|GREED, UNLAWFUL, AND SLIMY|
Lifting the Lid: EMC options had sweet timing even in sour times
4:39 p.m. 03/16/2007 Provided by
By Tim McLaughlin
NEW YORK, March 16 (Reuters) - In October 2001, shares of EMC Corp. (EMC), the world's largest data-storage company, were in a tailspin, near the bottom of a 79 percent plunge that year.
The company's explosive revenue growth had stalled and the world's financial markets remained jittery in the aftermath of the Sept. 11 attacks on the United States.
But there was a sweet spot amid that market chaos. And EMC's stock option committee found it.
Two days after EMC reported its first quarterly loss in 12 years, five top officials, on Oct. 19, got 6.3 million options with an exercise price of $11.51, that day's closing price.
The award was remarkable on two fronts: Top named executives received more options on that October day than from 1996 to 2000 combined, according to EMC proxy disclosures.
The award also was timed to near perfection. The October grant landed on the sixth-lowest closing stock price for 2001. By year-end, the stock was 17 percent higher than the Oct. 19 grant's exercise price.
There has been no sign that Hopkinton, Massachusetts-based EMC has run into trouble with regulators over the program, even though this kind of good fortune put other companies in the sights of the U.S. Securities and Exchange Commission and the U.S. Justice Department.
More than 170 companies have faced investigations because of suspicions that luck might not be the only reason option grants were awarded routinely during a low point in their stock prices, only to see shares rise in the days and weeks afterward.
The SEC and the DOJ declined to comment on EMC.
EMC Spokesman Greg Eden said the company has no issues with its stock options program. The company declined to answer questions about the program following several e-mail and telephone requests over the past month.
Still, U.S. academics, who declined to be named, told Reuters that EMC had option grants with price patterns that could lead to suspicion of some kind of manipulation. These academics have studied thousands of option awards across a diverse group of industries.
And independent research firm Gradient Analytics Inc., which focuses on forensic accounting and executive behavior, has said in a research report that there was a "notable risk" of stock option backdating at EMC.
Between 1996 and 2002, 36.2 million options were granted to EMC executives and about 48 percent happened around the time of share price reversals, Gradient said in an August research note to its clients, who include many hedge fund managers.
Almost 30 percent of the grants came within 5 percent of quarterly share price lows, Gradient said.
Government investigations of other companies have focused on whether companies backdated option grants or used hindsight to retroactively date grants to coincide with low points in a company's stock price.
Backdating an option so the exercise price is lower than the then-prevailing share price makes it much more valuable. Handing out lots of options before disclosing positive news, or after a market overreaction has pushed a share price to unsustainably low levels, also gives the recipients a major advantage over other investors.
A FAMILY AFFAIR
EMC's stock option program has produced huge gains for executives. Former Chief Executive Michael Ruettgers realized $111 million from options exercised from 1995 to 2000.
Big-ticket option grants laid the groundwork for Richard J. Egan, an EMC founder and former chairman, to become a billionaire. In the late 1990s, Egan and his son served on EMC's stock option committee, a subset of a board that included Egan's wife, Maureen, and his brother-in-law.
That committee sometimes ensured big paydays with discounted option grants. Egan, his son and Ruettgers received options in the late 1990s with exercise prices half of the grant date share price, regulatory filings show. Grants for other executives were as low as a penny a share.
In early 2001, as EMC's revenue dropped sharply, stock option awards no longer looked like the sure thing of years past. Options granted in January and April quickly fell below their exercise prices of $72.32 and $36.66, respectively.
Fortunately for top executives, EMC's pay committee, which included Egan and Ruettgers, strayed from the practice of the previous several years and did not grant options in late July. EMC shares dropped 33 percent in July 2001.
From 1996 to 2000, top executives received 3.65 million options during the month of July, or 71 percent of the option grants awarded to that group during the five-year span, EMC proxy statements show.
The late-July grant dates in those previous five years were a good time to receive options. EMC shares rose 11 percent to 22 percent, from July grant dates, through the third quarter.
Fast forward to Oct. 17, 2001. On that day, EMC reported a 47 percent decline in third-quarter revenue. The company said it would cut about 4,000 workers and recorded a $945 million loss, mostly from a big restructuring charge.
"This is a very difficult time for nearly all businesses," Ruettgers said then. EMC stock fell 17 percent that day.
Two days later, company leaders got their big option grant. The largest award that October went to Ruettgers: EMC's executive chairman and compensation committee member got 2.5 million options, proxy filings show.
The next week, EMC unveiled a five-year pact with Dell Inc. (DELL), a multibillion-dollar storage alliance in which the computer maker would resell EMC's hardware and software. EMC's stock rose another 17 percent that week.