Everyone seems to be talking about stock option backdating right now. Companies' offerings of stock to staff, executives, and directors as part of their compensation packages isn't anything new. But some high-ranking company leaders are now making news for their apparent habit of retroactively setting the options grant date to the lowest market price possible, enriching themselves at the expense of the company -- and investors.
To be fair, many allegations and investigations have yet to prove any wrongdoing, including the informal SEC inquiry befalling Openwave Systems (NASDAQ:OPWV), or a Merrill Lynch report suggesting that companies like Juniper Networks (NASDAQ:JNPR) and Altera (NASDAQ:ALTR) saw their stock prices take off immediately after granting large numbers of options. Openwave is cooperating with its investigation, and all three companies have set up in-house task forces to audit their previous options grants in search of any wrongdoing.
I'm not saying that cooperation necessarily means innocence -- Altera has other problems, such as a delisting threat due to unreported earnings. And some of these internal investigations do turn up smelly affairs. Mercury Interactive and Brocade (NASDAQ:BRCD) have already fired some executives for tipping the odds in their favor, and even large and otherwise respectable firms like UnitedHealth Group (NYSE:UNH) have fallen for the temptation to sweeten executive stock grants. UnitedHealth is working on restating the last three years of financial data, and it faces multiple shareholder lawsuits over option backdating issues.
Now that Openwave has been served with at least three lawsuits of its own, it's hard to tell what will come of it quite yet. This Rule Breaker recommendation and maker of cell-phone software may have broken the kind of rules that come with legal penalties -- but it may not have.
To begin with, not all backdating is illegal; it's a matter of proper disclosure and approval from the board of directors. That still doesn't make it a shareholder-friendly practice. Ordinary investors don't have the opportunity to use the same profitable system, and backdating removes much of the performance incentive that stock options are supposed to convey. But at least it's legal if done right.
Furthermore, sometimes the executives are bound to hit a jackpot or two. What may look on the surface like devious scheming and milking the market for every last penny could simply be dumb luck -- once or twice. Given all the grant events out there, the law of averages dictates that it's bound to happen occasionally.
For now, investors must wait and see what the internal and external investigations find in Openwave's books. In the future, we should see less of this particular kind of potential abuse, since the SEC is overhauling the reporting rules for stock options granted to top executives. As early as this summer, companies may be forced to disclose the grants to their top five executives in excruciating detail, which should improve transparency and encourage the adoptions of more reasonable practices in general. I'll steal Steak n Shake's tag line here: When done "in sight, it must be right!" And that's how Fools like it.
Further forthright Foolishness:
- Philip Durell calls UnitedHealth out
- KLA-Tencor is under scrutiny, among other troubles
- Fellow Fool Rich Duprey sums the situation up for us
UnitedHealth is a Motley Fool Stock Advisor selection, and Openwave has been made a Motley Fool Rule Breakers recommendation. Whatever your investing style, the Fool has a newsletter for you.
Fool contributor Anders Bylund has a cell phone, but no idea who wrote the software in it. Foolish disclosure is always appropriate; he owns none of the stocks mentioned.
