Good News? Top Affiliated Computer Execs Resign Over Options Flap

Hey, what could be better news for a company’s shares than having your CEO and CFO quit in a cloud of scandal! Nothing, in the case of IT outsourcer Affiliated Computer Services (ACS).

Early this morning, Affiliated announced that it had concluded its internal options probe, and found that certain conduct of CEO Mark A. King and CFO Warren D. Edwards had “violated the Company’s Code of Ethics for Senior Financial Officers,” and that both men have entered into “separation agreements with the company.”

The company named Lynn Blodgett, who had been Chief Operating Officer, the new President and CEO, effective immediately. John Rexford, who had been Executive Vice President - Corporate Development, is the new CFO.

The Company also said it expects to take a $51 million non-cash charge related to “incorrect accounting measurement dates” for stock option awards, plus additional tax related expenses.

SEC and Justice Department investigations of the company are ongoing. Do not be surprised if they focus on the fact that the company apparently knowingly lied on a previous 10-Q. Here is what they said in the release:

Further, with respect to the Company’s May 2006 Form 10-Q, the investigation concluded that Note 3 to the Consolidated Financial Statements which stated, in part, that the Company did “not believe that any director or officer of the Company has engaged in the intentional backdating of stock option grants in order to achieve a more advantageous exercise price,” was inaccurate because, at the time the May 2006 Form 10-Q was filed, Mr. King and Mr. Edwards either knew or should have known that the Company awarded options through a process in which favorable grant dates were selected with the benefit of hindsight in order to achieve a more advantageous exercise price and that the term “backdating” was readily applicable to the Company’s option grant process. Neither Mr. King nor Mr. Edwards told the Company’s directors, outside counsel or independent accountants that the Company’s stock options were often granted by looking back and taking advantage of past low prices. Instead, both Mr. King and Mr. Edwards attributed the disparity between recorded grant dates and the creation dates of the paperwork attendant to the stock option grants to other factors that did not involve the use of hindsight.

Moshe Katri, an analyst with Cowen & Co., asserted in a research note this morning that the resignations will allow investors to “focus on fundamentals as well as on the stock’s attractive valuation.” Katri writes that he expect to see the company to be less distracted from day-to-day operations. He also says the company is “an attractive acquisition candidate.”

The market’s view on the departures? Good riddance.

ACS 1-yr chart: