Now that the SEC and the U.S. Attorney in San Francisco have filed both civil and criminal charges against two officers of Brocade, I thought I would speculate about what else might be uncovered as the SEC and criminal investigators start turning over rocks.
There's been a tremendous amount of press about backdating and quite a bit about springloading. I think it's also possible that as all of these investigations continue, another scandal involving option repricing (reissuing the options at a lower strike price as the company's stock price tumbles) could be uncovered at a few unscrupulous companies. It wouldn't surprise me greatly to learn that at some companies, all of the paperwork for early option grants was destroyed and new options were issued at a lower strike price. This would allow companies to grant
Companies are reluctant to simply reprice options at a lower strike price because of the consequences. Institutional investors often have policies requiring them to vote against management's nominees for director if the company engages in options repricing. In fact, many institutional holders will vote against a company's proposed stock option plan unless it specifically prohibits option repricing.
The other consequence of options repricing is messy disclosure. Companies must include in their proxy statement a table showing options repricing. Naturally, companies don't want to include this type of table because it shows that executives could potentially still profit even though the stock price recently fell. If I'm an investor, I don't have the option to tell my broker, "I paid too much last month. I'd like to rescind that transaction and buy ABC Co. stock again at the new, lower price."
The rules regarding back dating and springloading are a little murky and experts disagree on the legal consequences. Regarding repricing, though, the SEC's rules are very clear. It will be interesting to learn whether, as the SEC takes investigative testimony, some companies are actually engaging in repricing without characterizing it as such and without complying with the SEC's rules.