Stock Options: Honesty and Deception Filter Down from the Top

New York, NYOne needs only to pick up the paper on any given day to read about yet another highly-paid corporate player having his or her way with the system, by thumbing a nose at securities law and manipulating stock options to improve yield and reduce tax.

For this reason, any employee of any company who participates in, or has stock options through his employer will want to watch very carefully how those stock options are handled, and to ensure there is no breach in the company's fiduciary duty according to the statutes and requirements of the Employee Retirement Income Security Act (ERISA 1974, as amended).

"Sometimes, you just have to take a look at what's going on at the top, in order to be motivated to watch your back.

Eighteen months ago the founder and CEO of Monster Worldwide stepped aside after 39 years with the firm. It has since been learned that Andrew McKelvey is battling terminal cancer, and while no specific reason was given for his departure on October 9th of 2006, it is widely believed that his declining health was a factor.

McKelvey, it was announced that day, would remain on the Monster Worldwide Board of Directors, and was elected Chairman Emeritus.

Barely a year later, McKelvey was in the news again, but this time for all the wrong reasons. In late January of this year it was announced that McKelvey had agreed to a deal with the US Attorney's office where he admitted to backdating stock options for company employees, as well as signing and certifying falsified public filings with the Securities and Exchange Commission (SEC).

The January 23rtd agreement also requires McKelvey to pay Monster.com $8 million, as well as convert 4.7 million shares in the company that he used to control from super voting rights, to common voting rights. The latter commands one-tenth the voting power of the former.

McKelvey was accused of manipulating stock options for key executives in an effort to maximize profits on their behalf. Such efforts were allegedly used to recruit and keep executives in the fold. The systematic practice of backdating a stock option to co-incide with a historic low price for the stock, maximized profits for the executives in question that amounted to millions of dollars which, according to federal officials close to the case, "did not result in a reduction in the company's earnings."

It has been reported that when the former general counsel to McKelvey, who himself pled guilty to a charge last year and co-operated with federal officials in the case against McKelvey, repeatedly suggested that he end the practice McKelvey replied, "Who will ever know?"

That's precisely why investors, and employees who hold and exercise stock options with an employer needs to watch his portfolio like a hawk, and make sure that everything is carried out according to ERISA guidelines.

It appears McKelvey got off easy, probably due to his deteriorating health. The former CEO will see charges against him dropped in 12 months, and he was spared prison time.

The same cannot be said for Gregory L. Reyes Jr., the former head of Brocade Communications. He was sentenced to 21 months in prison and fined $15 million for committing roughly the same crime as McKelvey, although the former's punishment was much harsher.

It is estimated that more than $1.5 billion has been lost over the last few years resulting from the cancellation, or devaluation of employee stock options.

The question is, were those cancellations and devaluations handled legally, and prudently? You be the judge, but craft your opinion with the knowledge that at least 200 major corporations have been investigated for the very practice of manipulating stock options through backdating, in order to max out profits for executives.

These are the very same executives who are paid very handsomely anyway, by anyone's standards.

The practice of illicit backdating of stock options without resulting in a reduction of the company's earnings became a self-fulfilling prophecy whereby the company could not afford to take the hit legitimately, given the need to adhere to strict financial targets. Thus the backdating at Monster remained a needed, and viable—if illegal—practice.

At court in San Francisco, Judge Charles Breyer told Brocade's Reyes Jr. "this offense is about honesty."

Is your employer being honest with you, and with your stock options? How can they be above reproach with you, if they are not honest with themselves?

In other words, if those at the very top are thumbing their nose at moral and legal tenets, how can they be above board with you?

Be very careful. Better yet, look into it, to make sure your stock options are being treated fairly, and legitimately.

Better still, have your lawyer do it for you...