Report says stock options scandal could widen

/ Source: Reuters

The stock options timing scandal, which has already implicated at least 140 companies, could include hundreds more, according to a new analysis that found lax enforcement of corporate governance reforms that should have prevented the practice.

Investors have widely discounted companies’ misconduct over stock options timing because they believe most of it pre-dates the Sarbanes-Oxley reforms on corporate governance of 2002 that were implemented in the wake of the Enron scandal.

But a report released over the weekend from proxy advisory firm Glass Lewis & Co. showed that many firms may not have filed properly options timing paperwork as recently as 2005.

“We believe the backdating scandal may be entering its second act,” Glass Lewis analyst Todd Fernandez said in the report.

Backdating involves changing the day that stock options were granted to an earlier date when a company’s stock was trading at a lower price, potentially allowing company executives to lock in higher profits when they exercise their options.

Beginning in August 2002, the U.S. Securities and Exchange Commission required companies to disclose their stock-option awards in Form 4 filings within two days of options grants to comply with Sarbanes-Oxley. Before that, companies did not have to report option grants for several weeks.

The new regulations should have removed most opportunities for backdating. But Glass Lewis, in the report, said the SEC has not enforced the two-day filing rule, possibly leading to many more instances of backdating.

More than 140 companies have launched internal reviews or are under government investigation over possible manipulation of stock option grant timing.

But that number may grow as Glass Lewis said an analysis of late Form 4 filings showed “hundreds” of companies may have, intentionally or mistakenly, backdated grants after the 2002 reforms.

“When rules are not enforced consistently, they often are not followed,” Fernandez said. “When we find late Form 4 filings where the price of the underlying stock increased materially between the purported grant date and the day the Form 4 was filed, we believe this raises legitimate questions about whether the grant was backdated.”

The SEC could not be immediately reached for comment.

Companies have said that many of the late Form 4 filings were unintentional -- a result of sloppy paperwork-- and their options grants have been accounted for correctly.

The chairman of one of the companies mentioned in the Glass Lewis report, Medis Technologies Ltd., told Reuters that Medis had been late in some of its Form 4 filings but did not engage in backdating of options.

“For some reason they fell through the cracks,” Robert Lifton, chairman and chief executive officer, of Medis, a fuel cell technology company, said of several late Form 4s the company filed from 2004 through 2005.

“Our attorneys and our auditors have checked it and rechecked it and there was no backdating,” Lifton told Reuters. ”We filed them late and we, ourselves, disclosed it in our proxy statement.”

Glass Lewis also raised concerns about late Form 4s that could have resulted in higher profits for executives at Hansen Natural Corp. O’Reilly Automotive Inc., Digital River Inc., American Home Mortgage Investment Corp., Websense Inc., Silicon Image Inc., and Keryx Biopharmaceuticals Inc.

A spokesman for Websense, Cas Purdy, said, “The late filings were unintentional and we filed the appropriate forms when we became aware of it.”

The other companies could not immediately be reached for comment.

Children’s Place Retail Stores Inc. was also mentioned in the report as having been late in filing Form 4s after August 2002. The company earlier this month said it expects to restate financial results for the past three fiscal years and the first quarter of the current year due to errors in the dating of stock options.

In several cases Glass Lewis said the Form 4s were repeatedly filed late, raising questions about the quality of internal controls over financial reporting at those firms.