|
New evidence suggests that corporate executives had used another way to manipulate their stock options beyond the current focus of the widespread scandal, according to a paper written by a Securities and Exchange Commission economist.
By Karey Wutkowski Evidence suggests new angle to stock option scandal David Cicero, in a draft paper circulating among the academic community, concludes through statistical analysis that many executives manipulated their option exercise dates to avoid paying higher income taxes. Most of the known investigations into stock option manipulation have focused on backdated stock option grant dates, rather than exercise dates. But an executive could also benefit by retroactively selecting a prior option exercise date when the stock was trading at a lower price, when the executive would have a lower tax burden, and then sell the stock when the price traded higher. The act would likely be considered tax fraud. "The favorable return patterns are greatly diminished in the post-Sarbanes-Oxley period, suggesting that they were likely associated with the backdating of the exercise date," Cicero writes in the paper. Post-Enron Sarbanes-Oxley legislation significantly narrowed the window of time allowed for executives to report stock option transactions, hindering their ability to manipulate award and exercise dates. The new data could further expand the stock option scandal, which has mostly focused on companies retroactively selecting stock option grant dates at previously lower trading prices to maximize the value of options for executives. More than 160 companies in the United States have launched internal investigations or are the subject of regulatory probes to determine if the dates of stock options were manipulated. More than 50 executives have resigned due to the probe. There has already been some publicity, however, about exercise date manipulation. The SEC has accused executives at Symbol Technologies Inc. of backdating exercises for tax purposes. Also, Mercury Interactive Corp. reported in an SEC filing earlier this year that option exercise dates for executives appeared to have been incorrectly reported. But David Yermack, a finance professor at New York University who has read the paper and previously studied the issue, said Cicero's paper details a new set of data for investigators and plaintiff lawyers to look at. "The number of people involved is not as big as backdating, but there will be some more companies that will probably see their stock prices hit," Yermack said. Cicero looked at more than 40,000 transactions between 1996 and 2005, and focused his analysis on executives who exercised their options and then held on to the shares. Before Sarbanes-Oxley in 2002, shares on average fell 1.3 percent in the 20 trading days prior to the reported exercise date. In the next 20 days, they rose 4.8 percent, meaning the shares were exercised during a significant low. The pattern did not hold after Sarbanes-Oxley. Cicero stressed in the paper that the views were his own, not those of the SEC. SEC spokesman John Nester said the commission did not have further comment beyond the testimony of SEC enforcement director Linda Thomsen's statements to a U.S. Senate hearing in September that the SEC is investigating exercise backdating as well as backdating of option grants. |
