Sept. 27 (Bloomberg) -- The scandal over backdating stock options, used by companies to reward top executives with shares granted at below-market prices, has so far cost investors at least $7.9 billion in market value.

More than two-thirds of 117 companies that announced investigations into their options grants by Aug. 31 fell in the stock market the next day, data compiled by Bloomberg show. The declines sliced an average 2.6 percent from their market value, 2.5 percentage points more than the average return on the same day for Standard & Poor's and Bloomberg indexes of similar companies.

The losses add grist to 220 investor lawsuits against 70 companies, including Apple Computer Inc. and Home Depot Inc., which demand restitution and damages. The inquiry into backdating and fortuitous timing of option grants rivals the probe three years ago into improper mutual-fund trading, which led to $4.3 billion in penalties.

``It's yesterday coming back to haunt you today,'' said Howard Silverblatt, equity market analyst at Standard & Poor's in New York. ``It's another blow against corporate governance and another reason why individuals will find it difficult to have trust and faith in management.''

Companies grant options to give executives an incentive to boost the stock price. The U.S. Securities and Exchange Commission and the Justice Department are looking at whether the companies backdated grants to coincide with days when the stock price was low, giving recipients a built-in profit, and cases where they may have failed to properly account for awards.

Probe Costs Jobs

Backdated options that aren't disclosed can hide compensation costs from shareholders, distort income taxes and earnings and thus obscure a company's financial statements, prosecutors and regulators said. At least 19 companies including Broadcom Corp. and Applied Micro Circuits Corp. already have restated profits by $2.5 billion. More than 30 companies have said they may revise earnings, among them Cablevision Systems Corp. and Cheesecake Factory Inc.

Probes also have cost about 20 executives and directors their jobs at more than a dozen companies, such as Gregory Reyes, chief executive officer at San Jose, California-based Brocade Communications Systems Inc., the world's largest maker of switches for storage networks, and Kent Roberts, general counsel at McAfee Inc., the Santa Clara, California-based maker of anti-virus software.

Five former executives at two companies face criminal charges, including Reyes and Kobi Alexander, ex-CEO of New York- based Comverse Technology Inc.

Peer Performance

Investment returns are based on a Bloomberg analysis of companies that disclosed probes from Jan. 1 to Aug. 31. Companies that announced probes before 2006 or after August weren't included. Stock prices were measured for a day, a week and a month, starting from the day the company first disclosed an investigation through Sept. 1.

The analysis then compared those returns to a peer group using an S&P index composed of similar companies. In three cases where an S&P peer group didn't match closely, a Bloomberg index was substituted. Houston-based Crown Castle International Corp. and Boston-based American Tower Inc., which own communications towers, were compared with the 110-member Bloomberg U.S. Communications Index. Stolt-Nielsen SA, a London-based shipping company, was compared with the 13-member Bloomberg Dry Ships Index.

Some of a stock's movement might have been explained by issues affecting the entire industry or market. To account for this, the calculation of how much a stock rose or fell, and how much its market value changed, was adjusted by subtracting the movement of market indexes of similar stocks on the same day.

Monster Decline

In the case of Monster Worldwide Inc., the New York-based job service, the stock's 8.1 percent loss on June 12 cut the company's market value by $433.9 million. Since its peers lost 1.8 percent that day, just 6.3 percentage points were attributed to the options announcement, reducing the loss of market value to $339.7 million, according to Bloomberg data.

The adjusted decline in market value totaled $7.9 billion for all companies on the first day of trading. Unadjusted, the total would have been $10.8 billion.

The review didn't consider the effect of accusations made by researchers, news reports and lawsuits -- many of them unsubstantiated -- which sent some stocks tumbling before formal announcements.

First-Day Trading

Shares of 78 of 117 companies fell in the first trading day, and 80 trailed their peers. The biggest declines included QuickLogic Corp., a Sunnyvale, California-based developer of low-power programmable microchips, on July 27, and SafeNet Inc., a Belcamp, Maryland-based maker of products to protect computer communications, on May 19. Their shares tumbled 22 percent on days when indexes of similar companies were little changed.

After a week, 62 of 114 stocks hadn't recovered and 71 of them lagged behind their peers. The entire group posted an average weekly loss of 2 percent, trailing their respective peers by 2.6 percentage points.

In addition to SafeNet and QuickLogic, the worst performers included Comverse, the world's largest maker of voice-mail software. Its shares fell more than 21 percent in the week following the company's March disclosure, and trailed the 115- member S&P Supercomposite Technology Hardware and Equipment Index by 26 percentage points.

