Backdating Buzz Only So Much Noise

The barrage of options relevations seems to be having an overall numbing effect on investors.
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The options-backdating scandal continues to metastasize, but investors seem to be growing less concerned.

This past week, a slew of companies, including

Cablevision

(CVC)

,

Apple Computer

(AAPL) - Get Report

and

Nvidia

(NVDA) - Get Report

reported bad news about their historical options grants, either admitting problems for the first time, reporting worse-than-expected problems, acknowledging regulatory investigations or delaying the filing of quarterly reports because of ongoing probes.

But investors have reacted rather calmly to most of this recent news. In most cases, companies' stocks dropped only slightly, if at all. And while the broader markets fell this week, some of the sector indices that focus on tech -- which has been

hard hit by the backdating scandal -- were actually up at the end of the week.

Investors seem to be getting inured to the issue due to the sheer number of companies that have announced options problems thus far, say analysts. The

Securities and Exchange Commission

, for instance, has said that it is

investigating more than 80 companies over their past options grants, and that total may not include numerous other companies that have more recently admitted problems or been targeted by outside probes.

"That's the case with almost anything: The more times you hear the story, the fewer times you pay attention to it," says Sam Stovall, chief investment strategist at Standard & Poor's.

Investors certainly had a lot to ignore this week. Among some of the options problems that cropped up:

  • Federal authorities filed criminal and civil charges against former executives of Comverse Technologies (CMVT) . The charges mark the second round of indictments in the broader backdating probe.
  • Apple, CNET (CNET) - Get Report, UnitedHealth (UNH) - Get Report, Redback (RBAK) , CA (CA) - Get Report, Xilinx (XLNX) - Get Report and several other companies officially filed to delay their quarterly reports, citing ongoing investigations into their past options grants.
  • THQ (THQI) announced that it is the subject of an SEC investigation into its options-granting practices.
  • Electronic Arts (ERTS) said that it was the subject of a shareholder suit over alleged backdating of past grants.
  • Cablevision, Juniper Networks (JNPR) - Get Report, Nvidia, Sepracor (SEPR) and Alkermes (ALKS) - Get Report said they'd found problems with their past options and were investigating.

Potentially prompting the raft of revelations was the fact that many companies are facing due dates for filing second-quarter reports with the SEC. With the broader scrutiny of options, many firms have launched their own internal reviews of their past grants, many of which have found problems big enough to affect historical financial reports.

The broader investigation has focused on the backdating issue, in which corporate insiders are accused of retroactively assigning to options a grant date on which their company's stock was known to have hit a short-term low.

Backdating isn't necessarily illegal. Instead, federal authorities are focusing on whether corporate executives defrauded investors by not adequately disclosing backdated options or by not accounting for them properly. Regulators

expect to file charges against officials at a growing number of companies in addition to Comverse and

Brocade

(BRCD)

.

But despite the seriousness with which federal authorities are addressing the issue, investors seem to have started tuning it out. Take Nvidia, for instance. The graphics chipmaker's stock traded off as much as 10% in after-hours trading on Thursday after it warned of its options problems. But in late trading on Friday, the company's stock was off less than 3%.

Meanwhile, shares of EA were actually up 3% on Friday, despite its announcement the day before of the options-related shareholder suit.

"Maybe people are becoming immunized given how pervasive it seems," says Ken Broad, a portfolio manager at Delaware Investments who has long followed issues related to stock options.

But it's not just the sheer number of companies under investigation that seems to have investors complacent. It's a sense that for many, if not most, companies, the options problems will have a limited impact, say analysts.

The bulk of the options problems identified thus far happened before the Sarbanes-Oxley law went into effect in 2002. So, while many companies will have to restate their past results, it's unlikely that they are going to find any recent problems, analysts say.

Moreover, for many companies, the executives in charge during the alleged options problems are long gone. So, while the company may end up having to pay a fine for the past troubles, ongoing operations will likely be undisturbed, analysts argue.

"The real story here is that there's not a material impact to what occurred at these companies in the last several years," says Owen Fitzpatrick, head of U.S. equities at Deutsche Bank Private Wealth Management.

At companies where options problems might lead to the departure of current executives, that might be an issue. But, he adds, "at most companies, that's not the case."

But some analysts warn that investors ignore the options problems at their own peril. Broad, for instance, notes that many of the companies involved in the backdating scandal were prolific in their use of options and opposed options expensing, neither of which was in the best interest of shareholders.

"There's a strong correlation between bad behavior and companies that have

backdating problems," he says.

And while investors may be growing numb to the options scandal, federal regulators certainly are not, says Pip Coburn, a portfolio manager and consultant at Coburn Ventures. That means that the issue will likely stay in the headlines -- and the news could get worse for some companies.

Federal prosecutors "are doing their jobs finding the bad guys. They want to make their point that

backdating is not OK just because everyone else was doing it," he says.