SAN FRANCISCO (AFX) -- An inquiry by federal authorities into the improper pricing of executives' stock-option grants widened Monday as three additional technology companies said that they've been contacted by the Securities and Exchange Commission or U.S. attorneys about the matter.
The three firms join more than a dozen others -- most in the tech sector -- that have come under scrutiny for awarding option grants to executives on dates that appear to have maximized profits when the individuals cashed them in.
Shares of most of the companies involved in the probe fell, with some dropping sharply. Makers of computer chips and chip equipment were especially hard hit after a Merrill Lynch report suggested the stocks of some firms generated 'excessive' gains in periods immediately following executive option grants.
'It's egregious what's happened,' said Christopher Matlock, chief investment officer of Lighthouse Capital Management in Houston.
KLA-Tencor Corp. shares lost 10% as Chief Financial Officer Jeff Hall told an investment-conference audience in San Francisco that federal prosecutors have requested information from the chip-equipment giant regarding the timing of past option grants.
Openwave Systems Inc. said that it had received a letter of informal inquiry from the SEC regarding past stock-option grants. Juniper Networks Inc. said that it was contacted by the U.S. Attorney for the Eastern District of New York.
Openwave shares fell more than 4%, while CNet Networks Inc. dropped almost 7% after the online-media company said that it appointed a special committee of independent directors to investigate past stock-option grants.
Comverse Technology Inc. and Vitesse Semiconductor Corp. already have fired top executives after internal probes into the so-called backdating of options.
CNet and Juniper were among 17 companies named in a report last week by the Center for Financial Research and Analysis that suggested the firms backdated option grants.
The practice looks likely to force numerous companies to restate past financial results in which improper stock-based compensation have been accounted for on corporate balance sheets. Several securities lawyers say that they expect a wave of shareholder lawsuits to follow the widening scandal.
'There's no question backdating is going to trigger a wave of suits,' said Joseph Serino Jr., a securities lawyer in the New York office of the law firm Kirkland & Ellis.
UnitedHealth Group Inc., which has said that it could have to restate three years' worth of results, faces several shareholder class-action lawsuits over the practice.
If federal prosecutors find that executives illegally backdated grants so that the 'strike' prices on their options were artificially low, those executives -- or board members who approved the practice -- could be charged with criminal fraud, another attorney said.
'This has become the issue du jour for the SEC and federal prosecutors,' said the San Francisco-based securities lawyer. The attorney spoke on condition of anonymity, because one of his clients is an executive at a technology company that has received an SEC subpoena.
Firms that have said they've been contacted by the SEC regarding the matter include software maker RSA Security Inc. , American Tower Corp. , Affiliated Computer Services Corp. , Mercury Interactive Corp. and Safenet Inc. .
Besides CNet, other companies that have said they're conducting internal probes into options backdating include Altera Corp. and McAfee Inc.
Before Hall disclosed the federal probe into KLA-Tencor, The Wall Street Journal, citing its own analysis, said executives of the company had received option grants that immediately preceded rapid and unusual run-ups in the stock price.
KLA-Tencor wasn't named in the report by the Center for Financial Research and Analysis. This story was supplied by MarketWatch. For further information see www.marketwatch.com.