Early last Friday evening, security software manufacturer McAfee (NYSE:MFE) announced it would be correcting a "small subset" of the measurement dates related to its stock-option backdating scandal. Management said it would be performing future corrections, but it couldn't say when or how much they would ultimately cost.
McAfee became one of more than 100 companies that have been embroiled in the stock-option backdating brouhaha, and it forced the software maker to oust both its CEO and president. The list of companies involved in the backdating issue grows almost daily, and the CEOs the scandal touches grows commensurately. Just last Friday, Apple (NASDAQ:AAPL) revealed that CEO Steve Jobs personally oversaw the backdating of some stock options, though not ones from which he personally benefited.
McAfee was amending the option grants made to its ousted executives. CEO George Samenuk received two grants, one in 2002 and one in 2004, with exercise prices of $25.43 and $16.57, respectively. The committee investigating the backdating mess at McAfee determined that those grants had actually received approval on different dates, and the board corrected the error by upping the exercise price to $27.19 and $16.75, respectively.
Similarly, McAfee's then-president Kevin Weiss received four stock option grants between 2002 and 2004, totaling 550,000 shares, which were also repriced higher, some substantially so. For example, a grant of 100,000 options on Dec.10, 2003, was originally priced at $13.41; the board subsequently repriced the options to $17 a share for an actual grant date of Jan. 4, 2004. Alas, they could only reprice the options that Weiss hadn't already been exercised, which totalled roughly 71,000 shares.
If you calculate the total amount of these options at the prices at which they were originally granted, and the revised prices set by the board following its investigation, you can get a sense of the actual cost to shareholders. Using the backdated price, Samenuk's option grants totaled $15.7 million. Had they been recorded on the proper date, the cost would have been $16.4 million. Since Samenuk would have paid less for his incorrectly dated options, he would have held on to $793,000 that would otherwise have flowed into the company's coffers.
So too with Weiss' grants. On the correct dates, it would have cost $8.8 million; using the backdated time frames, it was only $7.5 million, or $1.3 million denied shareholders.
While that $2 million might seem like relatively small change to a company with a market cap of $4.5 billion, let's also remember that the executives were already well paid: Samenuk received $835,000 in salary and a bonus of $1 million (along with other perks like flying his family around on the corporate jet), while Weiss received a salary of $483,000, a bonus of $448,000, and cost of living expenses of nearly $127,000 (down from $785,000 the year before) to compensate him for living in the United Kingdom.
Moreover, it must be remembered that McAfee has said this recounting is but a "small subset" of the corrections it will ultimately complete. The total cost to McAfee --and shareholders -- is currently unknown. But we do know is that these highly paid executives took it upon themselves to divert shareholder money to their own benefit. For that, they must be held accountable.
Account for the stock option scandal with these related Foolish articles:
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
