Executive perks seen fueling next scandal

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NEW YORK (AP) -- Questionable perks bestowed on top corporate executives could be the next scandal to shake America's boardrooms, as the number of companies involved in a widening federal investigation into the timing of stock option grants grew yesterday.

More than a dozen companies -- from high-flying technology names to a pharmacy benefits manager -- have received inquiries from the U.S. attorney in New York and the Securities and Exchange Commission seeking details on how they grant stock options to executives. The companies are being targeted for enhancing the payoff of stock options by backdating their grants to coincide with a point where the stock prices had dropped to lows.

The practice, if proven, meant executives were able to reap profits as their companies' stocks rose well above the options exercise price. Not only have some corporate officers ensnared in the investigation lost their jobs, but a former SEC head and other corporate governance experts project the inquiry could create a firestorm on Wall Street.

UnitedHealth Group Inc. is so far the biggest company to be enveloped in the investigation, saying last week that it was subpoenaed by the Department of Justice. Most of the others that have acknowledged being targeted were technology companies, including networker Juniper Networks Inc. and semiconductor-equipment maker KLA-Tencor Corp.

The fact there are at least 20 companies already involved "indicates more of this went on than anyone could have imagined," said former SEC Chairman Harvey Pitt, whose tenure saw the collapse of Enron Corp., a major accounting scandal rattle the Big Four firms and investigations into research practices at major investment banks.

The federal probe comes amid heightened scrutiny of executive compensation -- which includes everything from hefty pay packages to lifetime use of the corporate jet. It also comes when still fresh in investors' minds are names like former Tyco International Ltd. CEO L. Dennis Kozlowski and Enron's ex-Chairman Kenneth L. Lay.

The SEC under Chairman Christopher Cox is poised to make the biggest changes in rules governing disclosure of executive compensation since 1992. Under rules now being finalized, companies could be required starting next year to detail in annual filings the total yearly compensation for the chairman and the next four highest-paid executives. The true costs to the bottom line of their pay packages, including stock options, would have to be spelled out.

Legal experts say it is still uncertain whether the practice of backdating is technically illegal -- but predict it will become a priority for the SEC as part of its look into executive compensation.

"CEOs in these cases are playing cards with a stacked deck; its an egregious breach of trust," said Charles Elson, director of the Center for Corporate Governance at the University of Delaware. "The number of companies we've seen so far, I fear, is the tip of the iceberg. Who knows how far this investigation is going to spread, what companies are going to be targeted."

Spokesmen for both the SEC and U.S. Attorney's office in New York would not comment on the investigation.