patriotism on wall street

[Charles Brown <cbrown@xxxxxxxxxxxxxxxxx>]

Companies Say Backdating 
Used In Days After 9/11

By MARK MAREMONT, CHARLES FORELLE and JAMES BANDLER
March 7, 2007; Page A1
Amid the stock-market swoon that followed the Sept. 11, 2001, terrorist
attacks, dozens of companies granted stock options to top executives or
other employees. Now, some of those companies are saying the grants were in
fact made weeks later -- and backdated.
The disclosures are the latest wrinkle in a backdating scandal that involves
more than 140 companies and has resulted in more than 70 firings or
resignations of corporate officials. (See related article1.) The new
information suggests some executives profited from the market's plunge
following Sept. 11 by manipulating options grant dates.
FURTHER READING
 
? Options Scorecard: Companies under scrutiny2
 
? Perfect Payday: Complete coverage3
 
PREVIOUSLY ON PAGE ONE
 
? Executive Pay: The 9/11 Factor4
07/15/2006
 
Stock options give the recipient the right to buy shares at a set price,
typically the stock's closing price on the day the options were granted. If
the stock later rises, the recipient can cash in the option for a profit.
The lower the exercise price, the greater the potential gain.
Backdating options involves looking for past low points for a stock, then
pretending the options were granted on those favorable dates. The post-Sept.
11 period was an attractive time for backdaters. The market had its worst
week in more than 60 years, then rebounded sharply in the fourth quarter.
At KLA-Tencor Corp., at least 11 top executives purportedly were awarded
options on Oct. 2, 2001, at the very bottom of a sharp dip in the
semiconductor-equipment maker's stock. But in a recent filing KLA said those
options were among some that were improperly backdated, suggesting in a
securities filing they weren't actually awarded until weeks later. The
post-9/11 backdating increased KLA insiders' potential profit on the options
by more than $12 million.
Affiliated Computer Services Inc., Take-Two Interactive Software Inc.,
Progress Software Corp. and Corinthian Colleges Inc. similarly have admitted
they put erroneous dates on options that made it appear they were granted at
post-9/11 low points.
Former officials at Monster Worldwide Inc. and Brocade Communications
Systems Inc. have been accused by the Securities and Exchange Commission of
backdating options to that period. The former Brocade official denies the
allegations, and the ex-Monster executive has been in talks to settle the
charges.
A number of other companies that have admitted to widespread backdating,
including UnitedHealth Group Inc. and Broadcom Corp., also granted options
dated in the post-Sept. 11 period. They haven't indicated whether those
awards were backdated.
Harvey Pitt, who was chairman of the SEC at the time of the attacks, said it
was "offensive" for companies to capitalize on the market panic caused by
9/11. The terror attacks "created many pressures, difficulties and
dislocations," said Mr. Pitt. "The one thing it cannot be used to justify is
the fraudulent backdating of documents."
In the wake of the attacks, the nation's stock markets were closed from
Sept. 11 to Sept. 14. When they reopened the following week, the Dow Jones
Industrial Average skidded more than 14%, in the worst full week for the
blue-chip average since Germany invaded France in May 1940.
Scores of companies rushed to grant options during the market's trough; a
Wall Street Journal analysis published in July found that among a set of
1,800 leading companies the frequency of option grants more than doubled in
late September 2001, compared with other years. (See that July article.5)
When previously asked about their reasons for granting options in the wake
of the terrorist attacks, some companies said it was pure happenstance,
while others said it was intended to help motivate executives through the
difficult period. But until recently none had admitted the award dates
reflected improper backdating.
The post-Sept. 11 backdating has caught the attention of plaintiffs'
lawyers. Some of them have already mentioned it in backdating-related
lawsuits or say they plan to highlight the issue.
Joel H. Bernstein, an attorney at Labaton Sucharow & Rudoff LLP in New York,
says that taking advantage of a national tragedy "is an emotional issue,"
but one that will "resonate very well with the judge and the jury." Mr.
Bernstein's firm is involved in suing executives and directors at two of the
companies that issued post-Sept. 11 options grants.
Post-Sept. 11 backdating also figured in two separate criminal cases filed
last month in New York, in which a pair of former executives pleaded guilty
to backdating-related offenses.
In one case, the former top lawyer for Monster admitted he helped
orchestrate a years-long backdating scheme at the New York company, operator
of the Monster.com job-search Web site. In a related civil complaint, the
SEC charged that the ex-lawyer, Myron Olesnyckyj, helped award employees in
one division a bunch of options that were backdated to Oct. 2, 2001, when
the stock hit its lowest level in nearly two years.
That also was the day Monster announced it would have to scale back its
earnings projections as a result of the terrorist attacks. Monster's
then-CEO told investors that business activity had almost halted as
companies "responded to help those in need" and "reflected on the tragedy."
According to the SEC complaint, senior Monster executives didn't begin
discussing the Oct. 2 grants until mid-October, when the company's stock was
already recovering.
Andrew Levander, an outside lawyer for Monster, said the company has
