SEC to expand options probe


WASHINGTON -- In a broadening investigation, the Securities and Exchange Commission is examining whether companies "springloaded" stock option grants so executives would benefit from company news.

Much of the recent scrutiny of the alleged misconduct has centered on whether companies backdated grants to periods when their companies' stock prices were lower, in hopes of providing profits for executives.

But authorities confirmed that they also were looking into possible instances of springloading, in which a company purposely schedules an option grant ahead of expected good news or delays it until after it discloses business setbacks.

In both cases, the idea is to springload the option to increase its value to the recipient.

"Going forward, we will be very interested in both kinds of springloading," said SEC Chairman Christopher Cox, acknowledging that it could be difficult to prove an improper connection between the timing of news and option grants. "Backdating is more easily determined than springloading, because of the nature of the evidence."

Many companies offer stock option grants on the same date each year, in part to guard against allegations of manipulation. But a recent study by the research firm Corporate Library suggested that companies could be timing the release of news, if not the options themselves.

For example, a company might delay releasing favorable news until shortly after options have been granted, hoping that the public release of information will boost its share price and make the options more valuable.

Cox said a forthcoming rule on executive compensation might be revised to require companies to explain how they chose particular dates for granting stock options to senior corporate officers.

The recent furor over stock options has focused on allegations that companies backdated grants to days when the stock traded lower. But regulatory changes now on the books, including the Sarbanes-Oxley corporate reform law, have made backdating more difficult.

"A good deal of what you're reading in the press about backdating relates to the '90s, because in '02 and '04, the doors were slammed shut," Cox said.

Along with eliminating potential for backdating, Cox said, the SEC "is equally concerned with misbehavior in using inside information to time the granting of options."

"To the extent that our mission is to protect investors from abuses of trust, this is a perfect example of when commission action is needed," he said.

Since March, nearly 50 companies have come under scrutiny by the SEC or federal prosecutors for their options grants.

The probes have sparked a flurry of shareholder lawsuits and spread anxiety across a growing swath of corporate America.

"In my 20 years of practice, this issue has swept across public companies as an area of concern like no other," said Ronald O. Mueller, an attorney at Gibson, Dunn & Crutcher in Washington.

Stock options give the recipient the right to buy shares for a set price in the future. The lower the option price, the more a person profits when the options are later sold at a higher price.

By giving executives options, supporters say, top managers have a strong incentive to raise the value of the company's shares.

Jonathan Peterson writes for the Los Angeles Times.

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