The Justice Department's crackdown on stock-option backdating took a
thunderous hit this month when U.S. District Judge Cormac J. Carney dismissed charges against three former Broadcom executives -- only one of whom was on trial at the time. The judge was so upset with the prosecutors' behavior, he even dismissed the Securities and Exchange Commission’s lawsuit against the company.



Carney's accusations of witness intimidation and tampering are serious
enough to warrant an internal investigation by the Justice Department,
and one is underway. More disturbing is that prosecutorial misconduct
also led an appeals panel in San Francisco to throw out the backdating conviction
of former Brocade Communications Systems chief Gregory L. Reyes. The
government's errors in the Broadcom and Brocade cases, however, don't
provide a blanket excuse for undisclosed backdating. It may need to
reexamine the cases it has brought in light of Carney's rebuke. But if
the SEC or Justice finds credible evidence that companies deliberately
deceived investors, it should take action.



It is legal for companies to grant stock options whose price is tied to
a previous day's lower price, a move that makes them potentially more
lucrative. But companies must disclose what they have done and deduct
the options' estimated value from their revenue. During the period when
backdating apparently flourished
-- from the late 1990s until 2002 -- some companies disguised the value
of the options by lying about the date they were issued or about the
price. Those deceptions enabled them to report lower expenses and
higher earnings. Executives at some companies, including KB Home, also allegedly concealed efforts to enrich themselves. And in at least one case -- Mercury Interactive -- the company circumvented a shareholder mandate not to grant "in the money" options.



Critics of the government’s efforts argue that there were no victims
when companies disguised backdated stock options. After all, the awards
were often aimed at retaining talented employees on the cheap -- they
merely cost a company some of the revenue it might make from future
stock sales. The issue, however, isn't how companies compensated their
workforces or how much they paid them. It is whether investors received
the data they were entitled to -- including an

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