SEC Stock Option Backdating Probes Heating Up – Apple Computers the Latest to be Hit by the Backdating Scandal

Implications: 1. Companies are completing their internal investigations of stock option backdating.

2. Settlements with the SEC and the Department of Justice are likely to be reached in the first quarter of 2007.

Analysis:

Options backdating is the manipulation of the timing of stock option grants in order to boost the compensation of executives and other employees. This practice has caught the attention of the Securities and Exchange Commission and the Department of Justice which is now probing nearly 200 companies for stock options backdating. Apple Computers is now among the companies being investigated and its stock price fell significantly after a legal publication reported that federal prosecutors were probing whether the company’s executives were forging documents to maximize the executives’ stock option profits.  http://www.ft.com/cms/s/801e1b82-9605-11db-9976-0000779e2340.html

The SEC and the Department of Justice are likely to be completing their investigations into stock option backdating and settlements are likely to be reached in the first quarter of 2007. Many companies have suffered from falling stock prices while the investigations are underway. In order to determine the gravity of an investigation involving a particular company and the magnitude of regulatory sanctions, investors should evaluate the following factors:

1. Have the executives exercised their backdated stock options? If so, the executives are likely to have received significant financial gain from these transactions and higher fines and penalties will likely be imposed.
2. Were any documents forged to cover up the options backdating practices? Forging documents is a serious offense and can even lead to criminal charges. Forging documents to cover up the backdating practice also is evidence that the executives acted with intent to defraud the company’s shareholders.
3. What level of knowledge did the Board of Directors have about the backdating? If the Board was aware of the options backdating practices and failed to properly disclose it to shareholders, individual board members could face sanctions from the SEC.

These are just a few of the factors that observers might use to evaluate the seriousness of a particular backdating investigation.