Corproate stock option scandals may bear legal fruit

The corporate stock option scandal continues to grow. Hundreds of companies have been accused of issuing stock options to execs and backdating them to a time when the stock price was lower than it is at the time they actually were issued. Automatically, the options are valuable--the execs can't lose.

And there's another form of option fraud brewing on the back burner for the moment: "spring loading" options," which means deliberately issuing the options to the execs a day or two before the company announces some real good news that makes the stock price go up. Again, the execs can't lose.

But there was a very important legal ruling made in a Delaware Chancery Court recently, that may signal the start of a real legal remedy for stockholders of the companies that played these games.

DIRECTORS of US companies involved in the options backdating scandal could be vulnerable to lawsuits and damages claims from disgruntled shareholders following two decisions by an influential Delaware court.

The recent rulings by the Chancery Court of Delaware, the state where most US companies are registered, are likely to make it easier for investors to press forward with cases alleging that directors' approval of backdated stock options breached their fiduciary duty towards shareholders.

The options scandal already has engulfed 200 companies and several executives, including former Monster Worldwide general counsel Myron Olesnyckyj, who pleaded guilty to securities fraud and conspiracy in federal court in New York on Thursday.

In a Delaware case involving Californian chip maker Maxim Integrated Products, Judge William Chandler ruled that former chairman and chief executive John Gifford and six past directors must face a "derivative lawsuit" filed by shareholders.
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In a separate case, against Tyson Foods, the court raised the possibility that directors who received "spring-loaded" grants - options awarded just before positive news announcements - could face damages claims.

Judge Chandler's decision to allow the Maxim derivative lawsuit to go forward puts additional pressure on directors at other companies where options backdating occurred.

The best news is that the Chancellor indicated that "spring loading" is also illegal. Up to now, the SEC has shown absolutely no desire to even investigate spring loading, and, according to Floyd Norris in a piece for the NY Times titled Option Lies May Be Costly For Directors on Feb. 16, one SEC commissioner has "suggested" that spring loading is "just fine with him."

What really burns my butt here is that "cut labor costs" has long been a mantra in business, on Wall Street, and in Business schools across the country. CEO careers have been made on reducing a company's work force to a fraction of what it used to be.

But the last I looked, corporate executive salaries were also a form of labor costs, even though they get hidden from view by burying them in overhead, rather than assigning them to a direct cost of producing the company's product. So cut--cut--cut when it's the people who actually produce something, but fraud--fraud--fraud to reward the people who....do the cut--cut--cutting.

Slime. Absolute slime. And kudos to Chancellor Chandler for his wisdom and courage in making the ruling that has undoubtedly scared the bejesus out of thousands of CEOs and Directors.