Is the Nasdaq going easy on delinquent filers?

The exchange has a clear policy requiring companies to stay up to date when it comes to filing quarterly and annual earnings reports, with the threat of delisting as the ultimate enforcer.

But as the Nasdaq grapples with a wave of companies caught up in the stock-option backdating scandal, it appears that the Nasdaq is being lenient on violators.

Investors will get a better sense of just how lenient this month, as several late filers face critical deadlines.

The clock runs out for both Atmel ( ATML) and Foundry Networks ( FDRY) to file missing financial reports this week.

Marvell Technology Group ( MRVL), which has not filed a complete financial report in the past four quarters, has until June 26.

Unlike previous phases in the delisting process, the latest deadlines appear to offer delinquent filers little hope of reprieve: A company either files its missing reports by the stated date or it loses its listing.

According to some attorneys involved in the delisting process, though, there is little certainty about how the Nasdaq will handle the situation for companies that aren't able to meet the deadlines.

"I think a lot of these will be handled on a case-by-case situation," says Jordan Eth, co-chair of the securities litigation, enforcement and white-collar defense group at the law firm Morrison Foerster.

Companies that miss the deadline by only a week could get a break, reckons Eth. Others that are still months away from filing their reports may not be so lucky.

"The Nasdaq is taking a practical approach to the issue, realizing that what they're facing in this area is widespread and unprecedented, and you can't just take a Procrustean approach," says Eth, who represents companies involved in delisting matters but declined to name which ones.

Nasdaq rules contain a provision allowing the exchange's board of directors to call a special meeting to review any delisting decision -- an exceptional step more along the lines of a presidential pardon than a standard procedure in delisting cases.

Jason Frankl, a former Nasdaq attorney who now works for FTI Consulting advising companies on Nasdaq compliance issues, says that two of his clients at risk of delisting received notices this week calling for the Nasdaq board to review their cases and staying any future delisting actions.

To Frankl's knowledge, this is the first time the Nasdaq board has ever exercised its discretion to step in.

A Nasdaq representative said the exchange does not comment on interactions with listed companies. "We'll have to let our rules speak for themselves," said the representative, referring to the regulations posted on the Nasdaq Web site.

The current situation stems from the backdating controversy, in which many companies, particularly tech firms, retroactively granted stock options on days when the share price was low, thus ensuring a larger potential payoff.

This backdating has captured the attention of the Securities and Exchange Commission as well as the U.S. Department of Justice. Last week, the SEC settled charges with Mercury Interactive (since acquired by Hewlett-Packard ( HPQ)) and Brocade Communications Systems ( BRCD), with the two companies paying penalties of $28 million and $7 million, respectively.

A side effect of the backdating has been the scramble among many companies to review their books for such accounting shenanigans and to restate any necessary past financial results.

As the laborious review process has plodded forward, the unresolved issues in past accounting data have meant that auditors cannot sign off on recent earnings reports.

The resulting delays in filing the reports created the current bind by triggering automatic delisting notices from Nasdaq.

Many companies have won extensions, giving them more time to file their missing reports, by appealing the delisting notices to different rungs of Nasdaq's administrative review ladder.

One such rung -- the Nasdaq Listing and Hearing Review Council -- has already shown itself more lenient than in the past by freezing delisting orders while it considers individual cases.

A section of Nasdaq's Web site about listing qualifications says that the council generally does not exercise its discretion to stay a delisting. But it notes that such stays may be appropriate in stock option accounting cases, given the unexpected nature of the situation, the complexity of the resulting internal investigations and the "enormous" effect the issues could have on the companies and individuals involved.

While a stay can offer temporary protection from the pink sheets, a company must still file the financial reports within the extended time frame granted by the Nasdaq Council. As those extensions now begin to expire, the Nasdaq may have to take a tougher line with the late filers.

Securities-law experts say the delisting rules never contemplated such a situation as the current backdating phenomenon.

Delisting rules exist to protect investors from companies that have ceased providing the market with up-to-date information and whose stock prices therefore no longer match the company's fundamentals, explains Dale Oesterle, a securities-law professor at Ohio State University Law School.

"In the back of Nasdaq's mind must be the view that there's enough information for these prices to still be pretty accurate and that this is a technical disclosure violation and doesn't affect the fundamental aspects of the company," he says.

Laxity and Leeway

The Nasdaq, which makes much of its money from listing and transaction fees, does not want to delist companies, contends Oesterle. Nor does it want companies to move to a competing bourse, such as the London Stock Exchange. He says the Nasdaq seems to be carrying companies that are grappling with backdating issues longer than it normally would for late filers.

"If, for example, you were accused of not filing your reports because of some sort of Ponzi scheme, I don't think they would give you much leeway," Oesterle says.

That's not to say the Nasdaq has not delisted companies for missing filing deadlines. Vitesse Semiconductor and Mercury Interactive are among the delinquent filers that have gotten the boot.

And if the Nasdaq is too lax, the SEC has the power to step in. A spokesman for the SEC said he could not comment on the commission's attitude or its response to the Nasdaq's delisting practices for backdaters.

But he said that the SEC has oversight over the Nasdaq and other exchanges and that part of the oversight involves examining how the exchanges are enforcing their rules.

The next couple of months should be telling.

One person involved in the delisting process estimates that as many as eight companies are facing June deadlines and says that another batch of companies will see the clock run out in July.

Chipmaker Integrated Silicon Solutions ( ISSI) filed the last of its missing financials on Tuesday -- Nasdaq's deadline -- restating $32.1 million in additional stock-based compensation between 1997 and 2006 and escaping delisting in the nick of time.

Atmel, another semiconductor company, said last week that it was on track to file its results by "early June," although the company did not specifically say by June 8, which is the deadline it is running up against.

As more companies near their deadlines, the Nasdaq may find itself forced to make a difficult choice of flexing its muscle or exposing its penalties as empty threats.

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