Options Backdating Revelations - Far from Over

An article in today's New York Times reports that "[m]ore than 2,000 companies appear to have used backdated stock options to sweeten their top executives' pay packages."

The article is based on a newly released study, What Fraction Of Stock Option Grants To Top Executives Have Been Backdated Or Manipulated?, by Professors Erik Lie (Henry B. Tippie College of Business, University of Iowa) and Randall A. Heron (Kelley School of Business, Indiana University - Indianapolis).

According to the Times, the study's authors used information from the Thomson Financial Insider Filing database of insider transactions reported to the Securities and Exchange Commission, to examine nearly 40,000 stock option grants from January 1, 1996 through December 1, 2005 to top executives at more than 7,700 companies.

The article goes on to note:

The findings were based on an analysis of whether share values increased or declined after option grant dates. "Half should be negative and half should be positive," said Professor Lie. "That's the underlying logic."

But the analysis revealed that the distribution was shifted upward.

"This is not random chance. It's something that's manipulated, clearly," said Professor Lie.

The study concluded that before Aug. 29, 2002, 23% of unscheduled grants - as distinguished from grants that companies routinely schedule annually - were backdated.

On that day, revisions to Rules 16a-3, 16a-6 and 16a-8 under the Securities Exchange Act of 1934 took effect, and the SEC began requiring executives to report stock option grants they receive within two business days.

According to the study, after the enactment of the enhanced reporting requirements, "the backdating figure declined to 10 percent of unscheduled grants."

While approximately 5 dozen companies have already disclosed that they: 1) are the targets of government investigations; 2) are the subject of investor lawsuits; or 3) have conducted internal audits involving the practice, this new study estimates:

that 29.2 percent of companies have used backdated options and 13.6 percent of options granted to top executives from 1996 to 2005 were backdated or otherwise manipulated

It appears that all of the options backdating taskforces will have their hands full.