Illegal Options Could Rival Fund Scandal

The Securities and Exchange Commission, Justice Department and Internal Revenue Service are investigating more than 25 companies as to whether they illegally backdated stock option awards to executives to allow them to buy the securities at artificially low prices, thereby increasing the executives' profits when they exercised the options, Bloomberg reports.

In addition, the attorneys general in New York and California have subpoenaed 14 of those companies. All of the firms under investigation are technology or healthcare firms.

Companies frequently award stock options to top executives annually. While they may offer to sell them the stocks at prices below current market prices, companies are supposed to charge the difference against earnings. And should they make the options available at below-market prices, companies could lose the right to tax deductions on salaries exceeding $1 million.

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f the regulators' findings are proven to be correct, this could turn out to be "the biggest pervasive financial scandal in capital markets" since the mutual fund late-trading and market-timing scandal, commented New York Attorney General Eliot Spitzer.

"It shows again individuals abusing their position to enrich themselves at somebody else's expense," said James Cox, a law professor at Duke University. Derek Meisner, a lawyer who is advising some of the companies being investigated, said he was not aware of a corporate practice that the SEC has scrutinized so thoroughly.

If the companies are found guilty, they face criminal fraud charges, penalties, additional taxes, earnings restatements and civil lawsuits.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.