Options Sleuth's Own Slip
In Backdating Probes,
Navigant Consulting's
Work Is Close to Home
By MARK MAREMONT
March 30, 2007; [WSJ] Page C1
Navigant Consulting Inc. [NCI] has been hired by dozens of companies in recent months to sift through corporate records for signs of improper stock-options backdating aimed at giving recipients bigger payoffs.
Perhaps the Chicago-based firm's forensic accountants should be inspecting their own company's options. A review of its grants reveals six instances between 1997 and 1999 when option awards were dated at yearly or quarterly lows in its stock price. That pattern raises questions about whether some of Navigant's top officials benefited from the practice the firm now investigates for other public companies.
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CLOSE TO HOME
• The Issue: Navigant Consulting Inc., hired to investigate stock-options backdating at two dozen companies, issued fortunately timed options to its own top executives in the late 1990s.
• What's at Stake: Having an options investigator with its own history of problematic grants is a new twist in a backdating scandal that so far has engulfed more than 140 companies.
• Bottom Line: Navigant says it cleaned up its options problems seven years ago, but questions remain.
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A Navigant Consulting spokesman dismisses the issue as "ancient history." After an internal probe, the company in 2000 disclosed that about 300,000 options had been granted at below-market prices. The company, whose stock trades on the New York Stock Exchange, reduced its reported corporate earnings by $4.1 million over three years to account for the extra compensation cost of the bargain-priced options.
"We believe it was fully taken care of and cleaned up in 2000," says Navigant spokesman Andrew Bosman. He added that the company lacks specific information about those events because of a complete change in management since then.
The Navigant tale is the latest twist in a scandal that has prompted federal investigations of 140 companies and criminal prosecutions of 10 individuals.
Stock options give employees the right to buy shares at a "strike" price, typically set at the market price on the day the option is granted. The employee is supposed to profit only if the stock rises. Backdating the grant date to an earlier date when the price was lower gives the recipient an added potential benefit.
The backdating scandal has spawned a mini-industry of lawyers, accountants and forensic sleuths paid to clean up the mess. Navigant is a player in that business. With a stock market value of about $1.1 billion, the firm has 2,400 employees, including a former acting chief accountant of the Securities and Exchange Commission and ex-partners of Big Four accounting firms.
Navigant's 2000 disclosure, in a regulatory footnote, left some questions unanswered. It didn't say whether the options problem was related to backdating, explain how it happened, identify the tainted grants' recipients or say whether senior executives got any.
A review of options grants from that period shows that top managers received about 1.2 million that were dated at yearly or quarterly lows -- quadruple the number of options that the company found at fault in 2000. The unusual timing of Navigant's grants appears to have stopped after a 1999 purge of senior management.
Two current outside directors received options priced at the stock's annual or quarterly lows in that period; both were on the board's compensation committee at the time of some of the grants. One is James R. Thompson, a former governor of Illinois and former U.S. Attorney in Chicago. The other is Peter B. Pond, a former investment banker. Both continue to hold some of the options.
Navigant says "to the best of our knowledge" no grants to directors were faulted in the 2000 inquiry. Gov. Thompson and Mr. Pond didn't return calls. Navigant's Mr. Bosman said it would be "inappropriate" to comment on their behalf.
The company says it has been hired to assist internal options backdating investigations at about 25 companies, including Bed Bath & Beyond Inc., CNET Networks Inc., Vitesse Semiconductor Corp. and Quest Software Inc. Navigant helped those four companies determine that backdating or misdating explained their unusually fortunate stock-option patterns.
Once known as Metzler Group, Navigant started selling shares of itself to the public in 1996 and has grown through acquisitions. Its services include conducting internal fraud probes, and it has done such work for Krispy Kreme Doughnuts Inc., auto-parts firm Visteon Corp. and for-profit education company Career Education Corp. Revenues last year totaled $682 million.
The backdating controversy is the "biggest single event on the investigative side that we've ever had," says John Geron, a Navigant managing director. "The number of companies involved was mind-boggling."
He said the company now has about 50 backdating-related clients, including executives fighting civil or criminal legal actions related to questionable options. The company also has published a "technical accounting" brief on backdating and sponsored a legal seminar in July titled "What the Options Backdating Controversy Means to You." Wall Street analysts cited Navigant as a beneficiary of business generated by the scandal.
When doing internal options-backdating probes for client companies, Navigant consultants pore over emails and documents and often sit in on employee interviews about accounting-related issues, Mr. Geron says. Navigant accountants sometimes help clients explain findings to SEC enforcement staffers.
In 1997, the year after going public, Navigant granted a total of 300,000 stock options to two officials, including then-chief executive Robert P. Maher, a former Ernst & Young consultant. The company said in SEC filings that the options were "granted on May 21, 1997 at the fair market value" of the stock on that date -- $13.33 per share. That was the stock's lowest closing price for the year. It rose 42% in the month afterward. Mr. Maher declined to comment, saying he had no recollection of events from more than seven years ago.
Mr. Pond, then on the board's compensation committee, received options bearing the same favorable May 1997 date. Last month, Mr. Pond cashed in those options for a $96,000 profit, not long before they were set to expire.
Mr. Maher also received grants in January 1998 that were dated at the yearly low and in October 1998 that were dated at the fourth-quarter low. Also receiving grants at that October low were Mr. Pond and Mr. Thompson, who by then had joined the compensation committee, and four other top executives. Mr. Thompson also received options dated at that year's third-quarter low. In 1999, Navigant granted options to top officials on three occasions, two at quarterly lows in March and July.
In late 1999, Mr. Maher resigned under pressure and two other top executives were fired after directors found evidence of what they called "inappropriate" stock transactions unrelated to backdating. Following Mr. Maher's departure, the company convened a special board committee to investigate. Messrs. Thompson and Pond were two of the special committee's three members.
The probe uncovered some problematic options, which the company disclosed in a footnote to an amended filing in May 2000. The footnote said that 16 people, including five nonemployee relatives of Mr. Maher, had received options granted at below-market prices.
Navigant's Mr. Bosman says the company hasn't specifically told any of its backdating clients about its history of stock-options problems, because "everything was fully and publicly disclosed back then." The issue, he adds, has no bearing on the company's ability to investigate backdating because "the professionals working with clients weren't with our organization in 1999." |
