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A new executive-pay scandal comes to light.
The latest executive-pay flimflam is unfolding before us, and while its perpetrators can't hope to set the bar any lower than Dennis Kozlowski's expense-account toga party, this new hidden enrichment scheme has the potential to embarrass a lot of companies, especially in the tech sector.
Enforcers at the Securities & Exchange Commission have opened inquiries and investigations into just shy of a dozen companies, hunting for executives who've switched the dates of their stock option grants to favor their own bank accounts. So far it has launched investigations into Analog Devices, Brocade Communications, Siebel Systems and Nyfix.
In a volatile market or in advance of a good earnings report there's plenty of incentive to change the paperwork on a stock option to a grant date when the stock price was lower. (The strike price on the option, the price at which shares may be bought, is usually pegged to the market price of the stock when the option was granted.) Timing can be fudged from as briefly as a few days to as long as a quarter, and investors wouldn't know it because companies typically disclose only the grant date, not that of the switcheroo. Accounting rules prohibit the change. "It's kind of like picking lottery numbers after the lottery has run," says Charles Mulford, a professor of accounting at Georgia Tech.
The tactic has taken down Forbes' 2003 Entrepreneur of the Year, Amnon Landan, chief executive of Mercury Interactive, which sells software for tuning up a company's Web applications. Landan, his chief financial officer and his chief legal counsel resigned on Nov. 2. (The executives could not be reached for comment.) An internal investigation, prompted by an SEC inquiry initiated in November 2004, found 49 instances since 1995 in which the recorded date of the option grants differed from the date on which the options appear to have been granted, almost always in favor of the executives. Mercury shares fell 26% despite a decent earnings outlook. The company faces delisting from Nasdaq if it cannot file restated earnings back to 1998 by Nov 30.
The SEC, tipped off a year ago that companies were backdating stock option grants, is eager to widen its investigation into what it calls secret executive compensation of the sort that tarred Kozlowski, GE's Jack F. Welch Jr. and Tyson Foods' billionaire founder, Donald Tyson. Lynn Turner, a former SEC chief accountant, suspects it's a fairly common practice and "bigger than most people realize."
Adds a Silicon Valley lawyer who asked not to be named: "I'd be surprised if there was even one public tech company that did not employ this practice in those [bubble] years."
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