Thursday, December 28, 2006

Options-Timing Cases March Onward

The time between Christmas and the New Year is supposed to be quiet, with little news emerging because so many people are on vacation.  That is not the case with the options-timing investigations, which continue to percolate.  With over 100 companies having acknowledged potential problems with their issuance practices, and responses ranging from internal investigations that trigger multi-year restatements to SEC and criminal probes, it's not surprising that news pops to the surface almost daily, even during the holiday lull; maybe that's the whole idea why some companies make the disclosures this week, perhaps getting lost in the shuffle.  Three recent disclosures and one news story caught my eye:

  • Monster Worldwide, Inc. announced (here) that as of December 26 former SEC Commissioner Philip Lochner (1990-1991) has joined the board of directors, and will begin service immediately on the special committee investigating its options practices.  On November 22, the company announced that it had fired its general counsel, Myron Olesnyckyj, "for cause" related to the options issuance.   Welcome aboard, Mr. Lochner.
  • HCC Insurance Holdings, Inc. announced that its founder and former CEO, Stephen Way, had back-dated documents, but that he did not intend to misstate any financial records.  An amended 10-K (here) also implicates the company's former general counsel in the options issues: "The Special Committee found that Stephen L. Way, Chief Executive Officer, retroactively priced options, that he should have known he was granting options in a manner that conflicted with our stock option plans and public statements, and that this constituted a failure to align the stock option granting process with our stock option plans and public statements. Although finding his actions were inconsistent with the duties and obligations of a chief executive officer of a publicly-traded company, the Special Committee also found that Mr. Way’s motivation appeared to be the attraction and retention of talent and to provide employees with the best option price. The Special Committee also concluded that Christopher L. Martin, Executive Vice President and General Counsel, was aware that options were being retroactively priced in a manner inconsistent with applicable plan terms and the procedures memoranda that he had prepared, that granting in-the-money options had accounting implications, and that he did not properly document our Compensation Committee’s informal delegation of authority to Mr. Way. The Special Committee also found that there was no evidence that Mr. Way or Mr. Martin intended to falsify the consolidated financial statements."  Of course, the board's determination is not binding on federal investigators, and good intentions are not an excuse for falsifying records, so the SEC and perhaps federal prosecutors will ask tough questions about the conduct of Messrs. Way and Martin.
  • UnitedHealth Group Inc. announced (8-K here) on December 26 that on "December 19, 2006, the Company received from the SEC staff a formal order of investigation. The Company has cooperated and will continue to cooperate with the SEC."  I guess they didn't want to ruin the annual holiday party with a public announcement of this news, so they held off until the day after Christmas.  I can't say this for certain, but I believe this is the first formal SEC investigation of a company since the options-timing issue hit in March 2006.  A formal order means that the Enforcement Division staff can subpoena records and need not rely any longer on the cooperation of others to obtain records.  This step by the Commission is often viewed as reflecting the seriousness of the investigation.
  • A story in The Recorder (here) discusses the criminal probe of possible falsified documents at Apple, Inc. related to its options practices.  Earlier in 2006, the company's CFO and general counsel left their positions, and there is always speculation about how high up the managerial ladder any options-timing goes.  As one of the highest profile tech companies caught up in the options investigations, Apple will be a top priority for federal prosecutors in the U.S. Attorney's Office for the Northern District of California, which brought the first criminal case over options-timing practices at Brocade.

As the calendar turns to a new year, look for the SEC and various U.S. Attorney's Offices to begin filing cases against individuals and, at least on the civil side, companies alleged to have engaged in back-dating options, falsification of documents, and perhaps most ominously, securities fraud. (ph)

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