Video: Top cop speaks out

updated 6/8/2006 5:19:47 PM ET 2006-06-08T21:19:47

Alarmed by the possible manipulation of stock options to enrich top executives at a growing number of companies, federal regulators are looking at refining their plan to expand public disclosure of compensation.

The list of public companies under investigation by the Securities and Exchange Commission or federal prosecutors regarding the suspicious timing of options grants has grown to at least 30, and executives at several companies have been fired in recent weeks.

“We’ve already learned that the problems are more than episodic,” SEC Chairman Christopher Cox told The Associated Press on Tuesday in response to questions. “The apparently widespread nature of the problems is of serious concern” to the agency.

In addition to investigating specific companies, the SEC also may respond to the options-dating controversy by revising the new pay disclosure rules it proposed in January. Cox is expected to speak publicly on the matter Thursday.

The scandal has prompted some corporate-governance and shareholder groups to press for revisions to the pay disclosure proposal, which would require companies to disclose in far greater detail their executives’ pay and perks.

“By any reasonable standard, stock option backdating is unfair to shareholders who do not have the ability to retroactively purchase shares of stock at past market lows,” Richard Trumka, secretary-treasurer of the AFL-CIO, a major investor in public companies, wrote in a letter to the SEC on Wednesday.

At issue is whether executives manipulated option grants by backdating them to a point where the company’s stock was at or near a low point, boosting the value of those awards.

Stock options are generally issued with an exercise price equal to the current market price, and therefore have no immediate value. By choosing an earlier date when the stock was lower, the options are instantly worth the difference between the strike price and current price.

While stock options are used as an incentive for executives to boost a company’s performance and stock price, improper backdating can mean that executives reap big profits with no relation to their individual performance.

The SEC proposal, expected to be formally adopted by the agency this summer, will bring the biggest changes in rules governing disclosure of executive compensation since 1992. Public companies for the first time would be required to furnish tables in annual filings showing the total yearly compensation for their chief executive officers, chief financial officers and the next three highest-paid executives.

The true costs to the company bottom line of the executives’ pay packages, including stock options, would have to be spelled out.

Backdating of options can be legal so long as the practice is properly disclosed to shareholders and approved by the company’s board, securities experts say. But even if the backdating was not illegal, it appears some companies may have violated accounting and IRS rules regarding compensation.

The SEC proposal in its current form already requires companies to provide detailed information on how they determine when option grants are made to executives and, if they do so, how and why they backdate options. The required tables showing option awards to executives would include the date that options were granted. If the exercise price is less than the stock’s market price on the date of the grant, a separate column would have to be added showing the market price on that date.

The SEC now is considering possible additional requirements or guidance to companies regarding disclosure of options backdating.

“The most troubling aspect of stock option backdating is that (company) boards apparently relinquished responsibility for setting option grant dates to executives,” Trumka said in his letter. “In effect, option backdating opens the door to executive self-dealing. Companies should describe what role, if any, executives play in their stock-option grant decision-making process.”

“Board policies on executive stock options should be made more transparent,” he said.

The SEC investigations of companies’ option grants have been ongoing for several months, and subpoenas have been issued by U.S. attorneys’ offices in New York City, Massachusetts and northern California.

Among the companies that have disclosed receiving subpoenas or SEC requests for documents are big, well-known names such as UnitedHealthGroup Inc. and Caremark Rx Inc.

Many are from the high-tech world, where stock options have long been a prized perk and incentive for executives and employees alike: Affiliated Computer Services Inc., Juniper Networks Inc., KLA-Tencor Corp., OpenWave Systems Inc., Vitesse Semiconductor Corp., McAfee Inc., Quest Software Inc., Sycamore Networks Inc. and others.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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