Backdating may be more widely spread - 19 Aug 2009 - WSJ

(thank you to Christine Zwerling for pointing out this article)

By MARK MAREMONT

The
majority of companies that improperly backdated stock options never
were caught by regulators or confessed to the practice, according to a
new academic study.

Researchers at the University of Houston's C.T. Bauer College of
Business used a sophisticated statistical test to sift through more
than 4,000 publicly traded companies for those with patterns of
granting options at abnormally favorable times, often at low points for
their share prices.

The study identified 141 companies with such advantageous
options-granting practices that the researchers concluded they were
highly likely to have been involved in backdating. Ninety-two of those
companies never were publicly linked to investigations or announced
earnings restatements related to backdating.

The companies include advertising giant Omnicom Group Inc., retailer Dress Barn Inc., trucking firm J.B. Hunt Transport Services Inc. and equipment-rental concern United Rentals Inc.

Officials at the companies, which showed some of the strongest signs
of likely backdating in the study, had no comment or said they found no
evidence of wrongdoing.

The unpublished study is the latest sign since the backdating
scandal erupted in 2006 that the practice might have been more
widespread than thought at the time. Other researchers have drawn a
similar conclusion.

Scott Whisenant and Rick Edelson, authors of the University of Houston
study, said such abnormally favorable options-granting patterns would
be expected to occur by chance in only a couple of companies that they
examined.

Still, the study cautioned that the findings are "purely
statistical" and don't "claim to provide categorical or absolute legal
proof that any specific company has engaged in backdating."

Backdating companies reached back in time by weeks or months to
select a date when their shares were trading at low points, then
represented that options had been awarded to executives at that time.
The practice gave executives a head start on rich options profits,
generally contravening accounting and disclosure rules.

Employee options allow the recipient to buy a particular stock at a preset price for a period of time, usually a decade.

In the wake of the scandal, scores of companies conducted internal
probes, and the Securities and Exchange Commission launched
investigations into more than 140 firms. The agency has filed civil
charges against 24 companies and 66 individuals for backdating-related
offenses, and at least 15 people have been convicted of criminal
conduct.

Mr. Edelson said extrapolating from the study's findings suggests
that only one-third of all companies that backdated were investigated
or caught. That would mean "at least 500 are still undisclosed,"
according to the study. Mr. Edelson briefed the SEC on the research a
year ago, providing a preliminary list of suspected companies.

An SEC spokesman said the agency "appreciated the input" but
wouldn't confirm or deny whether it sparked any enforcement actions.

Stephen J. Crimmins, a securities lawyer at K&L Gates LLP in
Washington, said the SEC devoted lots of resources to backdating cases
but now is looking to other problems. "They came down like a ton of
bricks on options backdating, and they believe the message has been
sent and received," he said.

Plaintiffs' lawyers still could file fresh backdating lawsuits, but
the statute of limitations may complicate claims involving grants made
more than five years ago, Mr. Crimmins said.

The study doesn't name the companies that the researchers concluded
were highly likely to have backdated options. But the authors provided
a list of companies to The Wall Street Journal, which compared
options-grant dates listed in the companies' securities filings with
their stock prices.

At Dress Barn, based in Suffern, N.Y., securities filings show that
top officials received options five times at unusual low points between
1996 and 2002, when backdating became difficult because of tighter
rules.

A 1996 award was dated at that year's lowest stock price, while one
in 1999 came at the bottom of a trough in the stock price. An April
2001 award came at the lowest price of that year's second quarter.

Some of the well-timed options went to Chairman Elliot S. Jaffe and
Chief Executive David R. Jaffe, members of the family that has run
Dress Barn since it was founded in 1962.

more...