Backdating Likely More Widespread

By MARK MAREMONT

The majority of companies that improperly backdated stock options never were caught by regulators or confessed to the practice, according to a new academic study.

Researchers at the University of Houston's C.T. Bauer College of Business used a sophisticated statistical test to sift through more than 4,000 publicly traded companies for those with patterns of granting options at abnormally favorable times, often at low points for their share prices.

The study identified 141 companies with such advantageous options-granting practices that the researchers concluded they were highly likely to have been involved in backdating. Ninety-two of those companies never were publicly linked to investigations or announced earnings restatements related to backdating.
Report

* A study of companies with abnormally favorable patterns of executive stock option grant timing

The companies include advertising giant Omnicom Group Inc., retailer Dress Barn Inc., trucking firm J.B. Hunt Transport Services Inc. and equipment-rental concern United Rentals Inc.

Officials at the companies, which showed some of the strongest signs of likely backdating in the study, had no comment or said they found no evidence of wrongdoing.

The unpublished study is the latest sign since the backdating scandal erupted in 2006 that the practice might have been more widespread than thought at the time. Other researchers have drawn a similar conclusion.

Scott Whisenant and Rick Edelson, authors of the University of Houston study, said such abnormally favorable options-granting patterns would be expected to occur by chance in only a couple of companies that they examined.

Still, the study cautioned that the findings are "purely statistical" and don't "claim to provide categorical or absolute legal proof that any specific company has engaged in backdating."

Backdating companies reached back in time by weeks or months to select a date when their shares were trading at low points, then represented that options had been awarded to executives at that time. The practice gave executives a head start on rich options profits, generally contravening accounting and disclosure rules.

Employee options allow the recipient to buy a particular stock at a preset price for a period of time, usually a decade.

In the wake of the scandal, scores of companies conducted internal probes, and the Securities and Exchange Commission launched investigations into more than 140 firms. The agency has filed civil charges against 24 companies and 66 individuals for backdating-related offenses, and at least 15 people have been convicted of criminal conduct.

Mr. Edelson said extrapolating from the study's findings suggests that only one-third of all companies that backdated were investigated or caught. That would mean "at least 500 are still undisclosed," according to the study. Mr. Edelson briefed the SEC on the research a year ago, providing a preliminary list of suspected companies.

An SEC spokesman said the agency "appreciated the input" but wouldn't confirm or deny whether it sparked any enforcement actions.

Stephen J. Crimmins, a securities lawyer at K&L Gates LLP in Washington, said the SEC devoted lots of resources to backdating cases but now is looking to other problems. "They came down like a ton of bricks on options backdating, and they believe the message has been sent and received," he said.

Plaintiffs' lawyers still could file fresh backdating lawsuits, but the statute of limitations may complicate claims involving grants made more than five years ago, Mr. Crimmins said.

The study doesn't name the companies that the researchers concluded were highly likely to have backdated options. But the authors provided a list of companies to The Wall Street Journal, which compared options-grant dates listed in the companies' securities filings with their stock prices.

At Dress Barn, based in Suffern, N.Y., securities filings show that top officials received options five times at unusual low points between 1996 and 2002, when backdating became difficult because of tighter rules.

A 1996 award was dated at that year's lowest stock price, while one in 1999 came at the bottom of a trough in the stock price. An April 2001 award came at the lowest price of that year's second quarter.

Some of the well-timed options went to Chairman Elliot S. Jaffe and Chief Executive David R. Jaffe, members of the family that has run Dress Barn since it was founded in 1962.

Dress Barn did an internal review of its options awards when the scandal erupted, and "we didn't feel there was an issue," said Armand Correia, the retailer's chief financial officer, who got options on two of those dates. The company's board and outside auditors were satisfied the grants were proper based on board minutes and other evidence, he said, and the firm didn't feel the need to disclose the review to shareholders.

At J.B. Hunt, CEO Kirk Thompson and other executives were granted options dated at low points in 1997, 2000 and 2001, according to securities filings. Other grants to top officials of the Lowell, Ark., company also came at unusual dips in the stock, including at the bottom of a V-shaped trough in 1998, a yearly low for J.B. Hunt shares.

In a statement, a J.B. Hunt official said "no backdating occurred," adding that the firm's internal auditors investigated the issue in 2006 and found nothing significant. The official said the findings were reviewed by the firm's outside auditors.

United Rentals has changed most of its top management following SEC allegations that the equipment-rental firm engaged in accounting misdeeds between 1998 and 2002.

A former chief financial officer, Michael J. Nolan, pleaded guilty to criminal charges and settled SEC allegations, while former United Rentals President John N. Milne is contesting criminal and civil charges.

Messrs. Nolan and Milne were among the United Rental executives who received a total of more than five million stock options in two favorably timed grants in 1998. One award in October was dated at the lowest price of the entire year. In 2002, four of the officers, including Messrs. Nolan and Milne, cashed in part of the October 1998 grant for a $14.1 million profit, securities filings show.

In a statement, United Rentals said the Greenwich, Conn., company in 2006 conducted a review of its historical options grants, including the October 1998 award, with the assistance of outside counsel. The review "found substantial evidence that these options were appropriately granted and approved on their recorded date."

A lawyer for Mr. Nolan declined to comment. A lawyer for Mr. Milne had no comment.

At Omnicom, a New York holding company for ad firms such as BBDO Worldwide, securities filings show that one options grant to top officials came in March 2000 at the lowest closing price of that year's first six months.

All three grants in 2001 came at unusually low points, including a giant award of four million options to CEO John Wren just as the stock dipped to a quarterly low. Mr. Wren still holds all of those options.

An Omnicom spokeswoman had no comment.