The US corporate world is being roiled by a scandal on bloated stock-option payments that has its epicenter in the Silicon Valley but ripples nationwide with a threat of big-wig arrests.
The first salvo of a prosecutors' campaign that may target 80 companies was fired on Thursday with the filing of securities fraud charges against Brocade Communications Systems former chief executive Gregory Reyes and former vice president of human resources Stephanie Jensen.
Allegations focus on options backdating, an obscure practice of manipulating the dates on an option that gives employees the right to buy shares at a set price to make the profits more lucrative.
Under the scheme, the options' original "strike dates" would be brought back through paperwork manipulation to a point in time when the stock price was lowest, so the recipient could reap the maximum profit at the time of sale -- a lucrative deal during the late 1990s technology stocks extravaganza.
The charges do not allege that Reyes and Jensen did this to enrich themselves, but rather to attract employees amid stiff competition for qualified computer engineers during the recent tech boom that engulfed Northern California.
But they still face up to 20 years in prison and US$5 million in fines.
"The criminal charges filed today allege that this back-dating scheme contributed to the restatements of hundreds of millions of dollars of Brocade's financial results," US Attorney Kevin Ryan said on Thursday in San Francisco.
"It is integral to the public trust in our financial markets that books and records are maintained honestly, and that the true financial condition of public companies is disclosed accurately," he said.
US Securities and Exchange Commission (SEC) Chairman Christopher Cox said the stock-option backdating scheme was carried out at Brocade for four years, ending in 2004.
The tactic doled out illicit rewards to hundreds of employees and inflated Brocade's earnings by more than a US$1 billion in one year alone, he said.
"It strikes at the heart of confidence in financial markets and deceives share holders," Cox said of stock-option backdating. "It is poisonous to an efficient marketplace."
The practice is not illegal if it is revealed to shareholders and recorded in the company's accounts. The SEC alleges this was not the case with Brocade.
Ongoing SEC investigations into reports of the practice at more than 80 companies nationwide is expected "to lead to more enforcement actions in the coming weeks and months," Cox said.
The probes are unwelcome news in a corporate world just calming from the storms created by the Enron and WorldCom scandals. The great names of US business like Apple Computer and The Home Depot have already been linked to the inquiry.
The high-tech sector clustered around San Diego may be the biggest target, with some two dozen companies all located no more than a few kilometers from each other all within the SEC's sights.
RBC Capital Markets said on Friday in a research note that stock-market repercussion from the scandal could affect the entire tech sector this year.
One recent study said 29.2 percent of US businesses had at one stage backdated or similarly manipulated their stock options between 1996 and last year.
The practice was most prevalent among small and tech-sector companies and other enterprises with volatile stock prices, said the authors of the study, Randall Heron of Indiana University and Erik Lie of the University of Iowa.
But their study concluded that only a small minority of those who practiced backdating will ever be prosecuted because of the difficulty of determining an illegal practice.
Some companies, for example, may try to cover up the practice by choosing only the second-lowest stock price for the backdate option strike date.
Others may have had several simultaneous backdated stock option plans running at the same time and may in the end have chosen one over another.
In the emerging scandal the Wall Street Journal recently suggested that some of the backdaters profited from the market plunge that followed the Sept. 11, 2001 terror attacks.
Merrill Lynch, which lost three employees in the attack on the World Trade Center, reportedly granted its president on Sept. 24 options to buy more than 750,000 shares, at a price 15 percent below the pre-attacks level.
ROLLER-COASTER RIDE: More than five earthquakes ranging from magnitude 4.4 to 5.5 on the Richter scale shook eastern Taiwan in rapid succession yesterday afternoon Back-to-back weather fronts are forecast to hit Taiwan this week, resulting in rain across the nation in the coming days, the Central Weather Administration said yesterday, as it also warned residents in mountainous regions to be wary of landslides and rockfalls. As the first front approached, sporadic rainfall began in central and northern parts of Taiwan yesterday, the agency said, adding that rain is forecast to intensify in those regions today, while brief showers would also affect other parts of the nation. A second weather system is forecast to arrive on Thursday, bringing additional rain to the whole nation until Sunday, it
CONDITIONAL: The PRC imposes secret requirements that the funding it provides cannot be spent in states with diplomatic relations with Taiwan, Emma Reilly said China has been bribing UN officials to obtain “special benefits” and to block funding from countries that have diplomatic ties with Taiwan, a former UN employee told the British House of Commons on Tuesday. At a House of Commons Foreign Affairs Committee hearing into “international relations within the multilateral system,” former Office of the UN High Commissioner for Human Rights (OHCHR) employee Emma Reilly said in a written statement that “Beijing paid bribes to the two successive Presidents of the [UN] General Assembly” during the two-year negotiation of the Sustainable Development Goals. Another way China exercises influence within the UN Secretariat is
LANDSLIDES POSSIBLE: The agency advised the public to avoid visiting mountainous regions due to more expected aftershocks and rainfall from a series of weather fronts A series of earthquakes over the past few days were likely aftershocks of the April 3 earthquake in Hualien County, with further aftershocks to be expected for up to a year, the Central Weather Administration (CWA) said yesterday. Based on the nation’s experience after the quake on Sept. 21, 1999, more aftershocks are possible over the next six months to a year, the agency said. A total of 103 earthquakes of magnitude 4 on the local magnitude scale or higher hit Hualien County from 5:08pm on Monday to 10:27am yesterday, with 27 of them exceeding magnitude 5. They included two, of magnitude
Taiwan’s first drag queen to compete on the internationally acclaimed RuPaul’s Drag Race, Nymphia Wind (妮妃雅), was on Friday crowned the “Next Drag Superstar.” Dressed in a sparkling banana dress, Nymphia Wind swept onto the stage for the final, and stole the show. “Taiwan this is for you,” she said right after show host RuPaul announced her as the winner. “To those who feel like they don’t belong, just remember to live fearlessly and to live their truth,” she said on stage. One of the frontrunners for the past 15 episodes, the 28-year-old breezed through to the final after weeks of showcasing her unique