Backdating Backlash

4:30 PM -- If youve been reading the financial news lately, you know that investigations into the timing of stock option grants are definitely in vogue.

That’s the type of SEC investigation Brocade has lived with for 17 months now, prompting the resignation of CEO Greg Reyes. (See Brocade Eyes SEC Settlement and Brocade Switches CEOs, Restates .) A rash of other companies in recent weeks have been subpoenaed by the SEC or identified by the Center for Financial Research and Analysis or analyst firms as having granted options at fortunate times for executives.

The SEC wants to know if companies backdated stock options or changed the date of an option grant to a date when the stock price was low ensuring the executives would make money.

The latest list of companies identified as having backdated options includes a bunch of tech companies, some with storage products, such as F5, Broadcom, Juniper, and Vitesse. The list even touches the pristine world of tech publishing with CNET Networks (Nasdaq; CNET). (See Vitesse Execs Get the Axe and Options Scare Hits SafeNet, Juniper.) And AMCC today said it would investigate its own stock option grants. (See Vitesse Execs Get the Axe.) So far, no pure-play storage companies have been identified outside of Brocade.

At least one Wall Street analyst, Paul Mansky of Citigroup, thinks it will stay that way. Mansky conducted his own analysis of the situation by collecting share performance figures for Brocade, EMC, Emulex, Network Appliance, QLogic, and Western Digital over 30-day periods before and after option grant dates. He divided the results into two sections: pre-Sarbanes Oxley (1997-2002) and post-Sarbanes Oxley (2003-2004).Mansky says no company's prices jumped nearly as significantly as Brocade’s did before Sarbanes Oxley controls were put in place.

“It doesn’t look as if anybody has ever approached the types of return we saw at Brocade,” Mansky remarks.

Mansky also says there has been less of a variation in stock price before and after options since the regulations were put in place -- a hint that Sarbanes Oxley is good for something. “People haven’t been as aggressive with options since Sarbanes Oxley.”

Other analysts think such a detailed study isn’t needed to raise or alleviate suspicions. According to one source, if companies want to head off investigations, they can answer two questions. First, do they grant options on the same day every year? Second, can the CFO or CEO grant options without getting the directors to sign off?

If the answers are "yes" to the first and "no" to the second, the company is probably in the clear. If not, there’s increased potential for fraud.— Dave Raffo, News Editor, Byte and Switch

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