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Backdating options scandal moves forward

Ashley Milne-Tyte Jul 5, 2006

KAI RYSSDAL: From a country with nothing to corporate executives with everything. New developments today in Wall Street’s widening stock options. Now there’s nothing wrong with stock options — in fact, the whole point of issuing them is to give executives an incentive to work hard to improve the business, and thus the company share price. Problem is, it seems quite a few companies may have fudged the date they issued those stock options so executives got them at a retroactively low price and could reap a nice profit without even trying.

Well, today, the Wall Street Journal reports the SEC is ready to press civil charges against the directors of one company under investigation for alleged backdating of stock options. Not accounting for those options is coming back to haunt companies’ bottom lines.

Ashley Milne-Tyte reports.

ASHLEY MILNE-TYTE: There are about 60 companies being investigated right now for possible stock-option irregularities. James Cox teaches securities law at Duke University. He says it’s a big deal that the SEC may press charges against directors at Mercury Interactive, a software and consulting company:

JAMES COX: I think the SEC, seeing that this is a epidemic among public companies, picked a case that they thought that they could easily win, because winning this case makes it much easier to negotiate results in all the other cases that are pending.

Mercury has carried out some serious revision of its financial statements — a previously stated 2003 profit of $41.5 million has been transformed into a $62.6 million loss. Cox says such numbers reflect the size of the options that are involved.

COX: But it also reflects maybe something else that’s going on, and that’s why there’s a serious market adjustment anytime there’s a hint of the backdating of options. And that is the market saying, “If they’re cheating on the options, what else have they been cheating on?”

Shareholders will want to know. Randall Heron teaches finance at Indiana University. He says lots of angry investors will digest companies’ revised financial statements, and their effects on the market. But he sees a silver lining in all this:

RANDALL HERON: In the end, I think what we’re gonna see is a lot of improvement in compensation packages: how they’re reported, how they’re disclosed, how they’re designed.

But other analysts say some companies will always find ways to fudge executive compensation.

In New York, I’m Ashley Milne-Tyte for Marketplace.

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