More Stock Option Dating Problems

The Securities and Exchange Commission has expanded its inquiry into backdated stock options to over 100 companies. SEC Enforcement Division Director Linda Thomsen also has promised to pursue "spring-loading" cases (issuing options just before the release of good news). Earlier comments by SEC Commissioner Paul Atkins were that spring-loading is not insider trading, and may actually be good for shareholders by making it "cheaper" to compensate executives. The remarks generated considerable outrage in the press and investing public. At least 46 executives have resigned or been fired, and additional accounting charges taken so far exceed $5 billion.

Meanwhile, Glass Lewis, a proxy advisory firm, has found that the Sarbanes-Oxley Act may not have discouraged backdating as much as investors expected. The law requires reporting of option grants within two days of the award, but the study found the SEC is routinely granting extensions of filing deadlines and rarely imposing penalties of any substance. Looking at late filings between 2004 and 2006, Glass Lewis found that at least 6,000 option grants to executives had questionable timing.

Finally, Eric Dash wrote in the New York Times (October 30, 2006) that many executives appear to have reported the exercise date of their options at a time other than they actually occurred in order to save taxes. For instance, at Symbol Technologies, certain executives were allowed to push back the exercise date for their options to the time when the share price was the lowest over a 30-day period, thus minimizing the spread they have to report for taxes. The extent of the practice is unknown, however.