Thursday, February 15, 2007

BEA Systems Takes Its Options Backdating Hit, But No Heads Roll

Silicon Valley software company BEA Systems, Inc., announced that it is taking an accounting charge of $340 to $390 million for a number of options grants that involved backdating and other questionable employment practices to ensure recipients received favorable strike prices.  According to a press release (here), the timing issues involved senior management at the company.  Two major findings in the internal investigation conducted by New York law firm Simpson Thacher are:

  • Most options granted between June 1997 and June 2006 were approved via Unanimous Written Consents (“UWCs”). The Company used the effective date on the UWC as the grant date, and as per the Company’s stock option plans used the closing price of the trading day immediately prior to the grant date as the exercise price for the options. During that time period, the majority of grants were not final as of the effective date stated on the face of the UWC. As a result, the grant date recorded by the Company was not the appropriate accounting measurement date, resulting in compensation expense that, in most instances, was not recorded.
  • With respect to a number of grants, most made prior to 2003 when certain improvements were made to the stock option granting process, some members of senior management appear to have chosen grant dates with the benefit of hindsight and submitted those grants for approval through UWCs to be executed by the Chief Executive Officer. The UWC approving such grants reflects the chosen date of the grant rather than the date of the approval. As a result, the grant date recorded by the Company was not the appropriate accounting measurement date, resulting in compensation expense that, in most instances, was not recorded.

Unlike other companies involved in options backdating of this variety, the CEO did not lose his job, nor apparently will any other senior officers, although some will be demoted and all will have their options repriced and pay back any improper gains from an exercise.  BEA Systems' current general counsel will step down from that position, and the office "will be strengthened by providing that the position will be filled with a new executive officer who reports directly to the CEO and who also has a reporting responsibility to the Board’s Nominating and Governance Committee."  It is always a welcome development when the GC's office is not treated like an ugly step-child to be tolerated when necessary but otherwise avoided at all costs.  The company's former CFO, who was promoted to being an executive vice president in 2005, will give up that title and become a regular vice president, another apparent demotion.  Whether the SEC, which is conducting an informal investigation, will push ahead with a case remains to be seen. (ph)

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