Congress examines stock options

Government officials told Congress today they are vigorously pursuing suspiciously timed options grants to top company executives.

Shareholders and rank-and-file employees have been “ripped off by senior executives who rigged stock-option programs … to further enrich themselves,” said Senate Finance Committee Chairman Charles E. Grassley, Iowa Republican.

The tax-writing panel Mr. Grassley heads is considering reducing or eliminating a deduction that encourages companies to award stock options to executives.

“It is high time that we tried to close the loopholes,” said Sen. Max Baucus of Montana, the panel’s senior Democrat, at today’s hearing.

At least 78 public companies, including IPod maker Apple Computer, UnitedHealth Group Inc., Home Depot Inc., the personal-finance software maker Intuit Inc., and Barnes & Noble Inc., are under scrutiny by the Justice Department or the Securities and Exchange Commission or both for manipulation of stock option grants.

The Internal Revenue Service is conducting its own investigation for tax-law violations in option grants.

“We will apply our resources to this area with full rigor,” IRS Commissioner Mark Everson said in testimony at the hearing.

SEC Chairman Christopher Cox told a Senate Banking, Housing and Urban Affairs Committee hearing that his agency “is currently investigating over 100 companies concerning possible fraudulent reporting of stock-option grants.”

The companies under scrutiny are located throughout the country. They span several industries and include both Fortune 500 corporations and smaller companies, Mr. Cox said.

At issue in many of the investigations is a practice known as backdating, in which stock options are issued retroactively to coincide with low points in a company’s share price. Such a move can fatten profits for options recipients when they sell their shares at higher market prices.

Backdating options can be legal as long as the practice is disclosed properly to investors and approved by the company’s board, but it can run afoul of federal accounting and tax laws in some cases.

The issue touches a nerve for company shareholders and the public: lavish compensation for executives, unrelated to their performance, even as companies stumble and lay off employees.

Over the summer, the Justice Department and the SEC fired two big opening salvos in their crackdown against possibly illegal options grants to top executives, bringing criminal and civil charges against former officials of two technology companies, Brocade Communications Systems Inc. and Comverse Technology Inc.

The SEC is focusing on cases of serious fraud, with elements such as deliberately lying, forging documents or deceiving directors or investors. In addition, as part of the most substantial overhaul of benefit disclosure rules since 1992, the agency this summer adopted new rules for what public companies must disclose regarding the dating of stock option grants to executives.

Tax issues in the IRS inquiry include whether deductions were taken correctly by companies regarding options that were backdated and whether executives who received options accurately reported their sale profits.

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