The NASPP Blog

April 13, 2010

Stock Option Slushies

Just when it feels like we’ve put the stock option backdating scandal behind us, another story comes along that catches our attention. The current option backdating flavor of the week is Comverse Technology: an action-packed story that involves option slush funds, an executive on the lam, and disgorgements in the millions of dollars.

Comverse Technology:  Value Added Option Backdating
Comverse Technology engaged in the usual backdating procedures under which the CEO and CFO would “cherry-pick” (the SEC’s words) grant dates by looking back at historical stock prices and choosing a date with a low price. The compensation committee minutes were then backdated to reflect that the grants had been approved on that date, even though the committee did not meet to approve the grants until later (sometimes as much as six months later). Snore, right? What self-respecting backdating company didn’t do this?

But, Comverse added their own creative twist. They also created an options “slush fund” (also the SEC’s words) by submitting options grants to fake employees for comp committee approval. These grants were then held in a special account in the stock plan database. The name on the account was originally “I.M. Fanton,” which we thought stood for “phantom stock options,” but Adam Kasfield of Courthouse News Service says was for the play “The Phantom of the Opera.” I guess whoever set up the account was a movie buff, because the name on the account was later changed to “Fargo.”

The “slush fund” options were re-allocated to Comverse employees at the descretion of the then CEO.

All Settled?

At this point, the SEC’s case against Comverse has been settled. The company itself seems to have cooperated enough with the SEC’s investigation to escape with minimal penalty, but the former CFO and General Counsel consented to judgements in excess of $2 and $3 million, respectively, and are barred from serving as officers of public companies.

In an interesting twist, the former CEO is a currently a fugitive–he never returned from a family vacation outside the United States. Who would have thought stock option backdating would lead to such drastic measures (although apparently Comverse was involved in some other accounting irregularities that may have contributed to the ex-CEO’s escapism)?

Why Now?

So why has this come up now? Because, on top of everything else, a Section 16 claim has been filed against a corporate insider at Comverse that received some of the “slush fund” options.

The insider exercised the option and sold the underlying stock within a period of less than six months after the grant. If the grant had been properly approved, this would have been fine. But since the grant wasn’t properly approved, and since the shares underlying the grant were not held for six months, the grant is considered a non-exempt purchase for Section 16(b) purposes. As such, it can be matched against the sale (and any of the insider’s other sales in the six months before or after the grant date) to trigger short-swing profits recovery. The profits in this case are $4,000,000.

The Moral of the Story

I think we already know most of the lessons that can be learned from this: don’t backdate options, don’t create option slush funds–or, if you do, at least use account names that aren’t so obvious. And, if you receive suspicious grants and you are subject to Section 16, wait at least six months before you sell the underlying stock. But, even with these ho-hum lessons learned, this has been a far more action-packed blog than the topics I usually write about.

Read the SEC Complaint Against Comverse.

Domestic Stock Plan Design Survey Extended
Due to overwhelming demand, we have extended the deadline to participate in the 2010 Domestic Stock Plan Design Survey until Friday, April 23.  But don’t wait any longer–we absolutely will not be able to extend this deadline again. 

Just a Few Days Left for Conference Early-Bird Discount
You only have until this Thursday, April 15, to take advantage of the $300 early-bird discount on the 18th Annual NASPP Conference.  The Conference will be held from September 20-23 in Chicago.  Last year’s Conference sold out and we expect even more attendees this year.  Don’t count on the early-bird deadline being extended–register today!

Finish the 2010 Domestic Stock Plan Design Survey by April 15 and you can receive an additional 10% off the early-bird rate.

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog. 

– Barbara