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June 20, 2006 > Scandal over options timing could bring wave of earnings

Scandal over options timing could bring wave of earnings

by Marcy Gordon

WASHINGTON (AP), Jun 16 _ The widening ripple through corporate America over the suspicious timing of stock options grants to top executives could force a wave of restatements to past earnings reports, experts say.

In expanding the investigation, at least 44 public companies are under scrutiny by the Securities and Exchange Commission or federal prosecutors for possible manipulation of options grants to increase their value to the recipients.

While that practice may not be illegal in itself, it appears many companies did not follow accounting rules requiring them to deduct that added compensation in their earnings calculations.

Until recently, the accounting rules for options specified that a company didn't need to subtract a compensation expense if an option was granted with an exercise price equal to the stock's market price on the day of the grant. That would mean the option has no immediate value.

But a deduction likely would have been required for any options where the strike price was backdated to a time when the stock was lower, giving them instant value.

Companies implicated in the scandal, many of them from the options-loving technology industry, may need to review all the years in which grants were made and possibly revise their earnings downward.

"A whole lot of folks at a whole lot of companies are going to be doing restatements,'' said Anthony M. Sabino, who teaches business law at St. John's University in New York.

The restatements would be another "egg-on-the-face'' for those companies implicated in the options scandal, Sabino said, along with "a maelstrom of regulatory investigations, shareholder lawsuits and bad publicity.''

While it's not possible to estimate the magnitude, experts say the expected wave of restatements could rival or surpass the largest one in recent memory, which occurred last year over accounting for leases. A cavalcade of some 240 public companies restated earnings, mostly in the restaurant and retail industries, where leases are a key element of the business.

They included a host of well-known names like Cheesecake Factory Inc.; Ruby Tuesday Inc.; 7-Eleven Inc., and CKE Restaurants Inc., owner of Hardee's and Carl's Jr.

The restatements came mostly in the weeks after the SEC in February 2005 clarified rules for lease accounting. Of particular concern, the SEC said, were accounting for the expenses from improvements that companies make to their leased properties and how they are spread over time. The SEC also weighed in on so-called ``rent holidays,'' where companies pay no or reduced rent during renovations.

"Lease accounting caught the financial world by surprise,'' said Jeff Szafran, a managing director of Huron Consulting Group.

Comverse Technology Inc., which is being investigated by federal prosecutors and the SEC over its options practices, recently said it is preparing restatements for five years of financial reports. That is delaying the release of reports due for the last fiscal year and the most recent quarter from the company, which provides telecommunications billings systems.

UnitedHealth Group Inc., one of the biggest companies caught up in the options timing affair, said last month it doesn't believe that a company review of its options grants will result in significant revisions to its earlier financial statements. But if restatements are needed, UnitedHealth said they could slice as much as $286 million from its total earnings for 2003-2005.

In related developments Friday:


  • The Home Depot Inc. said an internal review had found about $10 million in unrecorded stock option expenses. The country's largest home improvement store chain said the amount does not have a material financial impact and that it doesn't plan to restate any past results.

  • Trident Microsystems Inc., which makes chips for digital televisions and other displays, reported receiving a subpoena from federal prosecutors in Manhattan regarding its options practices. The company already had disclosed an SEC inquiry that began in 2004.

  • Shares of antibody developer Medarex Inc. fell in trading following the company's report of having received a subpoena for records related to its option grants.

  • Arts and crafts retailer Michaels Stores Inc. said it had received a subpoena for documents related to its stock option practices from 1996 to the present.

  • On Thursday, the company said the SEC had asked it to preserve all documents on option grants back to 1990. Michaels also said it understated compensation expenses between 1990 and 2001 by about $60 million, but that the revisions it will make to cover that won't require a restatement of earnings.

  • The Wall Street Journal reported that for seven years, until 1999, Microsoft Corp. regularly maximized gains for employees who received options by setting prices at the stock's monthly lows. Microsoft also routinely granted options to new employees at the stock's lowest price in the 30 days after they joined, The Journal said, noting that the software maker voluntarily ended both practices.


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