Grand Jury Tunes In to CNET

A month after the SEC began an inquiry into the potential backdating of stock option grants at CNET Networks (Nasdaq: CNET  ) , a grand jury subpoena has also been issued to get to the bottom of this.

Shares of CNET are trading more than 4% lower today on the news, even though this was a logical step in the investigatory process. The stock had already been hammered during the past five weeks over the whiff of controversy.

CNET isn't alone here. Recently, dozens of companies such as Juniper (Nasdaq: JNPR  ) , Monster Worldwide (Nasdaq: MNST  ) , and UnitedHealth (NYSE: UNH  ) have also been lookedat for possibleincidents of backdating.

Your portfolio may have a fallen investment or two as a result of the wave of inquisitive forces digging deeper into companies that have stock options dated near their recent lows. Even our Motley Fool Rule Breakers newsletter service has a pair of recommendations under suspicion: CNET and OpenwaveSystems (Nasdaq: OPWV  ) .

As a practice, I think backdating is indefensible. In theory, it may not seem all that different than the legal act of publicly repricing stock option grants after a serious tumble. But while both are ethically despicable, backdating is underhanded and corrupt.

In addition, backdating can cripple the market if investors feel that executives are, by and large, opportunistic crooks. Cracking down is important, but if you are an investor in an implicated company, it's important to look before you leap.

I remain a fan of CNET through all this. If the company does indeed have dirty hands, good riddance to the unethical executives who treated their shareholders like urinal cakes. Under tighter scrutiny, the dozens of affected companies may become ethical role models. As long as you're buying into a company because you believe in its model and its business, that's a win.

A guilty company will pay for its mistakes. Between the costs of settlements, defending class action lawsuits, and restating financials, shareholders will likely be stung several times over by the price of crooked compensation. However, bogus option grants will likely be wiped off the books, reducing the number of fully diluted shares outstanding and improving earnings per share.

The burden is real. The implications are huge. But don't assume these companies are doomed. I would be surprised if a company with a quality portfolio of high-traffic Internet properties like CNET isn't either trading higher organically a year from now -- or acquired at a respectable premium.

Backdating is vile because it indicates that companies were cherry-picking grant dates to take advantage of low prices. Guess what, investor? You can do that, too, by taking a closer look at these companies now -- like Rambus (Nasdaq: RMBS  ) , with its double-digit percentage dip today -- and ask yourself how you would feel about the value of the company if it had more responsible executives. Yes, you too can take advantage of the low-lying fruit. Pick prudently.

Openwaveand CNET were recommended last year in Motley Fool Rule Breakers. If you're interested in high-octane growth stock investing, you may want to take advantage of the service's free 30-day trial. UnitedHealth is a Stock Advisor selection.

Longtime Fool contributor Rick Munarriz has been known to backdate a birthday present or two after a momentary lapse -- but nothing worse. He does not own shares in any of the companies in this story. The Fool has a disclosure policy. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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