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Feds probe companies’ stock options

Bob Moon May 19, 2006

CHERYL GLASER: Once again, federal investigators are asking corporate America: “Who’s been messing with the books?” Prosecutors want to know whether some companies back-dated or tried to time their stock option grants. Why do the feds care? Those gimmicks could help executives lock-in bigger returns if they sell their shares down the road. The Securities and Exchange Commission has launched an investigation. And as Marketplace’s Bob Moon reports, now many companies are looking into the matter, too.

BOB MOON: Stock options basically are incentives to give executives and workers a really good reason to make their company successful. They are supposed to be granted independently of management. But it seems some executives have figured out a different kind of, uh, Cher pricing plan.

CHER [singing]:“If I could turn back time. If I could find a way . . . “

Say a stock option was granted on a day shares were selling for $20. Columbia University professor John Coffee says some executives have been trying to lock in an even better deal:

JOHN COFFEE:“If you want to cheat, you might say, ‘Three weeks ago, the stock price really was down as low as 16, so if we back-date the option grant we’re going to get probably 20 percent more.”

The list of companies reporting stock option troubles has been growing this week, University of Georgia accounting professor Dennis Beresford hopes the practice hasn’t been widespread. He points out the number involved so far is a tiny fraction of all the country’s public companies.

DENNIS BERESFORD:“The reality is that a pretty high percentage of companies grant options really at the same time every year. They might do it at the date of the annual shareholders meeting, or perhaps as of the first of the year, or something like that. So they basically have put in place procedures quite some time ago to avoid any implication that they would be playing around with this date.”

And for those who have been “playing around,” Columbia’s John Coffee says there’s no excuse:

COFFEE:“I suppose it’s no different than a manager reaching his arm into the corporate till and taking a million dollars out of petty cash.”

Coffee says that might not be significant on an earnings-per-share basis, but it’s still corrupt.

In New York, I’m Bob Moon for Marketplace.

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