CANADA - Stock options return to spotlight amid recent controversies over investments - 25 Jan 2009
Stock options return to spotlight amid recent controversies over investments
3 days ago
TORONTO — Stock options, a corporate practice that went under the
microscope in the wake of the Enron accounting scandal, are in the
spotlight again thanks to controversies surrounding the investments at
two well-known technology firms in recent days.
BlackBerry-maker
Research In Motion's (TSX:RIM) two top executives are reportedly facing
a record fine of up to $100 million related to a stock option
accounting controversy which started in 1996, which involved so-called
backdating.
On Friday, Google Inc. (NASDAQ:GOOG) said it was
resetting more than eight million stock options at lower prices to
reflect the current market meltdown, where shares of the company are
well below the option prices set a few years ago, making such options
worthless in today's financial markets.
The resetting has irked
shareholders still stuck with agonizing losses on their investments.
Google is giving option holders a break on the stock that has plunged
57 per cent since its peak at $747 a share in 2007.
"A lot of
people just hate it," said Broadpoint AmTech analyst Rob Sanderson. "I
had one money manager tell me, 'The next time you talk to Google's
management, tell them I want all the stock I bought at $400 a few
months ago to be repriced at $285."'
More companies are expected
to follow Google, and Starbucks before it, trying to make up for losses
since the bottom dropped out of the stock markets.
Stock options
allow for the holders to buy shares of a company in the future at an
already established price. For example an option might allow you to
acquire 100,000 shares from the company treasury at $10 a share and
then sell the stock in the future. If you exercise the option on all
the shares at a time when the market price is $30, you can dispose of
the shares into the market and pocket a $2 million profit.
Backdating occurs when the options are repriced at even lower values, making the potential profit even higher.
"Who
gets them are executives, key managers - someone that you want to
retain for whatever reason. It's part of their remuneration package,"
said Adrian Mastracci, portfolio manager at KCM Wealth Management in
Vancouver.
"Basically what you're saying is 'If you do well and
make the right decisions, manoeuvre this company in the right
direction, the stock price will ultimately go up."'
"It's like having hindsight," said Mastracci. "It's like getting in front of the gravy train."
Backdating
is not illegal in itself but companies have been convicted of breaking
accounting and tax rules in reporting the grants.
In the case of
RIM, the backdated stock options were exercisable at a price that was
lower than the day that the options were granted.
RIM had said
that a special committee found that all options granted before Feb. 27,
2002, were accounted for incorrectly, but that it didn't find any
internal misconduct.
The practice grabbed the attention of
regulators in the early 1990s. In the United States, the Securities
Exchange Commission ruled that companies were required to report stock
options in full detail for both their financial reports and in
regulatory filings.
However, that didn't necessarily mean that companies actually stopped using the practice to reward their executives.
Nearly
three years ago the SEC began placing about 200 companies under
investigation for their options accounting, including RIM.
The
cases stretched to other major tech companies like Apple Computer,
which restated its earnings to reflect US$84 million in expenses tied
to options awards. Executives at the company, including chief Steve
Jobs, were cleared of any wrongdoing.
Since the stock markets
took their tumble last year, some industry watchers have pondered when
the backdating practice might see a resurgence in popularity.
"There
has been a lot of momentum building" to reprice stock options, said
Alexander Cwirko-Godycki, a research manager for executive compensation
specialist Equilar.
"Everyone has just been sort of waiting for a big name to do it."
Corporations
become jittery over their employees when the stock options they've
given them significantly decline. Their belief is that staff will often
become discouraged or explore other job options if they feel they're
getting ripped off.
Fred Ketchen, manager of equity trading at ScotiaCapital, says the practice of backdating is inexcusable.
"Where is you conscience when you're doing that?" he said.
"You're
not being fair to the other shareholders of a company if all of a
sudden you're providing options that senior employees can exercise, and
the (exercise) price is below - significantly below in some cases - the
shares' worth."
"Why should somebody be given that kind of beneficial treatment?"
In
the case of RIM, the top five executives at the company reaped benefits
worth US$9.4 million for back dated stock options between 2000 to 2005.
RIM
said that a special committee found that all options granted before
Feb. 27, 2002, were accounted for incorrectly, but that it didn't find
any internal misconduct.
more...http://www.google.com/hostednews/canadianpress/article/ALeqM5hfMPyFK_Umsgn62KmgeVy4h6-RVA
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RIM Execs to Pay for Mispriced Options
Executives of the BlackBerry maker must fork over $75 million.
Stephen Taub
- CFO.com | US
February 6, 2009
Research In Motion Ltd. and eight executives have settled charges
from Canadian regulators over the company's historical stock option
granting practices.
Four of the eight executives — including two finance executives —
agreed to pay a total of $75 million (U.S.). The settlements still must
be approved by the U.S. Securities and Exchange Commission, but RIM
said the staff of the SEC's Division of Enforcement has agreed to
recommend that the commissioners give their approval.
Under the deal with the Ontario Securities Commission, the four men
— co-CEOs Jim Balsillie and Mike Lazaridis, chief operating officer and
former CFO Dennis Kavelman, and Angelo Loberto, former director of
finance and current vice president of corporate operations — agreed to
repay the company roughly $31 million for benefits arising from
incorrectly priced stock options granted to all RIM employees from 1996
to 2006.
They also agreed to pay RIM $36.3 million — $12.15 million of which
had previously been paid — to defray costs incurred by RIM to
investigate and remediate its stock options and governance practices.
In addition, $7.37 million will go to the OSC as an administrative
penalty and toward the costs of its investigation.
In addition, Kavelman is prohibited from acting as a director or
officer of any publicly traded Canadian company for at least five
years, or until he completes a course on the duties of directors and
officers of public companies.
