Stock-Options Scandal Hits

In the latest of a series of financial scandals, allegations of fraudulent bonuses to executive through stock-options have hit. One of the early such cases was that involving Brocade Communications, shortly after Greg Reyes� resignation from being chief company executive. There were allegations of accounting fraud involving stock options, and even a possible civil suit against Reyes brought by the Security Exchange Commission (SEC). Brocade makes data storage gear. Reyes threatened a series of counter-suits. \r\n Now in August 2006, a whole bunch of companies from California have been thrown into the Stock-option scandal mess. This include First American, a large California-based information and title-insurance company. A special committee from the Board of Directors is probing all stock-option awards done in the company for the last ten years. First American has been expanding and buying up operations in Western and especially in Eastern Europe in the last couple of years. The 31,000-employee company had already showed up in investigations of a network of title-insurers, mortgage brokers, and real estate agents. First American had to pay back $24 million to homebuyers for collecting kickbacks from real estate brokers. \r\n The allegations from the Wall St. Journal from back in March 2006 had been that executives timed the release of stock-options when the stocks were at a 52-week low, therefore the executives got much more stock, which was shortly worth quite a bit more after the stock went up. The Journal mentioned as a case study the extraordinary luck of Jeffrey Rich, CEO of Affiliated Computer Services, Inc, over the period from 1995 to 2002. The study was extended to other computers where similar patterns have been observed. Some accounting department officials admit that there was extensive back-dating of stock-options, in order to get the lowest price for the greater amount of stock purchased. Apparently, the practice of back-dating stock-options is legal as long as it is told to shareholders. Thus we have another violation of the principle of �shareholders value� , so famously violated in the offshore corruption and flimflam of Enron, Worldcom and other celebrated cases. \r\n These cases of backdated stock-options were found to be most widespread during the 1995 to 2002, especially in the period of lower stocks after the September 11th, 2001 attack. Nevertheless, this is a long-term watering down of stock and actually a massive example of insider trading, done in a rather public and shameless way. \r\n\r\n\r\nAnother way to look at this table is to calculate the percentage of future free cash flow pledged to option holders. Highlighted in yellow, this number is now 22% -- not insignificant. This percentage is calculated by dividing the 121.8 million options outstanding by the 545.3 million shares outstanding as of March 2006 (source: Broadcom 10-Q). The \"weighted average exercise price per share\" of $19.85 means that over the course of the option vesting schedule, 121.8 million new shares will be granted to option holders in exchange for an average price of $19.85.\r\n What the effect of this will be to the overall economy is unknown. As long as huge salaries and stock-options at guaranteed low prices are guaranteed to executives, nothing positive can happen. Since shareholders have gone with this idea of a deregulated economy that asks a money machine no matter who is hurt, it is a little hard for them to complain.\r\n Howard Giske is a legal consultant for legal information for small businesses legal information for small businesses and
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