Naughty: Options Backdating

I can't think of anybody who more richly deserves a lump of coal in their stocking this year than the cadre of current and former executives who engaged in stock options shenanigans at some time in the past few years. Maybe we could then grab that weighted sock and bash some sense into their selfish skulls.

If you haven't been paying attention to this drawn-out large-scale scandal, let me fill you in. Once upon a time, somebody came up with the idea of paying executives, board members, and some regular employees partly in stock options rather than cash or straight stock. Done right, this can be a fine compensation plan -- you align the recipient's financial interests with the market performance of company stock, thereby giving employees another incentive to work hard on ensuring their employer's success. And unlike regular stock awards, options postpone share dilution until they are actually exercised -- which might never happen.

But that commendable practice has been perverted by a few companies that saw fit to bend the rules a bit. By fiddling with grant dates and strike prices, executives and directors juiced their options awards for years before the Department of Justice and the SEC started picking at those scabs. Normally respectable companies like UnitedHealth (NYSE: UNH  ) , Broadcom (Nasdaq: BRCM  ) , and Apple Computer (Nasdaq: AAPL  ) were caught with their hands in the cookie jar.

Other miscreants include KLA-Tencor (Nasdaq: KLAC  ) , Rambus (Nasdaq: RMBS  ) , and Apollo Group (Nasdaq: APOL  ) . All of these businesses have had to restate several years' worth of results, delaying SEC filings and bringing them under the gaze of the Ghost of Delistings Future. Fines have been levied; high-level executives, board members, and legal teams have been forced to quit; and some of them are still working on those restatements. The former CEO of Comverse Technology (Nasdaq: CMVT  ) tried to run from criminal charges and is currently awaiting extradition from Namibia, where his flight ended.

These guys took pains to obfuscate company financials for personal gain and, in most cases, shareholders were left with the bill for the entire mess -- that is, where the company didn't buy back shares to cover the granted and exercised options. Now that stock-based compensation has to be disclosed in earnings releases, many of them try to hide them behind pro forma numbers and flowery press releases that require a microscope and the patience of an angel to find out the real story. That's making my job harder, but more importantly, it's also making it more difficult for the average investor to make informed decisions. For shame.

So Santa, back up the sleigh to your friendly neighborhood coal mine. We need to load that thing up something fierce to make sure this doesn't happen again. We wish you a full-disclosure Christmas, and an honest-corporate-governance New Year!

Further Foolishness:

There's a whole world of naughty and nice out there!Take a lookat the rest of the bunch.

UnitedHealth is both aStock Advisorpick and anInside Valueselection. Bad things do occasionally happen to great companies. Find out what the Brothers Gardner and Philip Durell think about the whole mess with a free 30-day trial of either newsletter.

Fool contributorAnders Bylundholds no position in any of the companies discussed here, or in any other options-scandal participants. You can check outAnders' holdingsif you like. Foolishdisclosure is always worth a read over a cup of eggnog.


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