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The list of companies under investigation for backdating stock options grows daily, while some bizarre tales surrounding the executives involved continue to surface. The Wall Street Journal reported March 22 that Affiliated Computer Services Inc. chairman Darwin Deason--who earlier in the week announced teaming with buyout shop Cerberus Capital Management LP on an $8.2 billion take-private offer for the company--jotted a Post-it note in 2002 in which he discussed "the practice of 'always' picking the 'lowest' prices 'so far' in the quarter to award stock options." The note was uncovered during a probe into stock options backdating practices at the company, which has asserted it was three executives (excluding Deason) and three executives only who had knowledge of the illegal practice. Deason's attorney said the note is evidence of the fact that he thought it was perfectly legal. ACS, the Journal points out, has long gone back and forth on exactly what its options backdating practices are.
The company's stock has lost 18% of its value since the Securities and Exchange Commission's probe into its backdating options began last year and some have contended Deason, the largest shareholder with 41.6% of stock, is trying to buy the company at a discount. ACS said it is facing two lawsuits in connection with the deal. Meanwhile, video game developer Take-Two Interactive Software Inc., the brains behind "Grand Theft Auto" recently saw most of its board and its chief executive unseated in a proxy fight. Its former chief executive Ryan Brant pleaded guilty to criminal charges over backdating and paid $6.3 million to settle an SEC civil suit. The former Brocade Communications Inc. chief executive is also facing charges. The list of companies implicated in backdating does goes on. Reuters said in February more than 170 companies have been subject to an SEC probe. Meanwhile, the Journal said earlier in March the SEC is struggling to figure out how harsh the penalties should be. While backdating options news trails in steadily, October 2006 was a gusher of a month. On Oct. 24, former chief financial officer of Comverse Technology Inc., David Kreinberg, pleaded guilty to conspiracy and securities fraud. Kreinberg has also agreed to cooperate in an investigation of charges of a scheme to make millions of dollars by manipulating stock options. The stage has been set for Kreinberg to testify against cohort Comverse founder and former chief executive Jacob "Kobi" Alexander. On Oct. 20, the U.S. called for the extradition of Alexander from Namibia. Alexander, to whom Reuters referred as a "fugitive millionaire," was arrested in the African nation in September and faces stock option manipulation charges in the U.S., but was released on bail. The next step is review by Namibia's minister of justice, Reuters said. He's still there, looks like. In January 2007, the company's former general counsel agreed to pay $3 million to settle a case. CREATIVE MEASURES Aside from allegations of just backdating, Dow Jones pointed out Oct. 23: "... [Comverse] awarded thousands of stock options to fictional employees, then secretly transferred the awards to an internal account under the name I.M. Fanton, which stood for phantom, U.S. court papers said. The scheme allowed Alexander to award those options to real 'favored employees' and to himself without board of directors approval, the papers added."
Frequently, a probe into allegations of stock option manipulation triggers the ouster of top management and calls into question whether companies are in play, whether earnings restatements are necessary and who knew what at the top.
NOT ALONE Other companies to come under fire include data storage giant EMC Corp. and homebuilder KB Homes. Sun-Times Media Group, formerly Hollinger International, said a board probe revealed backdating practices as did BEA Systems Inc. Further, Apple Corp. and SafeNet Inc.--which has a $634 million buyout offer from Vector Capital on the table--and even the Cheesecake Factory and Home Depot Inc. raised regulatory eyebrows in 2006. Some dealwatchers have argued, as in the case of Apple, that shareholders value the visionary CEO more than strict corporate governance.
According to a press release from the Portland, Maine research firm, of the companies: "new evidence [suggests] that the practice of backdating stock options may have been spread by word of mouth through the network of directors sitting on the boards of more than one company. Director interlocking relationships now appear to be the most important governance characteristic and indicator of backdating problems." The statement indicated that as the number of companies to come under review in the three months between June 2006 and September 2006 from 51 to 120, those implicated with directors on the boards of other companies implicated grew from 11 to 51. Further, the release said: "In analyzing the director network, the authors of the report also found a wealth of intertwined relationships involving the Silicon Valley law firm of Wilson Sonsini Goodrich & Rosati." Stay tuned to Dealwatch as the stories will surely continue to evolve. Meanwhile, corporate and securities attorney Joseph Bartlett writing for The Deal in August 2006, proposed an alternative to current methods for awarding stock options. Rather than escrowing, 20% of the company's outstanding stock into a stock option pool, he suggested, the solution contemplates issuing outright 20% of company stock to a limited liability company.
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