Executives’ stock options get closer look

WASHINGTON — The government is aggressively investigating the suspicious timing of stock options granted to top executives at scores of companies, federal officials said Wednesday.

Shareholders and employees have been “ripped off by senior executives who rigged stock option programs … to further enrich themselves,” the chairman of the Senate Finance Committee said at a hearing.

The tax-writing committee, led by GOP Sen. Charles Grassley of Iowa, is considering reducing or eliminating a deduction that encourages companies to award executives with stock options. This kind of compensation is linked to a company’s stock prices and by, extension, performance.

The Securities and Exchange Commission chairman expressed support for the idea.

Companies are required to pay taxes on compensation that exceeds $1 million a year received by each executive. There is an exception for pay tied to a company’s financial performance; all of this can be deducted. This requirement has led companies to dole out stock options.

SEC chief Christopher Cox told the Senate Banking Committee that this rule “deserves pride of place in the Museum of Unintended Consequences.” He said the $1 million threshold was “an unworkable price control.”

At least 79 public companies, including UnitedHealth Group Inc., The Home Depot Inc., personal-finance software maker Intuit Inc. and Barnes & Noble Inc., have publicly said that they are under scrutiny by the Justice Department or the SEC, or both, for possible fraudulent reporting of stock option grants.

The Internal Revenue Service is conducting its own investigation for possible tax-law violations in option grants.

“We will apply our resources to this area with full rigor,” IRS Commissioner Mark Everson said in testimony at the hearing.

Cox and the SEC’s enforcement director, Linda Thomsen said the agency is investigating more than 100 companies. The number may include companies that haven’t disclosed that they are under investigation.

This summer, the Justice Department and the SEC charged former officials of two technology companies, Brocade Communications Systems Inc. and Comverse Technology Inc.

With only two cases brought so far out of the scores of companies under investigation, the government is sending a message that “most don’t have to worry about it,” Lynn Turner, a former SEC chief accountant, said at the Banking Committee hearing.

At issue in many investigations is a practice known as backdating: Stock options are issued retroactively to coincide with low points in a company’s share price. This can fatten profits for options recipients when they sell their shares at higher market prices. Backdating options can be legal as long as the practice is disclosed properly to investors and approved by the company’s board. In some cases, however, the practice can run afoul of federal accounting and tax laws.