Backdating Battle Focuses on Fraud

Six months ago, few investors were likely worried about -- or had even considered -- the issue of stock-options backdating.

But in recent months, the issue has become a huge trouble spot for the markets in general and for the technology sector in particular. Dozens of companies are now under investigation by federal regulators in the scandal.

As a result, many have seen their shares plunge and some have seen upheavals in their executive suites and boardrooms.

Now officials at one company, Brocade (BRCD Quote), are facing criminal and civil charges. Watch out, warns Linda Thomsen, who heads the enforcement division at the Securities and Exchange Commission, there's more to come.

According to Thomsen, the issue is all about defrauding investors. Companies involved in the scandal are accused of essentially gaming the stock-options system by giving executives and employees grants to buy company stock at prices that were known months after the fact to be short-term lows.

That alone wasn't illegal; what potentially was, however, was that companies didn't disclose those favorable grants to investors or account for them correctly in their earnings reports.

After the government's press conference last week in which charges were announced against the former Brocade executives, TheStreet.com spoke with Thomsen about how the SEC is approaching the backdating issue and where the investigations might lead.

TheStreet.com: You have said that the SEC has 80 ongoing backdating investigations. If the overall backdating scandal is an iceberg, what portion of the iceberg are we seeing with those 80 probes?

Linda Thomsen: I don't think we know yet. I do think people are acutely focused on it now.

Is there any sense that the discovery of new backdating cases is winding down?

In terms of ongoing conduct, I think for a variety of reasons -- not the least of which is Sarbanes-Oxley -- it's winding down. In terms of past conduct, I'm just not certain.

The government is taking a heavy hand against the people in the Brocade case, filing criminal and civil actions against them. Will you approach each of the cases the same way, or do you see the possibility that there might be different gradations of backdating behavior? There have been reports, for instance, that some backdating was done following a favorable opinion from an auditor.

That's why we do these cases at a micro-level -- case by case, all the evidence. Our focus is going to be ... on fraudulent behavior. And we will look at all the conduct. We will look at efforts people made to comply. We will look at the roles of lawyers and accountants, at the end of the day.