By James Hamilton, J.D., LL.M.
The SEC’s Division of Enforcement is moving vigorously against the abusive backdating of stock options, noted Director Linda Chatman Thomsen in recent remarks, with over one hundred matters under investigation. The investigations are being conducted by SEC offices throughout the country and are being centrally coordinated and tracked in Washington. In addition, there is substantial criminal interest in options matters from U.S. Attorneys' Offices nationwide. The SEC does not expect to bring 100 enforcement cases regarding stock options, she noted, but is focusing on the worst conduct. That said, she indicated that more enforcement actions can be expected in addition to the four that have already been brought.
One reason that stock options grants became a monster, said the director, is that companies either abandoned or compromised their processes in granting options. Once released from a process designed to ensure legal compliance and fairness, she reasoned, stock option grants were allowed to ``run amok.’’ Also, many companies failed to comprehend that a stock option can be granted either in the money or at the money, but not both. You can take your pick, she emphasized, but you have to accept the consequences of your choice.
The director advised companies to devise a specific lawful process for granting employee stock options and always follows it. By following a standard options grant process, a company gets fair and transparent results, and there should be no random anomalies to explain. Further, in her opinion, the cost associated with creating a standard process for the award of stock options pales when compared with the costs of backdating to companies involved.