Delisting Risk Dogs Backdaters

Pink is the real color of backdating.

That's because the Pink Sheets, long the home of penny stocks, are where many of the companies embroiled in the backdating affair may wind up.

While the jury is still out regarding the legal fine points of backdating stock options, regulations governing the timely filing of financial reports have triggered a wave of delisting notices being sent to companies that delayed earnings reports as they review stock-option accounting practices.

For many of these companies and their investors, the delisting notices represent the beginning of an unpredictable process to avoid a fate typically reserved for only the most severe financial basket cases.

The last major wave of stock delistings followed the dot-com crash, when companies that couldn't keep their share price above $1 were ejected from the Nasdaq. This time around, however, many companies facing exile appear to be in otherwise sound operational shape and represent a significant chunk of shareholder capital.

Some are part of indices, such as the S&P 500, and consequently, are widely held in mutual funds.

The effect of potentially delisting such a wide swath of companies for filing delays rather than financial distress remains to be seen, says Stanford Law School professor Joseph Grundfest.

"We don't have experience with a set of events of this sort," Grundfest says.

Of course, whether Nasdaq will actually delist all companies that have missed deadlines is still an open question.

Late Tuesday, chipmaker Altera(ALTR), which has a market cap of $6 billion, was conditionally allowed to remain on the Nasdaq, provided it meets certain new filing deadlines. The decision followed the company's appeal in June to a special Nasdaq panel in Washington.

Semtech(SMTC), another chipmaker which has postponed its quarterly earnings report as it looks into past stock-option practices, said in late July that it would appear before Nasdaq's special tribunal within two weeks.