informed the government of any improprieties it has discovered.
At Take-Two, a New York-based videogame maker, former CEO Ryan A. Brant last
month pleaded guilty to New York criminal charges and admitted to backdating
numerous option grants to himself and subordinates to take advantage of
prior stock dips. Although it wasn't specifically mentioned in the charges,
one of the well-timed grants was originally dated Oct. 1, 2001, at the nadir
of the stock's post-Sept. 11 plunge.
A spokesman for Take-Two says the company recently repriced the Oct. 1
grants along with a number of others as it corrected its books due to the
widespread backdating. The spokesman says the company doesn't have
sufficient information to know whether the wrongly dated Oct. 1 options were
related to the Sept. 11 attacks, but he notes that Take-Two in October 2001
released a major new product, Grand Theft Auto III, the type of event for
which it typically awards extra compensation.
KLA-Tencor, based in San Jose, Calif., was among the many that saw its stock
battered by the terrorist attacks. On Sept. 10, KLA shares closed at $44.20.
They began falling as soon as the markets reopened, and bottomed out on Oct.
2 at $29.31. By late October, the shares had rebounded to preattack levels.
The dip provided a tempting opportunity to backdate. KLA did so, issuing at
least hundreds of thousands of options the company now says in securities
filings were backdated. KLA recently repriced those options to $45.25,
implying that they were really granted in late October when the shares next
hit that level. KLA's chief executive at the time, Kenneth Schroeder, was by
far the biggest beneficiary. He received a grant of 341,100 shares. The
backdating added $5.4 million to his potential profit.
A KLA spokeswoman declined to comment, other than to note the Oct. 2 grant
was given to a broad group of employees.
Mr. Schroeder stepped down as CEO in 2005 to take an advisory role with the
company. He was fired last October in connection with the options scandal. A
spokesman says Mr. Schroeder hasn't cashed out the post-9/11 grant for
profit, and KLA says it has canceled the grant -- along with other backdated
options Mr. Schroeder received -- outright. A spokesman for Mr. Schroeder
said the company "rashly and unilaterally breached its contract with Ken."
Mr. Schroeder is fighting to get back the options, which would yield more
than $2 million today, after the company's repricing.
Brocade, a data-storage networking firm based in San Jose, awarded employees
a total of 8.9 million options dated Oct. 1, 2001. All six top executives of
Brocade were given options with the favorable Oct. 1 date, including the
then-CEO, Gregory L. Reyes, who himself received 1.3 million options. The
stock quickly rebounded after the supposed grant date, rising to preattack
levels by Oct. 5.
Last year, Mr. Reyes and another former top Brocade executive were charged
by federal prosecutors in San Francisco with criminal offenses related to
options backdating. In a related civil complaint, the SEC mentioned the
post-Sept. 11 grant, charging Mr. Reyes with backdating options to employees
to give them the beneficial Oct. 1, 2001 date, and also with having received
backdated options bearing that same date.
In a separate civil complaint filed in San Francisco by shareholders suing
Brocade, Mr. Reyes and four others, the plaintiffs noted that the depressed
Oct. 1 stock price "resulted, in part, from the tragedy of Sept. 11th."
Richard Marmaro, an attorney for Mr. Reyes, said his client "never backdated
any options," and any insinuation that he did so to take advantage of the
post-Sept. 11 trough is "outrageous." After the attacks, Mr. Marmaro said,
Mr. Reyes anonymously donated $1 million to a fund for the benefit of the
New York City Fire Department. He also said that Mr. Reyes didn't set the
dates of his own stock-option grants, which were the responsibility of a
committee of board.
A Brocade spokeswoman declined to comment, except to note Brocade has
offered to settle with the SEC.
Joseph W. Alsop, chief executive at another admitted backdater, Progress
Software Corp., received options dated Oct. 10, 2001, to buy 125,000 shares
of stock. Several other Progress executives also received hefty grants dated
that Wednesday, when shares were down 16% from their pre-Sept. 11 levels.
Two weeks later, shares of Progress were back up 25%.
A board-led investigation concluded late last year that Progress "generally
selected the dates used as the grant dates retrospectively," often choosing
the lowest closing price of the company's stock for the quarter. The
Bedford, Mass., software concern said that the Oct. 10, 2001, grant was
misdated, and should have been priced one-third higher, at $17.42. The stock
next closed at that price on Dec. 4, suggesting that was the real award
date. Mr. Alsop agreed to forfeit more than $5 million in options value for
all of his misdated grants. He declined to comment.
Write to Mark Maremont at mark.maremont@xxxxxxxx, Charles Forelle at
charles.forelle@xxxxxxxx and James Bandler at james.bandler@xxxxxxxx 
 
URL for this article:
http://online.wsj.com/article/SB117323521819929109.html
 
Hyperlinks in this Article:
(1) http://online.wsj.com/article/SB117318296121828169.html 
(2)
http://online.wsj.com/public/resources/documents/info-optionsscore06-full.ht
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(3) http://online.wsj.com/page/2_1227.html 
(4) http://online.wsj.com/article/SB115292514221107632.html 
(5) http://online.wsj.com/article/SB115292514221107632.html 
(6) mailto:mark.maremont@xxxxxxx 
(7) mailto:charles.forelle@xxxxxxx 
(8) mailto:james.bandler@xxxxxxx 


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