Sloan Sessions: Backdating explained

Allan Sloan

TEXT OF INTERVIEW

SCOTT JAGOW: A lot of companies could be in trouble for the way they've handled stock options. The Securities and Exchange Commission's looking into at least 80 companies. Last week, the SEC filed charges against two executives who worked at a firm called Brocade communications. They're accused of backdating the stock options given to employees. Over the past few weeks, I've tried to explain this the best I could, but this morning, I'm gonna turn that job over to Mr. Allan Sloan.

ALLAN SLOAN: It's like this: Back in the day, the rule is, if you gave somebody a stock option where he could buy stock at the market price the day the option was granted, the cost of that option did not have to be charged against a company's profits.

JAGOW: OK

SLOAN: If however you gave somebody an option that was priced below the value the day that the option was granted, you had to take a rather large charge to your expenses.

JAGOW: Right I'm following you so far.

SLOAN: Then what happened was in order to entice employees to sign up with them, companies would put the price of the option not at what the stock price was the day the option was granted, but at some price that was convenient, as in low, so that the employee was ahead the day he got the option because they made sure to pick the lowest possible price for the option.

JAGOW: But Allan, is there actually any law on the books that prohibits this practice?

SLOAN: There's no law on the books that prohibits giving people options whatever you want to do it, however there are laws on the books about fraud. There are laws on the books about taxes, there are laws on the books about a variety of other things. I suspect that in the end, that's what they'll get these guys on, if they get them, on these criminal and civil charges. And there may be a nasty little tussle with the Internal Revenue Service which doesn't take kindly to companies taking deductions to which they're no entitled.

JAGOW: On the scale of corporate scandals, how does this one rate?

SLOAN: I think it depends on which company it is. If the charges against this company Brocade that were brought last week are true, that ranks pretty high up there, like an 8 or a 9. For some of the other companies, I suspect it's maybe a 2 or a 3 and I suspect a lot of these companies are in similar circumstances where there were just doing stuff and weren't trying to cheat anybody. But in fact it just wasn't telling the truth to people. If you believe in markets and you believe in disclosure and you believe in this and you believe that, cheating is a bad thing. It's not nice.

JAGOW: Allan Sloan is the Wall Street editor for Newsweek magazine. In Los Angeles, I'm Scott Jagow. Thanks for joining us and have a great day.

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