The nationwide investigation into executive stock-option grants seems to be widening daily. And some major players in wireless are coming under the microscope.
At issue is the practice of retroactively changing dates stock-option grants become effective. Stock options-allowing employees to purchase shares of the company at a discount-are commonly used as incentives. But by back-dating the ability to buy discounted shares, an employer could allow an executive to purchase at the lowest possible price within a time frame, virtually guaranteeing a substantial profit.
Analysts say such practices were relatively common until about five years ago, but grants that remain improperly accounted for may require companies to restate earnings, taking on additional expenses-and affecting today’s bottom line.
The Sarbanes Oxley Act, which was passed in 2002, requires firms to notify the SEC within two days of granting any options, minimizing back-dating opportunities. Companies now must also value options at the date they are granted.
Boston Communications Group Inc. last week became the latest wireless company to come under suspicion for questionably timed stock-option grants. According to a report in the Wall Street Journal, BCGI approved stock-options grants to senior executives three times during a five-year span at the lowest possible price for the calendar year.
E.Y. Snowden, the company’s chief executive officer, twice received options dated at the issue’s lowest point during a fiscal quarter, according to the report.
BCGI, which provides a billing platform for prepaid wireless services, responded by saying it is “in the process of reviewing the matters reported.”
The development was the latest in a year-long series of setbacks for BCGI, which is in the process of appealing a $128 million judgment in a patent-infringement case brought by Freedom Wireless L.L.C. Operators including Cingular Wireless L.L.C., Verizon Wireless and Alltel Corp. have dropped BCGI’s platform in the wake of the ruling, and the company has said ultimate failure to appeal the judgment could force it into bankruptcy.
Meanwhile, Openwave Systems Inc. last week said it received a letter of informal inquiry from the Securities and Exchange Commission relating to the broadening investigation into allegations of back-dating stock-options grants. In a prepared statement, Openwave said it “intends to cooperate fully” with the inquiry.
Comverse Technology Inc. has already been rattled by allegations regarding its practices for granting stock options. The U.S. Attorney for the Eastern District of New York has launched a criminal investigation into questionably dated grants, and the company announced a front-office shakeup earlier this month that saw founder and CEO Kobi Alexander step down.
David Kreinberg, Comverse’s chief financial officer, also resigned; William Sorin stepped down from his roles as senior general counsel and corporate secretary.
According to a Wall Street Journal investigation, Alexander and other executives received stock-option grants that were often priced at or near quarterly low points in the company’s share price, potentially maximizing recipients’ profits. One grant to Alexander, dated July 15, 1996, was priced at the bottom of a sharp one-day drop in the stock, which fell 13 percent the day of the grant only to rebound 13 percent the next day.
American Tower Corp. has become ensnared in an investigation as well; it also received a subpoena from the SEC. The news came just five days after the company announced the creation of its own investigative committee.
The owner and operator of more than 22,000 broadcast and wireless communications sites, American Tower said it intends to cooperate with the SEC investigation. The company also said it would temporarily freeze a stock buy-back program during the inquiry.
Like Comverse, American Tower has said that it may need to restate its financial reports for the last several years due to the practice of backdating stock-option grants. Meanwhile, investors in the tower company-and every other firm under scrutiny-are hoping such practices don’t affect today’s bottom line.
The SEC has been looking into reports of back-dated stock-option grants for more than a year, and about two dozen companies have disclosed being the subject of investigations or inquiries. Other firms under suspicion include Juniper Networks, San Francisco technology publisher CNET Networks, Quest Software Inc. and UnitedHealth Group Inc.
While much of the back-dating may have been technically legal at the time the options were granted, investors have been left to speculate whether such practices will have any real fiscal impact for the firms involved. Thus far, investors have had mixed reactions: while shares of Openwave and BCGI fell on news of the widening probe, Juniper shares actually rose after the company said it had received an SEC inquiry.
