Options Prosecutions May Be Weak, But Backdating Was Still Wrong

Rob Hof

My colleague Peter Burrows has a story in this week's issue making the case that stock-options backdating cases may prove weaker than they look. He may well be right. But I still can't get past the persistent claims by some implicated companies and executives that backdating isn't really much of a crime. From the story:

"My prediction is that a lot of these cases are going to prove to be a lot murkier in terms of criminality than the seemingly stark allegations as they initially emerged," says Larry E. Ribstein, a law professor at the University of Illinois. "There will be difficulties finding out who did what and whether they knew it was wrong."

That view is affirming to many executives in Silicon Valley who view the options backdating issue as a media-driven witch hunt. Many privately argue that the guidelines for setting option prices provided wide discretion to senior management and boards pre-Sarbanes-Oxley. The practice was widespread and often authorized by lawyers and accountants. And in many cases the backdating had little impact on the company's shareholders.

Please. A lot of Valley execs knew backdating was wrong, because it's misleading no matter how much you try to explain it away by saying "everyone was doing it." Fact is, many companies purposely didn't do it because it smelled bad. And the notion that nobody benefited and shareholders didn't get hurt is absurd.

I can't judge whether former Brocade CEO Greg Reyes' particular actions means he's guilty or innocent. That's up to the court. But he can afford to pay $1 million a month to his 20-person defense team largely because he made big bucks at Brocade. He did that by selling stock whose price was artificially inflated at least partly because, thanks to the unreported backdating of options, investors thought the company was making more money than it actually did. I'm betting a lot of current and former Brocade shareholders feel there was more than a "little impact" on their since-deflated shares.