Even more fraud on Wall Street

Jeff Tyler Oct 30, 2006

KAI RYSSDAL: The chairman of the Securities and Exchange Commission said today we’re going to see a whole bunch more companies get wrapped up in the stock-option scandal. Christopher Cox also said an unprecedented number of companies are coming clean with regulators on their own. Cox admitted that’ll be a point in their favor when it comes time to dish out punishment.

The SEC’s currently investigating more than 100 companies for backdating their options — using the benefit of hindsight to pick the most lucrative date for a particular option grant. But that might not be all that’s been going on. Marketplace’s Jeff Tyler has more on some new questions over what are called exercise dates.

JEFF TYLER: Exercise dates are not the same as meeting up with a buddy at the gym. I’ll let Tim England with the Securities and Exchange Commission explain.

TIM ENGLAND:“Option exercise manipulations are designed to reduce the amount of gain that individual will have to pay taxes on.”

For example, an executive may have an option to buy stock for one dollar a share. If the market price for that stock is higher than one dollar, the executive is supposed to treat the difference as taxable income. So, some sneaky execs pretend they exercised their stock options when the price was low in order to pretend they made less profit.

England says the SEC is on their trail.

ENGLAND:“We are and have been analyzing data to identify suspicious option exercises that may be made at low points relative to the company’s stock.”

And it’s not just the top brass who could get hurt. Securities lawyer Lance Kimmel:

LANCE KIMMEL:“The company typically is going to wind up entering into a consent decree with the SEC at a minimum, going through expensive and protracted litigation, the stock price will be dramatically adversely affected. And typically what also happens as a consequence of all of that is that shareholder class-action lawsuits are filed against the company.”

Tim England at the SEC says it’s hard to know the extent of the problem. But he says he would not be surprised to see more prosecutions in the future.

I’m Jeff Tyler for Marketplace.

There’s a lot happening in the world.  Through it all, Marketplace is here for you. 

You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible. 

Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.