Thursday, September 07, 2006

Groups facing stocks probe tops 100

Groups facing stocks probe tops 100
By Jeremy Grant in Washington
Copyright The Financial Times Limited 2006
Published: September 7 2006 03:00 | Last updated: September 7 2006 03:00

Lawmakers raised concerns yesterday that US tax laws might have created an incentive for companies to cheat shareholders, as the number of US companies caught up in a federal probe into the backdating of stock options swelled to more than 100.

Christopher Cox, Securities and Exchange Commission chairman, disclosed the number of companies being investigated at one of two Senate hearings into the issue that were held yesterday - a sign of the issue's growing importance in Washington as November's mid-term elections approach.

Questionable use of stock option compensation was thrust into the spotlight six months ago after it emerged that scores of companies - either by failing to do the proper accounting or make the necessary disclosures to shareholders - appeared to have improperly awarded options with a lower exercise price than on the day the award was made.

Chuck Grassley, an Iowa Republican who chairs the Senate finance committee, said the alleged behaviour struck him as "disgusting and repulsive".

"It is behaviour that ignores the concept of an honest day's work for an honest day's pay," he said.

Both Republican and Democrat lawmakers expressed concerns that a tax law passed in 1993 might have helped fuel instances of backdating by encouraging the use of stock-based compensation in favour of cash payments.

The law allowed companies to deduct for tax purposes compensation for senior executives up to $1m annually, but excused performance-related pay - such as stock options - from that limit.

Bob Bennett, a Utah Republican on the Senate banking committee, said: "We may in Congress have created an incentive to cheat."

Mr Cox said that the 1993legislation was intended to"control the rate of growthin CEO pay" but now "deserves pride of place in the museumof unintended consequences".But he said that while it was "relevant to talk about the tax code" when it came to discussing the incentives to use options, "people who are backdating and who are doing it wrongly, intentionally illegally, are hell-bent on breaking the rules no matter what, so it might be a logical leap too far to suggest some causal relationship there".

Asked whether backdating should be prohibited, Mr Cox pointed out that the practicewas "not really defined in the law".

But he said a "statutory prohibition" would be "completely in order" if lawmakers and regulators could first agree on a precise definition.

Mr Cox said the SEC hadadequate resources to handle a growing stock-options case load. But he warned there had been an "opportunity cost" in terms of the regulator's ability to carry out other functions as the SEC had decided to make stock options a priority.


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