A primer for firms hit by stock options scandal
How companies handle the investigation into backdating can have a big impact on their business - and investors.
By Grace Wong, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Two more CEOs hit by the scandal over stock options stepped down Wednesday, highlighting the risk to companies - and investors - stung by the backdating bullet.

The chief executives of McAfee (Charts) and CNET (Charts) both resigned Wednesday, the latest fallout in the growing scandal over the timing of stock option grants.

Some 125 firms have been linked to the stock options scandal, from blue-chip companies like Home Depot (Charts) and Apple Computer to a slew of smaller tech firms. (See table below).

"Options backdating is the 'hot topic' in corporate fraud. There are no signs at this stage of that waning," said Michael Koenig, an attorney at the Washington office of law firm Dewey Ballantine.

Stock options give executives and employees the right to buy shares at a certain price, and if the stock rises after the options are granted, profits can be fat.

Federal prosecutors and the Securities and Exchange Commission are investigating whether companies "backdated" or otherwise manipulated the dates they granted stock options to make them more lucrative.

The former CEOs of Brocade Communications (Charts) and Comverse Technology (Charts) are both facing criminal and civil charges for their role in manipulating options.

Many of the companies involved have opened internal investigations, while others are restating results, which can mean a big hit to profits.

How the companies manage the external and internal probes - and communicate with regulators and investors - can play a big role in cutting the risk to the firms themselves, and their shareholders.

Come clean, and do it early. A lot of people involved in the backdating mess probably think not they're going to get caught, but that's a calculated risk they're taking, according to Erik Lie, an associate professor of finance at the University of Iowa whose research first cast options backdating into the spotlight.

With the list of companies hit by the options saga growing - and Lie expects the number of companies involved to grow to at least a couple of hundred - it's a good idea to get ahead of an investigation.

"It's always better to come clean, restate and settle with anybody suing the company so you can move forward as soon as possible," he said.

Reshuffle management, as needed. Whether the CEO goes depends on what they did, according to Charles Elson, the director of the Center for Corporate Governance at the University of Delaware.

Companies need to act effectively according to the results of their investigations and put procedures in place to make sure it doesn't happen again, he added.

"Anyone involved needs to be held accountable. If someone intentionally backdated options with the intent to take a gain improperly, they're not the best steward of shareholder assets," he said.

Transparency, transparency, transparency. The more open a company is about the situation, the more information investors have to evaluate whether any backdating that occurred was the work of a few isolated individuals at the company or is more widespread, or even was done with the knowledge of senior management, according to John Mutch, founder of the shareholder activist hedge fund MV Advisors.

The less a company has to hide, the better, he said, giving the example of Apple (Charts), which initiated its own investigation into stock options. "[Apple CEO Steve] Jobs came out and said 'I screwed up, we'll make it better.' He provided a lot of transparency and visibility," Mutch said.

Apple shares slipped after the company announced its internal investigation in June but have since recovered. In fact, the stock is up about 24 percent since it launched its internal probe on June 29.

Cooperate with investigators. Even though several companies have launched internal probes, they may not escape the scrutiny of government investigators.

If a company comes under investigation by the SEC, executives should plan on cooperating fully, said Koenig from Dewey Ballantine.

"It varies on a case-by-case basis, but how a company responds to these cases is a major factor in what action, if any, the government takes," he said. Top of page

