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The Business Scandal Before the Bust

POSTED: 03:39 PM ET, 03/10/2009 by Derek Kravitz

With banks teetering on the brink of failure and Ponzi schemes seemingly being exposed every week, it's easy to forget that a few years ago the biggest financial scandal around involved backdating stock options.

A reminder came this week when the latest in a line of executives was charged with manipulating his options. KB Home chief executive Bruce Karatz was indicted for allegedly orchestrating the backdating of stock options from 1999 to 2006, which made his options worth an extra $1.63 to $4.56 per share.

Illegal stock-option backdating occurs when companies manipulate the dates they award stock options to executives, so the executives can earn the highest possible profit on their shares.

Post business columnist Steven Pearlstein has called such accounting "yet another game played by corporate executives at dozens of companies to pick the shareholders' pockets. And it's the latest evidence of how executive compensation has become a cancer, eating away at the souls of even the most successful American corporations."

In 2006, The Wall Street Journal first reported the use of stock-option backdating at many companies. By the end of that year, backdating was identified at 160 companies (most were resolved without any charges). More than 50 executives were fired or resigned in the scandal's wake.

Three years later, the SEC has charged more than two dozen executives with wrongdoing. Among the most notable cases:

  • Former UnitedHealth chief executive William W. McGuire quit his post in 2006 and settled a lawsuit brought by the Securities and Exchange Commission for $468 million.
  • Former Brocade Communications Systems chief Gregory L. Reyes was convicted in 2007 on 10 securities fraud charges and sentenced in January 2008 to 21 months in prison.
  • Ex-Apple chief financial officer Fred D. Anderson and general counsel Nancy R. Heinen were charged in April 2007 with securities fraud. Heinen was accused of knowingly concealing backdated stock options granted to company executives. Anderson was charged with failing "to take steps to ensure that Apple's financial statements were correct." Both settled with federal regulators.
  • Ex-Comverse Technology head Jacob "Kobi" Alexander was charged by federal prosecutors in 2006 with various types of fraud. The Israeli-born Alexander eventually fled to Namibia, which has no extradition policy with the United States. He was later arrested and still faces extradition hearings.
  • McAfee's former legal counsel, Kent Roberts, was indicted on fraud charges in February 2007 related to the scandal. In July 2007, former Brooks Automation president Robert Therrien was charged with income tax evasion. Both men are fighting the charges.

By Derek Kravitz |  March 10, 2009; 3:39 PM ET Economy Watch
Previous: First Round of Madoff Relief, FBI Sends SOS in Stanford Case, Conflict Issue for Urban Czar? | Next: Madoff Faces Life, Somali Americans Being Recruited and Intelligence Pick Withdraws

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During King George's reign, the Securities and Exchanges Commission (SEC) was rendered ineffective in its duties to oversee the financial investment and management practices by the investment firms - both on and off the Wall Street - in order to let the economy bubble grow and give a false impression of prosperous growth, all the while he was too preoccupied with Iraq, Afghanistan, and Iran.

Posted by: TalkingHead1 | March 10, 2009 4:41 PM

It seems to me that it is not King George's reign we have to be worried about it is the number of officers of the court who seem to think that anything is virtuous as long as no one knows about it and it makes money for them. Shakespeare was right !

Posted by: buckaroo5 | March 10, 2009 6:44 PM

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