Tech's Backdating Blues

Depending on a particular corporate options plan, backdating isn't necessarily illegal. But regulators are investigating whether the companies involved clearly communicated what was going on to shareholders. Because accounting rules treat options priced at market value differently from those priced below it, regulators are also looking into whether companies misstated their earnings or taxes as a result of the backdated options.

Erik Lie, an associate professor of finance at the University of Iowa, helped to expose the backdating scheme with a research paper published last year. Lie's research indicates that backdating was fairly widespread -- not just the work of a few bad actors.

"There are still more companies that have very strong patterns [indicating that backdating was going on] that have not come out yet," says Lie, though he declined to name any particularly suspicious companies. "It's a big thing, but I don't think we'll see the whole thing ... ever."

Lie and other analysts believe the scandal could metastasize. Most of the scrutiny so far has focused on options grants before 2002 because until then, companies could report options grants weeks or months after the fact. But even though the Sarbanes-Oxley Act requires more timely disclosure of grants, Lie estimates that about 20% of companies haven't done that, meaning that there could be other questionable grants of more recent vintage.

Then there's the age-old issue of when companies report material news. Some research has indicated that companies have timed the release of good and bad news around options grants so as to depress their stocks before the grant and boost it afterward.

The revelations thus far are "probably the tip of the iceberg," says Paul Hodgson, senior research associate at The Corporate Library, an investor research firm and watchdog group.

That's not a good thing for tech. Although some non-technology companies, such as UnitedHealth(UNH Quote), have been accused of backdating options, the scandal to date has had a decidedly tech flavor.

Just last week, for instance, chipmaker Altera (ALTR Quote), chip-equipment manufacturer KLA-Tencor (KLAC Quote), tech-news-and-reviews online publisher CNET Networks (CNET Quote) and integrated-circuits maker Analog Devices (ADI Quote) have disclosed that their stock-granting practices are the subject of regulatory inquiries.

That tech has borne the brunt of the scandal thus far isn't really surprising.