TechWeek: Mercury's Option Microcosm

Shocking as it is, the scandal shaking Mercury Interactive (MERQE) is merely the latest example of the abuse of stock options by corporate management.

"Don't be surprised at this," comments Lynn Turner, research director of proxy advisory service Glass Lewis and former chief accountant at the Securities and Exchange Commission. "There's no question that what was [allegedly] going on at Mercury was going on at other companies."

What Mercury allegedly did was backdate option grants to executives, including CEO Amnon Landon, CFO Douglas Smith and General Counsel Susan Skaer, allowing them to buy at a more favorable, that is cheaper, strike price. All "were aware of and, to varying degrees, participated in the practices," the company's board said. The three executives resigned Wednesday.

The board reported that from 1995 to the present, "there were 49 instances in which the stated date of a Mercury stock option grant is different from the date on which the option appears to have actually been granted." And -- no surprise here -- in nearly every instance, "the price on the actual date was higher than the price on the stated grant date."

As a former regulator and corporate governance advocate, Turner believes the exact details of what happened at Mercury are less important than what he calls the widespread use of insider information to manipulate the price of options. "Gaming the system is very common," he said. "A year ago ... we looked at this and found dozens of instances of executives using insider information to boost the value of their stock options."

In any case, this may well be a criminal matter, says Ross Albert, a securities lawyer with the law firm of Morris, Manning & Martin and a former SEC special counsel.

Still to be answered: Who did the backdating? "People who did the backdating have greater criminal and regulatory liability," Albert said. He says that backdating documents can be a product of carelessness, but in Mercury's case, "it's hard to believe 49 incidents happened by mistake."