Thursday, May 18, 2006

Southern District Jumps Into Options Pricing Investigation

The U.S. Attorney's Office for the Southern District of New York has issued grand jury subpoenas to Unitedhealth Group and Vitesse Semiconductor concerning the timing of options grants to senior executives and allegations that documents were backdated to allow the options to be issued at a lower price to enhance their value.  Unitedhealth announced the subpoena in a press release (here), and a Wall Street Journal story (here) discusses the subpoenas.  A grand jury in the Eastern District of New York has already subpoenaed Comverse Technology related to options timing issues at that company (see earlier post here), and it's not clear at this point whether the U.S. Attorney's Offices will be conducting a coordinated investigation. The SEC has already begun an informal investigation of a number of companies related to their options grants, and that investigation is likely to become a formal one, if it hasn't already happened, followed by the issuance of subpoenas.  Companies will be facing parallel investigations, along with the usual host of shareholder lawsuits.

Vitesse Semiconductor also announced that it had terminated its CEO, CFO, and executive vice president, who had earlier been placed on leave, and the company faces a delisting of its stock by NASDAQ because it has not been able to file its quarterly report.  More ominously for the former executives and the company is the disclosure that the internal investigation has raised questions about revenue recognition, and that its financial statements should not be relied on.  This raises an interesting question whether the options grants were linked to possible accounting violations designed to make the company look better and thereby enhance the value of the options, something that the grand jury will likely review.  An AP story (here) discusses the termination of the Vitesse Semiconductor officers. The various investigations are likely to expand rather quickly over the next few weeks. (ph)

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Fraud, Grand Jury, Investigations, Securities | Permalink

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