SEC seen mulling penalties for backdating

NEW YORK (CNNMoney.com) -- The Securities and Exchange Commission is holding up a final settlement with Brocade Communications Systems as the SEC reportedly considers whether backdated stock options harmed shareholders.

The Wall Street Journal reported Thursday that SEC Chairman Christopher Cox and his four fellow commissioners are still not certain whether and how to penalize companies where backdating occurred. The internal debate has delayed a formal commission vote on a proposed $7 million settlement SEC reached with Brocade a year ago.

Securities and Exchange Commission Chairman Christopher Cox.

Brocade (Charts), which makes computer network switches and software, was one of the first companies to reach a settlement with the SEC on a backdating case.

The case could affect pending settlements at other companies, including chipmaker Analog Devices (Charts), and set the direction for a number of other high-profile backdating probes by regulators, including one at Apple (Charts).

"We are relying heavily upon the resources of the Office of Economic Analysis and our chief economist," Cox told the paper, declining to comment on any specific case. "Each case rather obviously will turn on some facts, so we'll take them one at a time as they come."

The backdating of options allows executives to buy shares from the company at a price lower than the price of the stock option grant. Numerous companies have been forced to restate results when backdating scandals have been uncovered.

But the Journal says that the questions being looked at by the SEC and its staff, including its economists, also focus on whether the executives were compensated differently than shareholders believed. Being considered as well is whether there is a value to the company of using backdated options to attract and retain employees.

The stock of a company generally falls when a backdating problem is revealed, but the staff is looking into whether the price decline was a reflection of damage done to the company by the backdating - or if it was caused by fear of litigation or potential impact on corporate officers.

And while many companies have restated results, the SEC is looking at whether investors consider restatements involving options, which don't involve an expenditure of cash, relevant.

The paper reports that some SEC insiders believe Cox wants to ensure the commission's unanimous vote by developing an analysis that can withstand scrutiny and serve as a template for future penalty decisions.

In recent years, the Journal reports, the SEC has been divided on when and how to punish companies involved in financial frauds.

Republicans on the commission generally voted against penalties in such cases, arguing that if shareholders were harmed by executives' fraud, they shouldn't be harmed a second time by requiring the company to pay a fine. Democrats generally voted for penalties, contending they were appropriate for wrongdoing, the paper reports.

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