules, Raskin says, "are going to cause those companies that haven't done an audit [of options dating] already to do that." Moreover, he says, boards may have to examine, and perhaps tighten, the chain of command in granting options. In most cases, the board's compensation committee decides the value and timing of options, but occasionally, the authority is delegated and somehow gets lost. If awards are made without proper delegation, Raskin says, "they're supposed to disclose that."