Stock options saga
Company Ticker Investigations underway Charge or restatement
Actel Corp. ACTL Internal --
Activision Inc ATVI SEC --
Affiliated Computer ACS SEC, DOJ May restate
Affymetrix Inc. AFFX Internal Restate 2001-05
Agile Software Corp. AGIL Internal --
Altera Corp. ALTR SEC, DOJ Restate 1996-05
Alkermes Inc. ALKS SEC --
American Tower Corp. AMT SEC, DOJ May restate
Amkor Technology AMKR Internal Restate 1998-05
Analog Devices Inc. ADI SEC, DOJ --
Apple Computer Inc. AAPL SEC May restate
Applied Micro Circuits AMCC SEC Restate 1998-02
Arbinet ARBX Internal Restate 2004-05
ArthroCare Corp. ARTC SEC --
Aspen Technology Inc AZPN Internal Restate 2002-05
Asyst Technologies ASYT SEC, DOJ Restate 2002-06
Atmel Corp. ATML SEC --
Autodesk Inc. ADSK Internal --
Apollo Group APOL SEC, DOJ --
Barnes & Noble BKS SEC --
BEA Systems Inc. BEAS Internal --
Bed Bath & Beyond BBBY SEC --
Blue Coat Systems Inc BCSI SEC Restate 2000-05
Boston Communications BCGI SEC May restate
Broadcom Corp. BRCM SEC $1.5 bln charge
Brocade1 BRCD SEC, DOJ Restate 2002-04
Brooks Automation BRKS SEC, DOJ Restate 1996-05
CA Inc. CA Internal Restate 2006
Cablevision Systems CVC SEC, DOJ Restate 1997-02
Caremark Rx Inc. CMX SEC, DOJ --
CEC Entertainment Inc CEC SEC --
Ceradyne Inc. CRDN Internal --
Cheesecake Factory CAKE SEC Restate 2004-06
Children's Place PLCE Internal --
Chordiant Software CHRD SEC --
Clorox Co. CLX Internal $16 mln charge
Computer Sciences CSC SEC, DOJ --
Comverse Tech.2 CMVT SEC, DOJ Restate 2001-05
Corinthian Colleges COCO SEC --
CNET Networks Inc. CNET SEC, DOJ Restate 2003-05
Crown Castle Int'l CCI Internal --
Cyberonics Inc. CYBX SEC, DOJ --
Delta Petroleum Corp DPTR SEC, DOJ --
Dot Hill Systems Corp HILL Internal --
EPlus Inc. PLUS Internal Restate 2004-05
Electronic Arts Inc. ERTS SEC --
Equinix Inc. EQIX SEC, DOJ --
Extreme Networks EXTR Internal --
F5 Networks FFIV SEC, DOJ Restate 2001-05
First American Corp. FAF Internal --
Foundry Networks FDRY SEC, DOJ Restate 2000-03
Fresenius Medical FMS DOJ --
GlenAyre Technologies GEMS Internal --
HCC Insurance HCC SEC --
Home Depot Inc. HD SEC --
iBasis Inc. IBAS Internal --
Intuit Inc. INTU SEC, DOJ --
Integrated Silicon ISSI Internal --
I2 Technologies ITWO Internal Possible charge
Jabil Circuit Inc. JBL SEC, DOJ --
Juniper Networks Inc. JNPR DOJ Restate from 2003
J2 Global JCOM Internal --
KB Home KBH SEC --
Keithley Instruments KEI SEC --
KLA-Tencor Corp. KLAC SEC, DOJ Restate 1997-02
Kos Pharmaceuticals KOSP SEC Restate 2001-05
Linear Technology Corp LLTC SEC,DOJ, IRS  
M-Systems Flash Disk FLSH SEC Restate 1999-05
Macrovision Corp. MVSN SEC, DOJ --
Marvell Technology MRVL SEC, DOJ --
Maxim Integrated MXIM SEC, DOJ --
McAfee Inc. MFE SEC, DOJ May restate
Meade Instruments MEAD SEC --
Medarex Inc. MEDX SEC, DOJ May restate
Mercury Interactive MERQ Wells Notice Restate 2002-04
Michaels Stores Inc. MIK SEC, DOJ --
MicroIslet Inc. MII Internal --
Microtune Inc. TUNE Internal --
MIPS Technologies Inc MIPS Internal --
Moldflow Corp. MFLO Internal --
Molex MOLX SEC, DOJ --
Monster Worldwide Inc MNST SEC, DOJ --
Nephros Inc. NEP Internal Restate Q1 2006
Novell Inc. NOVL Internal --
Nyfix Inc. NYFX DOJ --
Nvidia Corp. NVDA Internal --
Openwave Systems Inc OPWV SEC, DOJ --
Pediatrix Medical PDX Internal --
PMC-Sierra Inc. PMCS Internal --
Pool Corp. POOL Internal --
Power Integrations POWI SEC, DOJ May restate
Progress Software PRGS SEC Restate 1995-06
Quest Software Inc. QSFT SEC Restate 2000-05
QuickLogic Corp. QUIK SEC --
Rambus Inc. RMBS Internal Restate 2003-05
Redback Networks RBAK SEC, DOJ $200,000 charge
Research in Motion RIMM Internal May restate
RSA Security Inc. RSAS SEC, DOJ --
SafeNet Inc. SFNT SEC, DOJ Restate 2000-05
Sanmina-SCI Corp. SANM SEC Restate 2002-05
ScanSource Inc. SCSC Internal --
Semtech Corp SMTC SEC, DOJ Restate 2002-06
Sepracor Inc. SEPR SEC Restate 2003-06
Sharper Image Corp. SHRP Internal Restate 2003-05
Shaw Group Inc. SGR Internal --
Sigma Designs SIGM SEC --
Sonus Networks Inc. SONS Internal --
Sunrise Telecom Inc. SRTI Internal Restate 2001-05
Sycamore Networks Inc SCMR SEC, DOJ Restate 2003-05
Take-Two Interactive TTWO SEC --
Tetra Tech Inc. TTEK Internal --
THQ Inc. THQI SEC --
Trident Microsystems TRID SEC, DOJ --
Ulticom Inc. ULCM SEC Restate 2002-05
UnitedHealth Group UNH SEC,DOJ,IRS May restate
Valeant Pharmaceutical VRX SEC --
Verint VRNT SEC --
VeriSign Inc. VRSN SEC, DOJ --
ViaSat Inc. VSAT Internal $700,000 charge
Vitesse Semiconductor VTSS SEC, DOJ May restate
Western Digital Corp WDC Internal --
Wind River Systems WIND Internal --
Witness Systems WITS Internal May restate
Xilinx Inc. XLNX SEC $1.5 mln charge
Zoran Corp. ZRAN SEC, DOJ --
Source: Reuters
1Criminal, civil charges filed against ex-Brocade executives on July 20.
2Criminal, civil charges filed against ex-Comverse executives on Aug. 9.


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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.