US Task Force Probes Options
Federal prosecutors open a criminal probe into option practices. Meanwhile, Broadcom plans a $750-million charge.
July 14, 2006
The U.S. Attorney’s Office and the FBI have opened a criminal probe into the back-dating of stock options, a problem that has surfaced in dozens of technology companies in recent weeks.
One of those companies, chip maker Broadcom, announced Friday that it plans to record a charge of more than $750 million for expenses related to past stock option grants.
Kevin Ryan, the U.S. Attorney for Northern California, said in San Francisco on Thursday that his office will investigate Silicon Valley companies that had retroactively changed the dates of stock option grants with the intent to defraud.
Mr. Ryan didn’t name particular companies. However, several companies have announced they have received subpoenas from the U.S. Attorney’s Office for the Northern District of California.
They include Openwave Systems, Intuit, Foundry Networks, VeriSign, CNET Networks, Marvell Technology Group, Maxim Integrated Products, and Zoran (see Options Fallout Widens in Tech, Marvell Probed on Options, and Openwave Tumbles).
Options are commonly used, particularly in the volatile technology industry, to bolster compensation for employees. The probe is focused on options that were granted based on a lower stock price in the past. Such options, in effect, give the employee a paper gain as soon as they’re issued, bypassing the risks faced by ordinary investors.
“We will investigate whether individuals and companies may have deliberately back-dated stock options with the intent to defraud,” Mr. Ryan said in a statement. “It is integral to the public trust in our financial markets that books and records are maintained honestly, and that the true financial condition of public companies is disclosed accurately.”
He added that his office would bring criminal charges when appropriate.
Arthur Balizan, the FBI’s acting special agent in charge, said his office would work in conjunction with the U.S. Attorney’s Office and other entities to investigate publicly traded companies that had illegally backdated stock options.
“Although not all of the allegations will rise to the level of criminal prosecution, the FBI has a duty to the investing public to examine whether companies, both in the past and present, are violating securities laws,” he said.
Mr. Balizan pointed out that illegally back-dating options gives company insiders an “unfair advantage over the investing public and contributes to shareholders’ lack of trust in those executives who are running these companies.”
Luke Macaulay, a spokesperson for the U.S. Attorney’s Office, said the offices would not work directly with the U.S. Securities and Exchange Commission, which has already begun inquiries into several Bay Area companies that prosecutors are also probing.
“Because of regulations and other types of case law, there are limitations about how much we can work with the SEC,” he said. “They are not part of the task force. They go after civil violations and our bailiwick is criminal violations. But there is some case law and some regulations that govern the sharing of information between the groups.”
He declined to talk about any specific companies and whether they would be facing criminal charges.
“We’re gathering information, and if appropriate and we find there’s an intent to mislead and defraud, at that point we would look at bringing criminal charges,” said Mr. Macaulay.
Ethics Cloud
While the U.S. Attorney’s Office traditionally has worked with the FBI since they are both under the umbrella of the U.S. Justice Department, some observers see significance in the new task force.
“It looks like this has now taken a big step forward,” said James Post, a professor in Boston University’s School of Management. “It’s a pretty clear indication that companies will have to cooperate or else. They’ve got the horsepower now to go after this practice.”
He believes the problem goes beyond whether or not company executives will be charged criminally.
“The back-dating is pretty clearly unethical even if it’s not illegal, but it certainly advantages the recipients of those options at the expense of other shareholders and that’s the unethical part for sure,” said Professor Post. “Even though it may have been a common practice, it certainly doesn’t pass the smell test in terms of management integrity.”
He sees the task force as a sign that there will be a “full court press” now by the SEC, FBI, and federal prosecutors to pressure more companies to disclose their option-granting practices.
“We’re in for a period of time in which we’re going to see more disclosures,” said Professor Post. “Those who come forward voluntarily will be given a chance to correct and amend their previous filings and change their policies with respect to backdating.”
Broadcom Restates
One company that said Friday it would have to restate its option grants is Broadcom. The Irvine, California-based chip maker said its audit committee had concluded that for certain option grants awarded during the years 2000 to 2002, the allocations and/or approvals had not been completed as of the original accounting dates.
As a result, the company expects to record additional non-cash stock-based compensation expenses of more than $750 million for the years 2000 to 2003.
Despite the news, Broadcom shares rose $0.08 to $27.97 in recent trading on a day most stocks fell on geopolitical concerns.
Another California-based company, security software developer Blue Coat Systems, headquartered in Sunnyvale, revealed Friday that it was delaying the release of its 10-K annual report for fiscal year 2006 while it completed a review of its past option grants (see Blue Coat Reviews Options).
Meanwhile, chip maker Rambus, based in Los Altos, California, said Thursday that it won’t be able to provide details on its financial performance other than revenue when it gives its quarterly numbers next week because it too is reviewing its stock option grants.
Applied Micro Circuits, a Sunnyvale, California company that has received subpoenas from the U.S. Attorney’s Office, also said Thursday that it had been sued by a shareholder.
Contact the writer: MCohn@RedHerring.com
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