The SEC Needs a Tougher Backdating Policy to Preempt Future Wrongdoing

On July 17 the SEC held a “seniors summit” focusing on the perils of investing for elders. I didn’t attend, and didn’t read up on it (not that I don’t think it’s important - it’s just a matter of priorities) but what transpired at the summit that interested me was the comment of Chairman Cox regarding backdating, as reported by Dow Jones Newswires: The agency would have an announcement “very soon” about civil charges relating to a backdating case. Tuesday morning’s Wall Street Journal (sub. req.) makes the case that the first company to be named could be Brocade Communications (BRCD).

You have to wonder how this will play out. If the SEC is bringing civil charges against a company, you’d have to believe that they’ve got substantial evidence of illegal behavior - not just an “oops!-we-goofed-administratively” kind of scenario.

Chairman Cox said that, “for some period of time now, it’s been abundantly clear that these are not merely episodic instances.” The question is this: How will they handle the problem if option timing is as widespread as it now seems?

A different paper by professors Erik Lie and Randall Heron suggests that perhaps 2,000 firms have participated in some sort of options dating mischief. It would seem that the SEC needs to issue some sort of policy - a Staff Accounting Bulletin, perhaps - that will force companies to cough up the correctly reported compensation in prior financials. They did this with revenue reporting at the turn of the century with SAB 101, which launched hundreds of re-examined revenue figures.

In the meantime, Brocade is again in the news this morning with additional reports of wrongdoing.