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OPTION 'LUCK' WIDESPREAD?

May 18, 2006

The Wall Street Journal today has another article ($link) on the apparent popularity of backdated options:

Federal prosecutors in Manhattan began a criminal probe of options-granting practices at UnitedHealth Group Inc., and Vitesse Semiconductor Corp. fired three top managers, including its chief executive officer, in the latest developments from a stock-options scandal that is roiling corporate suites.

UnitedHealth also said the Internal Revenue Service had made a request for documents, suggesting that the agency may be looking at the tax implications of possibly misdated stock options at the giant health insurer. UnitedHealth previously said that because of a "significant deficiency" in its options administration and accounting, it may need to restate at least three years of financial results and lose tax deductions.

The tax law caps executive compensation deductions if the "strike price" of stock options is lower than the stock's value on the date the option is issued. It appears that a number of companies backdated options so their price would be lower, saving the executives money at exercise time. This could cost companies millions of dollars in executive salary deductions.

Link: Prior Tax Update Coverage.

Additional Coverage:

Forbes

Twin Cities Business Journal

New York Times

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