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Yesterday, Bed Bath & Beyond (NASDAQ:BBBY) filed an 8-K detailing the findings of the special committee investigating its option backdating issues.

If you’re watching the events unfold at Bed Bath & Beyond from the standpoint of a long-term shareholder, you might read it and think “so far, so good.” And what the company discloses sounds relatively mild at first: while the problems with the improperly dated options stretch back to 1993, when the home furnishing juggernaut first came public, they’re not material to any one year (at least according to the special committee) and won’t tip the company into restatement mode. Instead, for the year 2006, Bed, Bath & Beyond will make a pretax $66 million reclassification in stockholders’ equity - the sum total of the adjustments needed through 2005. (Tax effects to be determined later, but presumably before they record this catch-up.) There will also be an $8 million year-to-date catch-up adjustment made in the third quarter for the current year effects not previously recorded.

Lots of other interesting stuff, though. For instance, Wall Street wonders why it takes so long to complete these investigations. One reason: Bed Bath & Beyond’s investigation covered 19,000 individual grants. The special committee’s counsel interviewed 31 officers, directors, employees, advisors and others.

Also interesting is the way the company “positioned” the occurrence of the improper transactions. There were a variety of options grants made over BBBY’s publicly-traded life: annual grants, monthly grants, and special grants. They were handled by two different compensation committees: one composed of inside directors (”Committee A”), the other composed of outside directors (”Committee B”). The most interesting conclusion about the process: “Excluding grants only to Form 4 filers beginning in 2003, almost all annual grant dates in 1998-2004 likely were selected with some hindsight.” At the same time, “the special committee found no evidence that either the Company or any person involved in the grant process had engaged in willful misconduct.” Seems contradictory: how can you select grant dates with some hindsight without willfully doing so? Only if you’re completely mistaken, probably. And that leaves open the question of negligence. (We’ll leave that to the attorneys to fight over.)

Other findings of the special committee:

• The option granting process had control and other deficiencies.

• The Company failed to maintain adequate controls with respect to issuance of options in compliance with the Company’s stock option policies; the Company’s policies also were not sufficient to ensure compliance with all applicable accounting rules.

• With respect to Committee A, lists of grantees and option amounts were not sufficiently final or determinable on the grant date.

• Among the other process deficiencies found with respect to the Committee A option grants were the delegation to the Company’s chief executive officer of the authority to select the annual grant date without explicit conditions or documentation; documentation which in various respects was not complete or timely; and a number of monthly grant dates which had or appeared to have grant amounts or dates which were inconsistent with the Company’s policies.

In short, it was handled haphazardly - and it would be hard to believe that Bed Bath & Beyond was the only company that didn’t consider options-dispensing to be a task deserving of fiduciary care. In retrospect, it was a sign of the times - and hard to justify in today’s world. The defenses given by Bed Bath & Beyond will probably reverberate throughout the halls of other companies performing similar investigations and wind up being memorialized in other filings. Here’s a look at their rationales:

• The grant process was characterized by informality which lacked safeguards to ensure compliance with applicable accounting and disclosure rules. For example, the process did not require any contemporaneous documentation or other action evidencing the selection of a grant date. (The “it wasn’t real money, they were just stock options with no value” defense.)

• The special committee found no evidence demonstrating that those who were responsible for selecting option grant dates (the Company’s co-chairmen and chief executive officer) appreciated the accounting or disclosure implications of the practices used for selecting those dates. (The “I’m not an accountant” defense.)

• The special committee found no evidence demonstrating that those responsible for the accounting and disclosure functions were aware of the deficient practices used for selecting grant dates. As a result, they did not consider the accounting or disclosure implications of those practices. To the extent they were aware of any other processes now determined to have been deficient, the special committee has found no evidence demonstrating that they appreciated the accounting or disclosure implications of those deficiencies. (The “I’m not an accountant” defense, squared.)

• The Company and directors regularly sought advice from and relied on outside counsel. (The “it’s not my fault, it’s theirs” defense.)

• The special committee found no evidence that the directors were aware of the practices used for the selection of grant dates (other than the co-chairmen and chief executive officer as discussed above) or other significant process deficiencies, and consequently, they did not believe that the accounting or disclosures were inaccurate. (The “I’m not an accountant” defense, cubed.)

• The special committee found no evidence that outside counsel was aware of any facts which led them to believe that the accounting or disclosures were inaccurate. (A variation of the “I’m not an accountant” defense; maybe the “I’m not an investor, either” defense.)

• The co-chairmen and chief executive officer (and others involved in the grant process) believed that, in granting options as described herein, they were acting in the best interests of the Company with the purpose of attracting and retaining employees. (The “Ends justified the means” defense.)

In all seriousness, the company recognizes its ills and also goes in much detail about how it plans to remedy the deficiencies that gave rise to the improper accounting. Are they out of the woods? Maybe, maybe not. For one thing, they’re still the subject of an informal review by the SEC. For another, they haven’t tied off the tax implications yet. Are they alone? Definitely not, and it’s likely that the defenses they raised here will be copied by others - however weak they may be. How well those defenses stand up under regulator/auditor/shareholder fire remains to be seen. Stay tuned.

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Source: Bed Bath & Beyond's Backdating Rationale