Loberto is also prohibited from acting as a director or officer of
any Canadian company until he completes such a course. Balsillie has
agreed not to act as a director of any Canadian company for at least
one year.
Under the deal, RIM, best known for its BlackBerry device, agreed to
submit to a review of its governance practices and procedures by an
independent person selected by the OSC and paid for by RIM.
"While RIM and its directors and officers regret the occurrence of
the matters described in the OSC settlement agreement, we believe the
actions taken by RIM's board of directors and management since the
conclusion of the company's internal review in March 2007 have further
strengthened the company," said John Richardson, RIM's lead director.
Back in May 2007, Research In Motion restated results downward for
2005 and 2006 by a total of $248.2 million, largely caused by
options-related errors. The impact on its fiscal 2007 results was not
material, the company added.
more...http://www.cfo.com/article.cfm/13089298/c_13088485?f=home_todayinfinance
UPDATE
SEC Clips BlackBerry Maker For Backdating Stock Options
Posted on Tuesday, 17 of February , 2009 at 5:04 pm
WASHINGTON, DC—-The Securities & Exchange Commission has charged BlackBerry maker Research in Motion Limited (RIM) and four of its senior executives for stock option backdating.
The
SEC’s complaint alleges that Ontario, Canada-based RIM, its former
chief financial officer Dennis Kavelman, former vice president of
finance Angelo Loberto, and co-chief executive officers James Balsillie
and Mike Lazaridis illegally granted undisclosed, in-the-money options
to RIM executives and employees by backdating millions of stock options
over an eight-year period from 1998 through 2006.
“As
alleged in our complaint, RIM and its highest level executives engaged
in widespread backdating of options which provided them and other
employees with millions of dollars in undisclosed compensation,” said
Linda Chatman Thomsen, director of the SEC’s Division of Enforcement.
“This enforcement action underscores the SEC’s resolve to assure full
and accurate disclosure to U.S. investors by foreign issuers.”
Antonia
Chion, associate director of the SEC’s Division of Enforcement, added,
“Companies and executives who attempt to conceal their fraudulent
conduct from investors and regulators will be held accountable.”
The
SEC’s complaint alleges that the defendants made false and misleading
disclosures about how RIM priced and accounted for options. In
addition, according to the complaint, the backdating violated the terms
of RIM’s stock option plan and a listing requirement of the Toronto
Stock Exchange. RIM’s stock is listed on both the NASDAQ Stock Market
and the Toronto Stock Exchange.
Specifically,
the SEC’s complaint alleges that Kavelman, Loberto, Balsillie and
Lazaridis backdated option agreements and offer letters, which
concealed the fact that the options were granted in-the-money. The
complaint also alleges that Kavelman and Loberto took steps to hide the
backdating from regulators, RIM’s independent auditor and outside
lawyer. For instance, Kavelman and Loberto usually picked low strike
prices within reporting periods and in some instances avoided the
lowest price so regulators would not detect the backdating.
On
one occasion, Kavelman allegedly asked a manager not to document
improper pricing in e-mails. Kavelman wrote, “FYI, it is a major breach
of protocol to be discussing (and documenting via email) using option
pricing other than that allowable by the Ontario Securities Commission
and the SEC in the US.”
The
complaint further alleges that after all four executives were aware of
backdating issues that had come to light at other companies, they
attended RIM’s July 2006 annual shareholder meeting where Kavelman
misled investors by denying that RIM was backdating options.
All
defendants have agreed to settle this matter, without admitting or
denying the allegations in the SEC’s complaint, on the following terms:
RIM
consented to the entry of an order permanently enjoining it from
violating the antifraud, reporting, books and records and internal
controls provisions of the federal securities laws. The settlement with
RIM takes into account RIM’s cooperation during the SEC’s investigation.
Kavelman
and Loberto consented to an order permanently enjoining them from
violating the antifraud, internal controls, books and records and
misrepresentation to auditors provisions and from aiding and abetting
RIM’s violations of the reporting, books and records and internal
controls provisions of the federal securities laws.
Kavelman
also consented to an order permanently enjoining him from violating the
certification provision of the federal securities laws. Kavelman and
Loberto agreed to be barred for a period of five years from serving as
officers or directors of any issuer that has a class of securities
registered with the SEC or that is required to file reports with the
SEC. In addition, Kavelman and Loberto agreed to resolve an anticipated
administrative proceeding by consenting to an SEC order prohibiting
them from appearing or practicing before the SEC as accountants for
five years.
Balsillie
and Lazaridis consented to the entry of an order permanently enjoining
them from violating certain antifraud provisions and
the internal controls and books and records provisions and from aiding
and abetting RIM’s violations of the reporting, books and records and
internal controls provisions of the federal securities laws.
The
individual defendants will pay penalties in the following amounts:
$500,000 for Kavelman; $425,000 for Loberto; $350,000 for Balsillie;
and $150,000 for Lazaridis. The individual defendants also agreed to
disgorge the in-the-money value of backdated options they had exercised
($132,914.60 for Kavelman, $47,950.56 for Loberto, $334,250 for
Balsillie and $328,300 for Lazaridis) plus interest. Their disgorgement
will be deemed satisfied by their previous payment of these amounts to
RIM.
The
settlements in the civil injunctive action are subject to the approval
of the U.S. District Court for the District of Columbia.
On
Feb. 5, 2009, the Ontario Securities Commission brought a related
settled action against RIM, Balsillie, Lazaridis, Kavelman, Loberto and
certain other directors which included the total payment in Canadian
dollars of $76.85 million and other sanctions. SEC Complaint 2-17-09