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Flight shame gives way to the night train

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Marketplace

Congress looks at corporate fraud

Kai Ryssdal and Scott Tong Sep 6, 2006
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KAI RYSSDAL: Researchers at the University of Michigan have been looking into Wall Street’s growing stock option scandal. Trying to figure out who’s winning and who’s losing. Executives, you won’t be surprised to hear, are winning when companies backdate their options. They’re gaining an extra $600,000 a year in compensation, on average. Investors, though, are losing. Share prices of companies being investigated have dropped an average of $500 million apiece.

With money like that on the line it was only a matter of time before Congress decided to weigh in. Today a pair of Senate committees got an update on the corporate scandal du jour. Marketplace’s Scott Tong has been on that story for us.

Hi Scott.

SCOTT TONG: Hi, Kai.

RYSSDAL: Remind us, would you, what this options backdating thing is all about?

TONG: Well, let me give you the Kai Ryssdal “for instance” here. . . . You are a big-deal executive at CandyStore.inc. Right? So, today, the board gives you an option to buy a company stock. And the stock’s been doing great since you guys have been selling a lot of jellybeans, right?

RYSSDAL: OK

TONG: So, today’s price is 10 bucks. Now, here’s where the potential fraud comes in. Someone pulls out the White-Out and instead of giving you the stock option at today’s price, you go back in time and you write down that they gave you the option in June, when the price was just five bucks. So, suddenly, that’s your purchase price. And today you get to buy a stock that’s worth $10 for half price.

Now, as you know, in real life it’s way more complicated than Kai’s confectionary. But that’s the idea.

RYSSDAL: Alright, so today Scott, what did we learn that Congress and the SEC wants to do about me and my candy store?

TONG: Well, the first thing that regulators are wanting to tell the world is they’re talking about stock options backdating in the past tense. They say that it all happened in ’99, 2000, 2001. And since then Congress and the agencies have passed a whole lot of disclosure rules. And suddenly it makes it a lot harder for companies to fudge the numbers. And the general consensus is backdating is seen as a history thing.

Now, it’s another thing to figure out who did this in history. And today Christopher Cox, the chairman of the Securities and Exchange Commission, told a Senate banking panel that the SEC is looking into more than 100 companies. Now, they filed charges against just two companies so far, but more is on the way. Here’s a clip of Chairman Cox talking to Senator Richard Shelby of the banking committee.

CHRISTOPHER COX: We’re interested in serious abuses. We’re gonna go after fraud. We’re gonna go after cases, for example, that might also interest the criminal authorities, as you’ve seen.

RICHARD SHELBY: You’re working with the Justice Department on a number of these cases, are you not?

COX: That’s exactly right. So we’re not going to focus on the capillary; we’re going to focus on the jugular.

RYSSDAL: Alright, Scott, what is left for us to learn about this? And what’s the SEC going to do now?

TONG: Well, the next few months we’re going to hear a lot more about which companies may be in trouble. There are a lot of company-sponsored, internal probes going on where companies are looking into their own books. And the SEC has decided to poke on its own into certain companies. And a lot of those results are going to come out this fall and this winter. We may see a lot more indictments coming before long. The other thing to watch is what’s the next fraud, the next potential fraud?

There was a lot of talk at today’s hearing about what’s called “springloading.” And that’s where companies give out stock options just before they announce good news. And the stock, presumably, rises after that. Christopher Cox, the chairman of the SEC today said they’re looking into that as well and whether there is any inside trading going on.

RYSSDAL: Alright, Marketplace’s Scott Tong in Washington. Thank you, Scott.

TONG: Alright, Kai, thanks.

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