The stocks slid an average 5.6 percent after a month, and trailed their peers by 4.3 percentage points. Shares of 53 of 79 companies that compiled 30-day records by the review's cut-off date sold for less than their pre-announcement levels, and 51 lagged behind their benchmarks.

Fleeting Damage

Vitesse Semiconductor Corp. fell the most, losing 52 percent in the 30 days after the Camarillo, California-based designer of microchips for computer networks said on April 18 it was investigating its options grants. The 39-member S&P Supercomposite Semiconductors Sub-Industry Index fell 4 percent, according to Bloomberg data.

For some companies, the damage proved fleeting. Asyst Technologies Inc., a company in Fremont, California, that makes semiconductor equipment, fell 4 percent June 14, a day when similar companies rose 1.7 percent. The gap with its peers widened to 8.6 percentage points after a week. By mid-July, though, Asyst shares were 11 percent above the pre-announcement level, and almost 13 percentage points ahead of its rivals.

The shock value of the revelations may also be wearing off. The average one-day loss for the first 30 companies to disclose investigations, from March 14 to May 25, was 2.9 percent, or 2.8 percentage points worse than their peers. The last 30 disclosures as of Aug. 31 prompted an average decline of 1 percent, trailing peers by 1.2 percentage points.

Hardest Hit

Some of the hardest-hit companies, including Comverse and Vitesse, have changed their top management. Alexander, Comverse's founder, became a fugitive after failing to appear to face charges in August stemming from the backdating probe. He was captured in Namibia, the U.S. Attorney's office said today.

Vitesse, which fired CEO Louis Tomasetta and two other top officers on May 17, faces probes by an internal panel, the SEC and the Justice Department, more than a dozen investor lawsuits and pressure from hedge funds to repay debt immediately because it violated bond agreements.

Price declines reflect doubts by investors about management's integrity, said Charles Di Bona, a software analyst at Sanford C. Bernstein & Co. in New York. He said investors remain wary even after top executives have been replaced.

``Companies that are inclined to do this don't necessarily have shareholders' interests at heart,'' said Di Bona, ranked among the industry's top three analysts by Institutional Investor magazine. ``There are easier ways to make money than taking a gamble that conditions have changed.''

Most Are Honest

The problems remind investors of ``greedy and venal'' executives, said Bill Riegel, chief equity manager at New York- based TIAA-CREF, which oversees $380 billion of assets. ``It gives me some pause.''

Most managers are honest, Riegel said, and that might make the declines of some companies a chance to buy. He cited shares of Apple Computer, the Cupertino, California-based maker of iPods and computers, which TIAA-CREF already owns.

Apple said June 29 it was investigating stock-option grants, including an award to CEO Steve Jobs. The stock dropped more than 6 percent in the next week. The stock has since gained 37 percent, compared with 9.7 percent for the S&P index that tracks computer and peripheral equipment makers.

``The market has a tendency to overshoot on fear,'' Riegel said.

Largest one-day losses after stock-option disclosures, ranked by
performance against peer group.

Company                   Date  Next    Chg      % Chg    + / -
                                Close                    Peers
SAFENET INC.              5/18  $14.93  -4.28    -22.3%  -22.8%
QUICKLOGIC CORP.          7/26  $3.14   -0.90    -22.3%  -22.7%
COMVERSE TECHNOLOGY INC.  3/14  $24.85  -4.30    -14.8%  -16.5%
BLUE COAT SYSTEMS INC.    7/14  $14.08  -2.83    -16.7%  -16.5%
M-SYSTEMS LTD.            6/1   $28.90  -4.55    -13.6%  -15.2%
ATMEL CORP.               7/25  $4.22   -0.60    -12.4%  -13.7%
SAPIENT CORP.             8/8   $4.52   -0.68    -13.1%  -13.1%
RSA SECURITY INC.         5/19  $15.15  -2.12    -12.3%  -12.1%
COMPUTER SCIENCES CORP.   6/29  $48.56  -7.32    -13.1%  -12.1%
INTEGRATED SILICON SOLU.  8/9   $4.56   -0.47    -9.3%   -11.0%


Notes
Table includes companies with starting market value of at least
$100 million.

To contact the reporter on this story:
Rick Green in New York at 
rgreen18@bloomberg.net.

Last Updated: September 27, 2006 12:36 EDT