Pssst! Heard about how easy backdating is?
A study finds that the options backdating scandal spread by word-of-mouth, from one corporate board to another.
By Shaheen Pasha, staff writer

NEW YORK ( -- Word of mouth among corporate directors may account for the ever-growing number of corporations ensnared in the options backdating scandal.

According to a survey released Thursday by corporate governance research firm The Corporate Library, 51 out of the 120 companies implicated in the backdating scandal at the end of last month have directors that sit on more than one board within the group of companies being probed.

Among that group, 43 directors sit on two boards while 9 directors sit on the boards of three of the implicated companies.

"Indeed, director interlocking relationships are fast becoming what appear to be the most important characteristic and indicator of backdating problems," the study said.

Stock options give executives and employees the right to buy shares at a certain "strike" price, and if the stock rises after the options are granted, profits can be large. But the Securities and Exchange Commission as well as the Justice Department are investigating whether some executives manipulated the dates on which they exercised options in order to reap a higher reward.

Currently there are over 125 corporations implicated in the scandal, although only Brocade Communications (Charts) and Comverse Technology (Charts) have received criminal indictments for their options practices.

FBI Assistant Director Chip Burrus, however, said in a recent interview that more indictments are likely to follow as the options scandal expands.

Interestingly, Comverse had six directors on its board who also served on the boards of other corporations implicated in the scandal, The Corporate Library said in its report. And Brocade Communications had two directors on the boards of other companies embroiled in the options investigation.

Options backdating investigations have gained momentum in the last few months, costing corporations millions in restatements to earnings and putting a number of high-profile chief executives out of work.

Most recently, UnitedHealth's (Charts) longtime CEO William McGuire stepped down from office amid widening scrutiny over the company's options practices.

Former CNET (Charts) CEO Shelby Bonnie, former McAfee (Charts) CEO George Samenuk and Monster Worldwide Inc.'s (Charts) CEO Andrew McKelvey, were also recent casualties in the options backdating scandal.

In the study, The Corporate Library didn't accuse any individual directors sitting on multiple boards of deliberately encouraging or recommending the questionable backdating practices, but added that "the theories behind social networking would support such a theory very strongly."


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