Those dark clouds hanging over Silicon Valley have nothing to do with the weather. After all, it seldom rains during the summer.
But this season may be different.
It's been raining letters of inquiry from the Securities and Exchange Commission and subpoenas from the U.S. Attorney's office. And valley companies may well be in for even more stormy weather, experts say. Before the clouds lift, experts say we're likely to see massive restatement of earnings, a host of stockholder lawsuits, some abrupt resignations, a few indictments and maybe even a jail sentence or two.
Should executives found guilty of backdating options to low points in a company's stock price be fired from their cushy jobs -- even jailed? You bet, according to compensation consultant Alan Johnson.
"The backdating issue is outrageous. It's stealing, as simple as that," says Mr. Johnson, managing director for New York-based Johnson Associates, Inc. "If you're willing to steal, there isn't anything you're not willing to do."
Kirk Hanson, executive director of the Markkula Center for Applied Ethics at Santa Clara University, isn't so sure, saying the line between illegal activity and "cloudy" judgment blurs frequently.
"There is a range of behavior that we're talking about here, but I think if you're doing the right thing and you're honest, you don't have anything to worry about," says Mr. Hanson.
Still, he believes some executives are likely to face prison.
"Jail time? Oh sure, in the most egregious cases, yes," says Mr. Hanson. "We're talking about fraud here and people go to jail for that."
The stock options controversy has gained momentum in recent months as federal prosecutors, the SEC and the Internal Revenue Service look into more than 60 companies throughout the nation, a disproportionate share of them based in the Silicon Valley, for possible manipulation of option grant dates and exercise prices.
The daily news reads like a "who's who" list among public companies: What is the latest company under investigation by a regulatory agency? Which board of directors has agreed to hire outside counsel for an independent review and who is the latest shareholder to file a civil suit?
As the number of companies probed continues to rise -- as Luke Macaulay, a spokesman for the U.S. Attorney's Office, Northern District of California, predicts will happen -- shareholders are going to need a scorecard just to keep tabs on their executives.
The latest inquiries certainly won't help boost CEO popularity ratings, which are still limp in the wake of Enron-era scandals that left board members, entrepreneurs and American workers weary. Add to that reports of mass layoffs and company closures at a time when executive continue to earn boatloads of cash, it may not be a good time to boast about being the chief.
White-collar crime doesn't appear to discriminate either. While tech firms are largely coming under fire because stock options helped recruiters lure top talent during the Internet heyday, analysts report the scandal has spilled over into non-tech industries.
A number of valley companies have been hit with official inquiries, including Zoran Corp., which received a grand jury subpoena from the U.S. Attorney requesting stock option documentation since 1995. Company officials, who also say they received an informal inquiry from the SEC asking for the same information, are cooperating with investigators.
Maxim Integrated Products says it has referred questions about its options to a special committee. The company also faces shareholder suits filed over options made from 1995 to 2001. The company says it believed it had complied with all applicable laws.
Apple Computer Inc., Marvell Technology Group, Turbo Tax-maker Intuit Inc. and KLA-Tencor Corp. face SEC probes along with Rambus Inc. and Redback Networks Inc. and many others.
No one will confirm if all the corporate drama being played out will force key executives to trade in their reserved parking pass and high-rise digs for a few tattered books and a bully cellmate in Block D. But industry experts predict the fallout will last for years to come.
"It's premature to tell what's going to happen to these companies. I can't tell you if anyone is going to jail or for how long. It depends on the particular offense and how many charges are brought against an individual," says Mr. Macaulay.
"All I can say right now is that the U.S. Attorney's Office for the Northern District of California is conducting an investigation into the possible backdating of stock option grant dates by several Bay Area companies.
"I think long-term you're definitely going to see private lawsuits against these companies," he says.
Santa Clara University's Hanson breaks the stock option brouhaha up into three categories: backdating, forward-dating and sloppy work, all of which will have serious consequences, ranging from restating financial documents that could impact tax liability to prison terms.
"At the very least, we're going to see many companies restating their earnings," says Mr. Hanson. "This is going to change what the income was and have a substantial tax impact for the individuals who received those options. I also think we're going to see a lot of lawsuits on behalf of the shareholders."
Backdating is an illegal practice that involves choosing a date when the prices are low, allowing the grantee instant gains; forward dating -- or spring loading -- is the result of looking ahead and deciding on a date based on events that are likely to happen.
When stock options were theoretically granted versus the actual date they were documented is a matter for serious debate, according to Mr. Hanson. "If you have a telephone meeting about granting stock options and then sign consent documents a week later, were the options granted on the day of the telephone call or when everyone signed the documents? That's a real cloudy issue."
From Mr. Hanson's perspective, the right answer is the day of the phone call.
But others may disagree.
Couldn't this all just be a coincidence? After all, is a phone call or a few e-mails enough for the feds to prove a company executive acted out of dumb negligence -- or worse -- calculated fraud?
Joe Grundfest, a Stanford law professor and an expert on securities law, doesn't seem to think so. For starters, the legal pro doesn't like the term backdating, preferring instead the term "misdating."
Mr. Grundfest says the alleged wrongdoing could amount to nothing more than "corporate hygiene" issues, blaming over-hyped media stories for dramatizing the investigations.
"We don't see any cases where higher stock prices were chosen and execs lost money," says Mr. Johnson.
All of this corporate cleansing may have gone unnoticed if it weren't for a University of Iowa researcher who looked at nearly 6,000 option grants between 1992 and 2002.
Erik Lie's study showed that some executives had a 1 in a million -- in some cases, greater -- chance of hitting the corporate lottery -- or just the ability to pencil in a choice date.
Although the scandal is unlikely to provoke new legislation, companies hit with fraud accusations will likely see share prices dwindle.
That worries the California Public Employees' Retirement System (CalPERS), the nation's largest pension fund with assets totaling more than $203 billion. It recently asked 24 companies it invests in to respond to questions about published media allegations of stock option backdating practices for top executives.
"These allegations raise concerns about a lack of oversight by the board of directors, weak internal controls, weak internal and external audit practices and poor accounting, as well as the possibility of civil and criminal penalties against these companies," says Christianna Wood, senior investment officer for Global Equity at CalPERS.
So far, CalPERS has received only a few responses back from the companies it contacted, says spokesperson Brad Pacheco.
"We are concerned because these allegations threaten the credibility of these companies and that can hurt their performance," says Mr. Pacheco. "Lower stock prices mean lower returns on our investments."