No insider trading seen in options' use

July 07, 2006|By BLOOMBERG NEWS

WASHINGTON -- Companies that build in a profit for executives on stock options by making grants ahead of good news aren't guilty of insider trading, said Paul Atkins, a commissioner at the Securities and Exchange Commission.

Atkins said such maneuvers - which some federal officials say might be criminal fraud - are good for shareholders because directors can issue fewer options to reward executives knowing the price will rise, and then can pay lower salaries.

"It is cheaper to pay a person with well-timed options than with cash," Atkins said during a speech at a corporate governance forum yesterday. He said timing the grants gives companies "the biggest bang for the buck."

More than 60 companies have disclosed probes, including 40 grand jury investigations, into whether options were timed to coincide with days when prices were low. Such timing might undermine the purpose of options, which are supposed to encourage executives to find ways of making their stock go up. At least 17 people have been fired or quit in connection with options probes.

"Spring-loading," or issuing stock options ahead of good news, isn't insider trading, Atkins said, because no one is harmed.

"It benefits shareholders because fewer stock options are granted," he said, calling it a matter of business judgment. "Who are we to second-guess that decision? Why isn't that decision in the best interests of shareholders?"

Atkins is one of five commissioners at the SEC, which has begun inquiries into options issued by four dozen companies. Chairman Christopher Cox has said options timing "cuts the connection" between the grant and the incentive for better performance.

Representatives of pension funds didn't agree that options timing would result in less pay for chief executive officers and more benefits for investors.

"It's also true that if you let your employees steal from the cash register, you don't have to pay them that much," said Damon Silvers, associate general counsel at the AFL-CIO in Washington, whose members hold more than $400 billion of union-sponsored pension funds.

"I'd always understood stock options as designed to give incentives for long-term growth - not something to be passed out like candy based on good news coming out in a couple of days," said Con Hitchock, outside counsel to the LongView Funds run by the Amalgamated Bank of New York. The funds manage more than $10 billion in assets.

"The other shareholders are being diluted and disadvantaged by stock options being issued at favorable prices," said Alastair Ross Goobey, chief executive of Hermes Pensions Management in the United Kingdom.

The International Corporate Governance Network, a London-based group that represents U.S. and foreign institutional investors with more than $10 trillion in assets, plans to ask the SEC to ensure that its new executive pay rules prevent companies from manipulating the timing of stock option grants, said Ted White, chairman of the group's remuneration committee.

The network, which sponsored the forum, wants members to approve executive pay guidelines that recommend companies issue stock options at the same time each year, and adopt a formal method for establishing the strike price of stock options.

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