Companies Investigated for Handling of Stock Options

New York, NYStock option plans are becoming an increasingly popular way for companies to attract and retain highly valued employees. Stock options allow employees the right to purchase shares in the company at a fixed price within a certain period of time. Employees can profit if the stock gains value after they have purchased it, usually at a price that is less than the market value.

For instance, a company might offer an employee the option to purchase 100 shares of company stock at $10 a share. The employee can exercise his right either within a certain time frame (i.e. a few years) or when the stock reaches a certain price. If the stock price rises high enough, say $50 a share, the employee can purchase his 100 shares at $10 each and then sell them for the market price of $50 a share.

There are three categories of employee stock option lawsuits. One is breach of contract/fraud lawsuits. In these situations, the employer has failed to live up to its promises regarding the exercise of stock options. In some cases, employees have found they were promised stock options as a benefit of joining a firm and were then never given the opportunity to exercise those stock options. A second form of litigation involving stock options occurs when companies mislead employees regarding the potential value of their options. Employees can also file lawsuits if their employers do not take proper steps to prevent their employees from losing money if the price of the options drops after employees have exercised their stock options. A final form of litigation involves wrongful termination. This when employees are terminated so that they cannot properly exercise their stock options.

According to the Associated Press, more than 100 public companies are under investigation by the Securities and Exchange Commission (SEC) for improper stock option backdating schemes. The practice has apparently become widespread, although many companies are not following all the rules when they backdate stock options. Now, some shareholders and employees are filing lawsuits of their own, alleging their companies have acted improperly.

Late last year, seven former McAfee employees filed a federal breach of contract lawsuit alleging they were cheated out of two million dollars because they could not exercise their stock options. According to the lawsuit, they were not able to exercise their options because of blackouts regarding backdating investigations. McAfee had promised to extend its expiration dates because of the backdating probe but then reneged on that promise.

Companies often impose blackouts during investigations to prevent insider trading allegations; however, many then extend the deadline date for exercising stock options. In the case of the McAfee employees, their stock option deadline, which expired 90 days after the end of their employment with McAfee, occurred during McAfee's self-imposed blackout period. The former employees' lawsuit alleged they were promised a 90-day extension on their window for exercising options, which was later revoked.

Employees who have not been able to exercise their stock options because of the actions of their employer may be able to file a lawsuit against their employer to recover their losses.