Option backdating and managerial compensation

I should begin of course where I always do — with a disclaimer. The investigations are being conducted by SEC offices throughout the country and are being centrally coordinated and tracked here in Washington.My views are my own and do not necessarily reflect the views of the Commission or any other member of the staff. In addition to our investigations, there is substantial criminal interest in options matters from United States Attorneys' Offices nationwide.In recent months, the SEC has brought two enforcement actions — one relating to Brocade and another involving Comverse.With respect to both, there are pending parallel criminal actions as well.First, on the SEC front, our investigations are born of a conscious effort to proactively think about where problems might be, to methodically inquire whether there actually are problems, and then to pursue the best ways to address any problems that exist.In this regard, we identified stock options grants as a potential trouble spot several years ago — well ahead of the curve.First, there are the recently adopted rules relating to executive compensation disclosure which specifically address options.

In addition to the enforcement efforts, others at the Commission have taken two other major steps to address this issue.

While they offended corporate shareholders, had to be expensed by the corporation, and had less favorable tax consequences, they had other advantages.

In the money grants offered instant paper gains and the prospect of future wealth that was obviously attractive to employees, some of whom were themselves entrusted to decide precisely when options would be granted.

Second, in September the Office of the Chief Accountant issued guidance for companies trying to cope with the financial reporting ramifications of their various historical options practices from a reporting perspective.

From my perspective, the collective efforts by the SEC are a model way of addressing an issue — proceeding from various perspectives to come up with practical and wide-ranging solutions. I'd like to address this on two fronts — first, I'll discuss how we got to our efforts at the Commission and then I'd like to step even further back and talk about some of my impressions on how we ended up with the option issues we are confronting.

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In settling with the SEC, the former Comverse CFO consented to, among other sanctions, a permanent injunction against violation of the securities laws, a permanent bar against serving as a corporate officer or director, and payment of $2.4 million in disgorgement and pre-judgment interest.

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