IE 11 is not supported. For an optimal experience visit our site on another browser.

Federal prosecutor to investigate stock options

Northern California’s top federal prosecutor has formed a task force to investigate whether companies in Silicon Valley have committed fraud by improperly issuing employee stock options.
/ Source: The Associated Press

Northern California’s top federal prosecutor said Thursday he has formed a task force to investigate whether companies in Silicon Valley have committed fraud by improperly issuing employee stock options.

The task force, formed by U.S. Attorney Kevin Ryan in San Francisco, is already investigating “several companies,” Ryan said at a press conference. He declined to say which companies were being probed or give other details about the group’s actions.

Formation of the task force, which is made up of four assistant U.S. attorneys and an undisclosed number of FBI agents, comes as more than 65 U.S. companies have said in recent days that they are under investigation for retroactively changing the date stock options were granted. About two dozen of those companies are located in Northern California.

“We just want to be sure that if there’s criminal conduct that hasn’t been addressed properly, we address it,” Ryan said. “This task force will charge ahead and we’ll see what’s out there.”

Cnet Networks Inc., KLA-Tencor Corp., and Mercury Interactive Corp. are among the companies in Ryan’s legal turf that have disclosed their stock option practices are under investigation by either the Securities and Exchange Commission or the U.S. Department of Justice.

While those two agencies probe for instances where civil laws were broken, Ryan’s office will be looking for violations of criminal statutes.

Ryan said the need for criminal oversight was especially important in Silicon Valley, where initial public offerings and rapidly rising technology stocks regularly turn college drop outs into overnight billionaires.

“There was a dynamic in this community wherein there might be issues that are worthy of this effort,” he said.

Stock options are a common form of employee compensation designed to align the interests of workers with those of share holders. They give people the right to buy shares at a set price at a future date, typically one to four years after the options were issued. They can represent a windfall if the stock price rises in coming years.

Federal investigators are looking in to a practice known as “backdating,” in which company insiders pin the grant date of options to a low point in their stock price. Because the options become more valuable as the price of shares rises above the exercise price, backdating to a low point fattens the recipient’s profit.

The practice can run afoul of federal laws governing accounting and taxes if the benefits aren’t properly reported to investors.

Earlier this week, Cnet, an online publisher of technology news and reviews in San Francisco, said it will have to record significant charges to correct accounting errors that occurred as a result of the stock options it has issued.

Company executives told investors to disregard all financial statements issued since the beginning of 2003 and warned results from previous years may also have to be revised.

Mercury Interactive, another Silicon Valley company, has already removed $525 million in previously reported profits to adjust for its backdating practices.

Apple Computer Inc., whose brisk sales of the iPod music player have turned it into a Silicon Valley icon, said last month that an internal investigation had uncovered “irregularities” that occurred between 1997 and 2001. The awards included millions of options given to the Cupertino-based company’s chief executive, Steve Jobs, who surrendered the awards in 2003.

Erik Lie, an associate professor at the Henry B. Tippie College of Business at the University of Iowa, studied 8,000 publicly traded companies and found that at least 1,600 of them, or 20 percent, appeared to engage in backdating or other suspicious behavior with the options they granted.

He said that not every instance was illegal, since wrongdoing largely depended on whether company executives intended to conceal their actions.