Congress Examines Stock Options Timing

Congress is taking a close look at suspiciously timed stock options for top company executives, a corporate practice that is a source of anger for shareholders and the subject of federal investigations.

At least 78 public companies, including iPod maker Apple Computer (AAPL), UnitedHealth Group (UNH), Home Depot (HD), Intuit (INTU) and Barnes & Noble (BKS), are under scrutiny by the Justice Department or the Securities and Exchange Commission, or both, for possible manipulation of stock option grants.

And the Internal Revenue Service is conducting its own investigation for possible tax-law violations in option grants.

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

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

"If the tax laws are inadequate on stock options backdating, I want to beef them up," Sen. Charles Grassley said recently. Grassley heads the Senate Finance Committee, one of two panels examining the issue at separate hearings Wednesday.

The controversy touches a nerve for company shareholders and the public: lavish compensation for executives, unrelated to their performance, even as companies stumble and lay off employees.

Grassley, with an eye toward possible legislation, said his panel was looking at timing of options grants and other issues related to executive compensation. After the wave of corporate scandals of recent years, he said, "It's frustrating to think that ... some executives are still looking for ways to take unfair advantage for personal gain."

Nearly every day, more companies — many of them in the technology sector — become ensnared in government or internal inquiries examining whether company insiders rigged stock options to ensure larger windfalls without properly disclosing or accounting for the manipulation. New lawsuits by shareholders are filed. More companies disclose that because past option grants may have distorted their financial results, they may have to restate earnings.

And more companies — most notably Apple — say they have been warned that their shares could be stripped from trading on the Nasdaq Stock Market because reviews of options grants made them late in filing their periodic financial reports.

This summer, the Justice Department and the SEC fired two big opening salvos in their crackdown against allegedly illegal options grants to top executives, bringing criminal and civil charges against former officials of two technology companies, Brocade Communications Systems Inc. and Comverse Technology Inc.

SEC Enforcement Director Linda Thomsen, Deputy Attorney General Paul McNulty and the head of the IRS, Mark Everson, were scheduled to testify before the Finance Committee. SEC Chairman Christopher Cox and Mark Olson, who heads the independent agency overseeing the accounting industry, were to appear before the Senate Banking Committee.

Cox said recently that the SEC was 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 new rules for what public companies must disclose regarding the dating of stock option grants to executives, as part of the most substantial overhaul of benefit disclosure rules since 1992.

In disclosing the IRS investigation in late July, Everson said possible tax issues in the inquiry included whether deductions were taken correctly by companies regarding options that were backdated and whether executives who received options accurately reported their sale profits.

Also this summer, the agency supervising the accounting industry, the Public Company Accounting Oversight Board, issued a special "audit practice alert" warning auditors to watch for problems in companies' accounting for stock option grants.

Companies that have reported options-grant investigations by the Justice Department or the SEC include Apple Computer Inc., UnitedHealth Group Inc., The Home Depot Inc., personal-finance software maker Intuit Inc., Barnes & Noble Inc., Caremark Rx Inc., Cheesecake Factory Inc., Monster Worldwide Inc. and for-profit education company Corinthian Colleges Inc.

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