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Government Scrutinizes Dating of Stock Options

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Government Scrutinizes Dating of Stock Options


Government Scrutinizes Dating of Stock Options

Government Scrutinizes Dating of Stock Options

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript

The Securities and Exchange Commission (SEC) is reportedly examining the timing of stock option awards by corporations. The SEC is concerned that some executives have been gaming the system by "backdating" their options to increase their value.


Before the Enron jury can even reach a verdict, another corporate scandal may be emerging. This time the focus is on stock options. Corporate executives get them. And investigators want to know if some executives are gaming the system by backdating their options to increase their value.

The Wall Street Journal reported last week that six companies have received subpoenas from the Justice Department. The Securities and Exchange Commission is reportedly examining at least 20 more companies, as NPR's Jack Speer reports.

JACK SPEER reporting:

Stock options are generally looked upon as way to motivate corporate executives by directly linking compensation to performance. If the company does well, the CEO and the shareholders profit and everyone wins. Except, it now appears in some cases CEOs were winning no matter what.

Professor CHARLES ELSON (Director, Weinberg Center for Corporate Governance, University of Delaware): It's affectively betting on a horserace after the race is over.

SPEER: Charles Elson is Director of the Weinberg Center for Corporate Governance at the University of Delaware. He says the backdating allegations are disturbing.

Prof. ELSON: It's so inherently unfair and so inherently wrong, that I'm a little surprised someone would do something like this. On the other hand, after Enron and WorldCom, I guess nothing really should surprise me these days.

SPEER: Here's what's being alleged. Executives at the companies managed to time the awarding of their stock options to a point right around when the company's share price was at its low point for the year. If you can do this - set the start point for your option very close to the absolute low - you just about guarantee a big profit for yourself.

There haven't been any indictments yet, and reasonable explanations may yet emerge. But there are signs the number of companies involved will grow. Eric Lie is an associate professor of finance at the University of Iowa. He looked at 1500 publicly traded companies and saw a pattern.

Professor ERIC LIE (Professor of Finance, University of Iowa): What I found was that they're marked by indexes. They also increased after stock option grants. So I said, well, that means either executives can actually predict how the whole market will do, or they're backdating their options.

SPEER: Lie says despite the odds against such perfect timing, in some cases, as high as 100 million to one, he still had a hard time convincing anyone of what the data was showing.

Prof. LIE: There wasn't any anecdotal evidence out there. It took a long time before anybody detected any of these cases.

SPEER: The backdating of stock options isn't necessarily illegal. Prior to the tightening of securities law under Sarbanes-Oxley, companies had wide latitude in reporting stock options. However, companies must report backdating, since options grants must be approved by shareholders and impact a companies' bottom-line.

It isn't clear how many companies will be caught up in the probe. Lie says he wouldn't be surprised if as many as 10 percent of corporate stock options were backdated; though he says that will be difficult to prove.

John Coffee teaches securities law at Columbia. He agrees regulators have their work cut out for them.

Professor JOHN COFFEE (Professor of Law, Columbia Law School): Some of these cases are outright cheating. And some of these cases might just have been sloppy record keeping. But this is, again, proof that weak internal controls place you in a fraud-like set of circumstances very quickly.

SPEER: So far, federal regulators are being tightlipped about the probe. However, some legal observers say, unlike Enron and other complicated corporate fraud cases, if prosecutors decide to bring charges, the issue of backdating stock options would be relatively easy for a jury to understand.

Jack Speer, NPR News, Washington.

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