With a ferocity that has caught almost everyone by surprise—and left executives and boards alike scrambling to double-check their compensation practices—Corporate America has found itself under suspicion for rigging equity compensation to enrich managements at the expense of shareholders. A scandal that started last fall at a few companies has since enveloped dozens more from coast to coast.
The precise issue is whether companies manipulated the timing of past stock option grants to benefit executives. The current probes—and the Securities and Exchange Commission and the Justice Department have launched many of them—appear to target two practices, according to Darryl Rains, co-chairman of the securities litigation practice at Morrison & Foerster. First is actual backdating: the recording of grant dates at times earlier than they were actually given, to inflate the value of the options. The other practice under scrutiny is timing grants to occur prior to the announcement of good news, in advance of expected increases in a company’s stock price.
