Financial Insitutions Avoid Backdating Intrigue

Interesting article in CFO.com: seems that the American Bankers Association was curious as to whether or not backdating lightning could strike some of their constituents. So, they commissioned The Corporate Library to examine the option granting practices of these 12 banks: Bank of America Corporation (BAC), Bank of New York (BK), Capital One Financial (COF), Citigroup (C), Commerce Bancorp (CBH), Countrywide Financial (CFC), JPMorgan Chase (JPM), Northern Trust (NTRS), State Street (STT), SVB Financial (SIVB), Wachovia (WB), and Wells Fargo (WFC). You can pick up the full report of their findings here. (Note: $1,100 needed.)

And they found… not much. Apparently, the big banks are pretty clean when it comes to option backdating - based on their option grant practices (like setting them on specific dates instead of at whim), and TCL’s study of the patterns of subsequent gains. That might give the ABA some relief and some public relations opportunities, but until the audit season is over, it might be wiser to reserve judgment about innocence or guilt about a particular company or sector.

One thing the study does bring to mind: the financial institutions really have been noticeably absent from the lists of companies under investigation. If financial institutions haven’t engaged in backdating, as the study shows, it would make sense. That’s because they aren’t major stock option issuers in the first place - they use them relatively sparingly, and when it comes to awarding stock-based compensation, they lean towards the issuance of restricted stock. You’d expect option abuses where there are more chances for them to appear - that is, where options issuance heaviest. And as we’ve seen, the backdating problems have occurred most frequently in the tech sector, the traditional hotbed of option compensation.

The banks in the survey may be the biggest in the country, but there are thousands upon thousands more to be examined in the coming audit season. There’s bound to be a few surprises when it’s all over, but the ABA and The Corporate Library are probably on to something.