When it comes to corporate scandals, it seems improper stock options practices have become ticking time bombs public companies have to be wary of. Seeds have been sown for a catastrophe of the likes of Enron and Computer Associates several years ago. No one could have imagined an Enron scandal could happen but it did.
No company seems to be immune to this problem. One week it's Apple; the next McAfee. Most recently it's the San Jose, Calif.-based networking gear maker Foundry Networks. The company announced on Jan. 22 that its chief financial officer Timothy D. Heffner and chairman Bobby Johnson Jr. resigned because of questionable stock options practices, which could force the company to take up to $205 million in charges against its past earnings.
Those potential charges could be devastating for a company already mired in controversy by receiving two delisting notices, one in December 2006 and another on June 2006, from the Nasdaq for missing financial filing deadlines. But what's surprising is that the Foundry board has decided to move Heffner to a new executive job that has no accounting or financial responsibilities and retain Johnson as its CEO and president. The two have some major allies on the board.
A Foundry review discovered that in many cases Johnson picked grant dates for and approved option awards after the grant dates had been recorded by the company. The grant date on options sets the strike price or purchase price of the stock award. Moving the grant date to periods when the stocks were at lows could increase the value of the shares to the option holders if the price has since risen.
Foundry said Johnson didn't receive any options from these grants and wasn't advised that such practices could violate accounting rules and cause the company to overstate its profits. To Johnson's defense, Foundry said Johnson didn't receive any options from these grants and wasn't advised that such practices could violate accounting rules and cause the company to overstate its profits.
Heffner has agreed to repay a net after-tax difference of $162,000 due to improper dating on two stock options and Johnson has been allowed to keep his position as CEO and president. Foundry said it will restate its financial records for all quarterly and yearly periods between Dec. 31, 1999 through 2005.
``The board is taking a risk here,'' Todd Fernandez, senior research analyst for Glass Lewis said in a Mercury news article. ``The board is saying, `These guys were immersed in something highly questionable and fumbled accounting 101, yet let's give them another shot because they just didn't know what they were doing.' '' And I guess that's one quality Foundry likes in its executives ... — Gerald Magpily
See the Mercury news article
See Associated Press article via Forbes
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