Next Wave of Corporate Scandal?

In what could be the start of the next big wave of corporate scandals, two executives of Brocade Communications (a maker of data storage networking products, out of San Jose, California) have been charged in a criminal complaint with fraudulently backdating stock options. Christopher Cox, chairman of the SEC, says it’s illegal to forge documents or lie to corporate directors and shareholders about option grants. BUT that still leaves a huge gray area. Suppose a company fully discloses, but still backdates? Remember that Cox’s fellow SEC commissioner, Paul Atkins, argued in a recent speech that companies that manipulate the timing of their executive options may not be guilty of violating the securities laws because they end up saving their companies money. He conceded that back-dating executive stock options, or timing them so they can be exercised just before the company issues a positive quarterly earnings report that raises share values, does create a windfall for executives. But precisely because of this windfall, he said, companies are able to compensate their executives more cheaply. They can issue fewer stock options or provide lower salaries. So by timing stock options this way, companies end up saving money, and investors pocket the savings. Extending this logic, Atkins’ argument would seem to make back-dating completely legal, as long as a company disclosed to its shareholders what it was doing.