October 21, 2006 in Business

Stock-options ‘dominoes falling’

Associated Press The Spokesman-Review
 

On the Web

“Justice Department: http://www.usdoj.gov

“Securities and Exchange Commission:http://www.sec.gov

“The Corporate Library: http://www.corporatelibrary.org

WASHINGTON — Chief executives caught in the stock-options scandal may find it harder to keep their jobs now that a CEO as mighty as UnitedHealth’s William McGuire has fallen.

The scandal rattling corporate America has claimed more than three dozen executives and board directors at 20 public companies so far. McGuire, whose retirement was announced Sunday, is arguably the most prominent.

The move was quickly followed this week by news that the chairman and founder of computer chip supplier KLA-Tencor Corp. was retiring over options, the top two executives of encryption specialist SafeNet Inc. had resigned, and consulting firm Sapient Corp.’s co-founder had quit as chief executive and co-chairman in a broad management shakeup.

Last week saw the abrupt departures of two well-known Silicon Valley CEOs: George Samenuk of McAfee Inc. and Shelby Bonnie of CNet Networks Inc. McAfee, a leading maker of computer antivirus software, also fired its president, Kevin Weiss.

The spotlight in the scandal has turned from lesser known executives like Jacob “Kobi” Alexander — the fugitive former CEO of Comverse Technology Inc. now in Namibia awaiting extradition to face charges — to more mainstream, established corporate leaders at blue-chip companies.

“Not only are the dominoes falling, but the dominoes are getting bigger,” said Anthony Sabino, a business law professor at St. John’s University in New York City.

The fall of a big domino like McGuire — the man who engineered UnitedHealth’s rise from a regional health insurer into the nation’s second-largest — can spark the descent of others like him, Sabino maintained. “Everybody else who’s involved is at risk,” he said.

A sort of guillotine for corporate executives has been set out in the public square. With more than 100 companies under options investigations by the Justice Department and the Securities and Exchange Commission, many likely are eager to show their cooperation with the authorities and willingness to take remedial action — like firing executives believed to be implicated or responsible and possibly recouping some of their options money.

“The companies are doing their best to anticipate the concerns that the government will raise,” said Tim Coleman, a former federal prosecutor who is an attorney at Dewey Ballantine in Washington. Companies’ actions “are with a view to what’s going to happen on the day of reckoning,” he suggested.

In return, some companies with potential criminal liability could receive what are known as deferred prosecution deals, in which prosecutors agree not to seek a grand jury indictment of the company so long as it commits no further wrongdoing. In the post-Enron era, with the specter of the 2002 conviction of the once-venerable Arthur Andersen accounting firm hovering, the Justice Department has increasingly engaged in such deals in recent years.

Or they may not be prosecuted at all.

The SEC, for its part, expects to impose civil fines on some companies and make criminal referrals to Justice on others, paying particular attention to companies that make big corrections to past profits because of faulty calculations of options.

At issue in many of the investigations is a practice known as backdating. Stock options are issued retroactively to coincide with low points in a company’s share price, potentially fattening profits for options recipients when they sell their shares at higher market prices.

If they aren’t properly disclosed, backdated options can falsely inflate corporate profits and result in an underpayment of taxes.

For executives and directors, “If there was knowing and willful participation by individuals, … there’s potential criminal liability for those individuals,” said Michael Himmel, also an ex-federal prosecutor now in private practice, at Lowenstein Sandler in New York.

Falsifying documents related to options grants, concealing information from the board — those would be signs of potential criminal conduct by executives, experts say.

Some company officers and directors may contend that lawyers and other advisers gave their blessing to the options dating arrangements.

“It isn’t criminal to basically end up giving bad advice,” said Lawrence Barcella, a former Justice Department prosecutor who specializes in white-collar cases at Paul, Hastings, Janofsky & Walker. It’s another matter, he said, if the attorneys or advisers “knowingly and willfully enabled” the company executives to carry out a deceptive options scheme.


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