Feds Say They're Targeting Stock Options

Securities and Exchange Commission Chairman Christopher Cox, left, and Mark Olson, Public Company Accounting Oversight Board Chairman, appear on Capitol Hill in Washington, Wednesday, Sept. 6, 2006 before the Senate Banking Committee hearing on stock options backdating. (AP Photo/Dennis Cook) (Dennis Cook - AP)

At issue in many investigations is a practice known as backdating: Stock options are issued retroactively to coincide with low points in a company's share price. This can fatten profits for options recipients when they sell their shares at higher market prices.

Backdating options can be legal as long as the practice is disclosed properly to investors and approved by the company's board. In some cases, however, the practice can run afoul of federal accounting and tax laws.

It can outrage company shareholders and the public when they see lavish compensation for executives, unrelated to their performance, even as companies stumble and lay off employees.

A new academic study found that corporate executives gained an average of $600,000 a year each from backdating of stock options between 2000 and 2004. By contrast, shareholders were hurt by an average loss in market value of 8 percent, or $500 million, for each affected company from the negative publicity of being under government investigation, the researchers at the University of Michigan found.

About 120 companies _ many of them in the technology sector _ are the subjects of government or internal inquiries into whether corporate insiders rigged options, without the proper disclosure or accounting, to ensure larger windfalls. The fallout: Shareholders have sued and some companies say they may have to restate earnings because past option grants may have distorted their financial results.

The SEC is focusing on cases of serious fraud, with elements such as deliberately lying, forging documents or deceiving directors or investors. In addition, the agency this summer adopted rules for what public companies must disclose regarding the dating of stock option grants to executives.

Possible tax issues in the IRS inquiry include whether deductions were taken correctly by companies regarding options that were backdated and whether executives who received options accurately reported their sale profits.

Everson also said the IRS's examination of compensation paid to executives of charities, begun in late 2004, has found problems with compensation reporting and loans made to executives and other officials.

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On the Net:

Securities and Exchange Commission: http://www.sec.gov

Justice Department: http://www.usdoj.gov

Internal Revenue Service: http://www.irs.gov