Management On The Gallows: The Options Pricing Scandal SCMR, AMT, UMH, QSFT, ACS, KLAC, CMVT, SFNT
As the options back-dating scandal grows to encompass nearly two dozen companies, one
question becomes how many audit and compensation committees at public companies are doing internal work to find out if their companies have a problem. It would not be surprising to see the issue touch a hundred companies or more.
The gaming of options is simple, but one would think that the odds of getting caught are so high that managements would avoid it. Normally, compensation committees of public boards grant stock options to executives at a specific price, or they are priced as of the close of trading on a specified day. Managers at companies like Vitesse, Safenet, UnitedHealth, and Affiliated Computer may have changed the dates of these grants so that they would fall on days when the share price was lower. If the stock later rises, they can buy these shares at cheaper prices than was intended and make more money on the spread as they sell their shares. The executives can make a much larger profit than would have occurred if the grant was followed to the letter.
Since each share sold represents dilution to current shareholders and options often represent 5% to 10% of outstanding shares, current stockholders can take a beating on the swindle without being aware of what has happened.
The by-product of these problems can be even worse for investors. At a typical company that would reset options dates, one could assume that the CEO, CFO and general counsel would know about it unless one or all was in a coma. Since these three executive positions are often among the top five or ten managers at any company, all the firms that get caught in the net of the investigation will probably lose the core of their senior management teams.
Imagine the ripple effect of having a hundred companies changing their senior managements in a relatively short period of time. Stocks in executive search firms may be worth a look!
It is hard to remember a situation facing corporate America that could remove so many top executives from their jobs. The vacuum this may create should make shareholders especially worried if a company they own is caught in the maelstrom.
The options issue also raises the question about whether boards and compensations committees have any responsibility to see that their mandates on grants are carried out. Checking to see whether option prices or grant dates are right is not a great deal of work. So, the board liability issue that has been at the heart of many earlier scandals like Enron now comes back center stage.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He is also the former president of Switchboard.com, which was the 10th most visited site in the world at the time, according to MediaMetrix. He has been chief executive of FutureSource LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about. He can be reached at douglasamcintyre@gmail.com.
question becomes how many audit and compensation committees at public companies are doing internal work to find out if their companies have a problem. It would not be surprising to see the issue touch a hundred companies or more.
The gaming of options is simple, but one would think that the odds of getting caught are so high that managements would avoid it. Normally, compensation committees of public boards grant stock options to executives at a specific price, or they are priced as of the close of trading on a specified day. Managers at companies like Vitesse, Safenet, UnitedHealth, and Affiliated Computer may have changed the dates of these grants so that they would fall on days when the share price was lower. If the stock later rises, they can buy these shares at cheaper prices than was intended and make more money on the spread as they sell their shares. The executives can make a much larger profit than would have occurred if the grant was followed to the letter.
Since each share sold represents dilution to current shareholders and options often represent 5% to 10% of outstanding shares, current stockholders can take a beating on the swindle without being aware of what has happened.
The by-product of these problems can be even worse for investors. At a typical company that would reset options dates, one could assume that the CEO, CFO and general counsel would know about it unless one or all was in a coma. Since these three executive positions are often among the top five or ten managers at any company, all the firms that get caught in the net of the investigation will probably lose the core of their senior management teams.
Imagine the ripple effect of having a hundred companies changing their senior managements in a relatively short period of time. Stocks in executive search firms may be worth a look!
It is hard to remember a situation facing corporate America that could remove so many top executives from their jobs. The vacuum this may create should make shareholders especially worried if a company they own is caught in the maelstrom.
The options issue also raises the question about whether boards and compensations committees have any responsibility to see that their mandates on grants are carried out. Checking to see whether option prices or grant dates are right is not a great deal of work. So, the board liability issue that has been at the heart of many earlier scandals like Enron now comes back center stage.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He is also the former president of Switchboard.com, which was the 10th most visited site in the world at the time, according to MediaMetrix. He has been chief executive of FutureSource LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about. He can be reached at douglasamcintyre@gmail.com.
posted by douglas mcintyre at 9:01 AM
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