Options Grant Practices Scandal Grows

Dozens of companies are being scrutinized for improper grants of stock options. While the primary focus has been on backdated options, new reports are looking at companies that grant options just before releasing favorable news (now being called "spring-loading"), a potential violation of insider trading rules. Pension funds in the U.S., Europe, and Australia have initiated lawsuits against at least 34 companies, and other shareholder suits are sure to follow. Most, but not all, of the companies are technology firms.

Erik Lie and Randall Norton, the academics who first discovered the pattern of backdating, now report that 13% of the companies required to report options grants under Sarbanes-Oxley are late in their filings, and that those late filers have a distinctly better share price performance in the 30 days following their grants, a pattern that is extremely unlikely to have occurred by chance. So there could be many more companies added to the investigations list soon. Lie told the Wall Street Journal, in fact, that the list of companies who may have backdated options could grow to 10% of all companies with plans.

Christopher Cox, chairman of the Securities and Exchange Commission, has said that he may press for stronger disclosure rules in light of the scandal. Charles Grassley, chairman of the Senate Finance Committee, has asked the Justice Department if new laws are need to prosecute companies engaged in the practice, and the Public Company Accounting Oversight Board has said it will be looking at new audit guideline proposals to help deal with the issue.

Background on backdating can be found in my May 26 column.