Already fingered by analysts as a potential stock options backdater and sued by shareholders over its past grants, Activision ( ATVI) is now the subject of a Securities and Exchange Commission probe over its options practices. The video game software publisher announced after the bell on Friday that the SEC has notified the company that it has launched an informal inquiry. Activision "intends to cooperate fully and respond to the SEC's inquiry," the company said in a regulatory filing. Additionally, the company has begun its own internal investigation into its past options practices, Activision said in the filing. The internal probe will be headed up by several unnamed independent members of its board. The company didn't say whether the SEC or the internal probe will investigate the backdating allegations made against the company, only that they are looking into the company's past options practices. Shareholders sold off the stock in regular trading on Monday. In recent trading, shares of Activision were down 72 cents, or 5.8%, to $11.75. Stock options were long the currency of choice among high-tech companies, which often gave them to employees instead of cash. Options give employees and executives the right to buy the company's stock at a preset price, typically the market price of the stock on the day they are granted to the employees. However, dozens of companies are now being investigated for handing out options that carried a strike price that wasn't equal to the market price on the grant date. Instead, these companies are accused of picking a past market price that was known at the time to have been a short-term low in the companies' stocks as the strike price for the options. The practice gave the options an inherent -- not just projected -- value at grant.
Backdating isn't necessarily illegal. Instead, federal regulators are investigating whether companies defrauded investors either by not disclosing the backdated grants or by failing to account for them properly. The SEC is
investigating more than 80 companies in connection in its broader backdating investigation. In recent months, the investigations have loomed over the tech sector, which has seen the lion's share of the probes. To date, the investigations have resulted in criminal charges against former executives at Brocade ( BRCD), executive or board turnover at several other companies and numerous shareholder suits. Activision announced earlier this month that it had been sued by shareholders over "purported improprieties" with its past grants. The lawsuit followed several analyst reports that suggested its past grants fit the pattern of those that were drawing the scrutiny of federal regulators. Separately on Friday, Activision reported that it had sharply reduced the number of options it handed out to top executives in its last fiscal year. The company gave CEO Bobby Kottick and co-Chairman Brian Kelly 41,682 options each in fiscal 2006, after giving them each 339,687 the year before. Four other top executives received no options last year after receiving thousands of options the year before. Those executives include both Ronald Doornink, a senior adviser who was moved out of his day-to-day role last year, and Kathy Vrabeck, former president of Activision's publishing division who resigned last September. But they also included George Rose, the company's current general counsel, and Michael Rowe, who heads the company's human relations department. Activision's compensation committee intentionally reduced its overall grants to cut back on the dilution caused by options and to comport with guidelines set by proxy advisor Institutional Shareholder Services, the company said in its proxy statement, filed on Friday.
"As a result, the company has reduced the annual dilutive impact of its stock-based compensation program and, combined with its enhanced operating position, is now better positioned to implement stock option expensing requirements, as and when required," the company said in the proxy statement. But the company has proven it can still be generous. Michael Griffith, who
joined the company last year as the CEO of its publishing division, received 1.3 million options last year and $2 million worth of restricted stock. Robin Kaminsky, who also joined the company last year as an executive vice president in its publishing department, received 266,667 options last year. Meanwhile, executives who saw their options grants reduced weren't exactly left out in the cold. Many saw their cash salaries jump last year. Kottick and Kelly, for instance, saw their salaries rise to $724,730 last year from $494,134 the year before. Activision's stock has generally outperformed those of its peers in the video game sector in recent years. However, the company, like others in the sector has been beset by slumping sales and a worsening bottom line in recent periods, thanks to a tough transition to new video game hardware.