The options’ buck stops at the SEC

The Securities and Exchange Commission is getting tough on companies that improperly issue stock option grants, and that…

The Securities and Exchange Commission is getting tough on companies that improperly issue stock option grants, and that is a very good thing.
Specifically, the regulator is cracking down on backdating — the practice of granting an option that is dated prior to the date a company actually granted the option, much like giving select racetrack customers the right to place their bets once a race is over.
Two Silicon Valley technology companies — Mercury Interactive Corp. of Mountain View, Calif., and Brocade Communications Systems Inc. of San Jose, Calif. — recently agreed to pay $28 million and $7 million, respectively, to settle cases with the regulator after extensive SEC investigations revealed backdating and other irregularities.
It’s now up to the SEC to continue to apply the necessary pressure and let corporate America know that stock option backdating, to put it bluntly, is theft and that intentionally filing false accounting numbers is misconduct that will not be tolerated.
The spate of recent stock-option-backdating scandals obviously has been troublesome for investors and advisers, who have a duty to clients to steer clear of companies with questionable track records.
A key point to the recent enforcement action is that its penalties appear to have resolved a long-standing internal debate among the five SEC commissioners about whether corporations should pay up in backdating cases.
The five reportedly disagreed over what sort of financial sanctions a firm should bear for backdating activity. It’s clear they have come to an understanding — and correctly support significant corporate fines.
Some companies, apparently, believed there was nothing wrong in rigging the game or neglecting to reflect their actions in their accounting.
Nor, as has become evident, did many companies see the need to disclose backdating to shareholders, who have borne the cost of transforming corporate insiders into multimillionaires.
Fortunately, that “you can ask, but we’re not telling” attitude is changing.
More than 200 companies have disclosed internal or federal stock option probes, according to published reports. Of those, 130 firms have said they must restate financial results. This has resulted in the ouster of 90 corporate executives and directors, and has triggered more than $12.2 billion in financial restatements and revisions.
The SEC must continue to use all its weapons to bring to justice the many other public firms under investigation for stock option backdating.
Let the recent settlements deliver a clear message: The SEC will not tolerate corporate executives who cheat investors and undermine public confidence in the capital markets.