|  | | 2006 News and Press Releases | | |
HEADLINE NEWS:
Self-Deal? CEOs? Nahhh ...; Backdating May Be Just The Beginning: A Lot Of Other Suspicious Stuff Tends To Happen When Companies Grant Options.
Justin Fox
Fortune. November 28, 2006
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EXCERPT: Beyond backdating Want to know what the next big corporate scandal will be? Get yourself a subscription to The Journal of Finance. Then there's the realization that, even before Lie's [finance professor Erik Lie of the University of Iowa] backdating bombshell, scholars suspected that executives were using insider information for financial gain in timing options grants and news releases. Does that make backdating just the most obviously illegal tip of an iceberg of dodgy corporate behavior? And is anyone going to get in trouble for the other stuff? Those are questions currently of great interest to securities lawyers, I learned at a late-October conference at Washington's Union Station. "Lucky Strikes" was the title of the event - organized by Stanford's Rock Center for Corporate Governance, of which [Joseph] Grundfest is faculty director - and much of the jargon was along similarly flip lines. "Bullet dodging," for example, is the term for delaying options grants until just after the release of bad news (or moving up the release of bad news to precede an already scheduled grant). Because the grant comes after the news is out in the open, such behavior is nearly impossible to prosecute on insider-trading grounds. More problematic is "spring-loading" - timing an options grant to precede the announcement of good news (or delaying the happy announcement to follow an already scheduled grant). At Union Station, Grundfest divided this into "symmetric spring-loading," where the members of the board of directors who approve the grant are fully aware of the good news to come, and "asymmetric spring-loading," where they are not. Asymmetric spring-loading itself comes in two flavors: "with ratification," when the board says after the fact that it's okay, and without. … The SEC has yet to aggressively pursue any spring-loading cases, and while a few shareholder lawsuits are in the works against purported spring-loaders, none is near a decision. "Everybody's sitting and waiting," says Grundfest. In the meantime, Grundfest has been advising companies to schedule their options grants three trading days after a quarterly earnings announcement. This minimizes the amount of inside information that executives could possibly take advantage of. It also has the interesting side effect of giving them an incentive to miss the quarterly earnings target set by Wall Street analysts (because that might depress the strike price of their options). Now that would be a shocking development. |
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