Analog Devices offers look into growing probe
Company gave options to executives on the day stock hit a 10-year low
As securities regulators expand their probe of option grants to corporate executives during the last years of the bull market, a pending settlement involving millions of dollars in options granted by Analog Devices Inc. of Norwood illustrates the issues -- and the challenges -- investigators face.
In September 1998, Analog -- a maker of microchips whose stock gyrated wildly in the past decade, from a low of $6.63 to a high of $101.38 -- granted its top five executives options on just over a million shares, adjusted for stock splits. Those options were granted on Sept. 4, the very day the stock hit its lowest price in the past 10 years. Analog chief executive Jerald G. Fishman, who last year alone cashed in deferred compensation of $145 million from his more than 15 years at the company , was awarded 600,000 shares that day, adjusted for stock splits.
The timing of that option award, as well as similar awards in 1999 and 2001, is at the core of a $3 million settlement the company has pending with the Securities and Exchange Commission.
Neither Analog Devices nor the SEC would discuss the pending settlement beyond securities filings made by the company, the latest dated May 16.
In the proposed settlement, Analog would neither admit nor deny wrongdoing as part of the deal, and wouldn't need to restate earnings. But the SEC would conclude the company should have told investors how it priced the options prior to releasing good news, and that it used the wrong dates to do so. In addition to the $3 million the company would pay, Fishman would pay a $1 million civil fine and agree to pay back an unspecified ``disgorgement payment" related to his gains.
For the 1998 options, the SEC would have the company date the grant four days later, as of Sept. 8. That day, Analog stock traded at a split-adjusted price of $7.38. The repricing would cost Fishman an additional $450,000 when he exercised his options; for the top five executives, the additional cost amounted to $757,500. An Analog spokeswoman said Fishman did not exercise any options from 1999 or 2001, the later periods in question by the SEC .
Corey Rosen, director of the National Center for Employee Ownership in California, which favors more equitable stock awards, said the relatively paltry gains that Analog Devices executives made on the options, relative to their total compensation, might reflect a mindset in which the executives simply stopped paying attention to rules they believed no longer apply to them.
``Enough is never enough," he said.
Stock options generally are rights to buy company shares at a discount, meant to give executives an incentive to improve their company's share price. But the specifics of cases like Analog's will matter as the widening options probe by regulators ripples out to more than a dozen companies nationwide, including Vitesse Semiconductor Corp., Caremark RX Inc., and UnitedHealth Group.
In addition to Analog Devices, three other Massachusetts companies, Internet security firm RSA Security Inc. of Bedford, communications operator American Tower Corp. of Boston , and Brooks Automation Inc. of Chelmsford, have disclosed SEC inquiries .
Yesterday Brooks also disclosed it received a subpoena from the Justice Department. The company previously said it expects to have to restate results. Last week it announced its last two directors from the dot-com era are stepping down to reduce distractions to the company and are giving back their remaining options.
To date many of these investigations turn on what could be called circumstantial evidence: cases where the timing of stock-option awards looks suspicious by falling on or close to low points in a company's share-price history.
But a challenge for investigators will be to prove that company boards and executives intentionally gamed the system. A common way is when companies award options just before disclosing good news, boosting the stock in trading and the value of the options just granted. Another dodge is termed ``backdating" options so their award dates are matched to a low share price, again increasing the amount executives earn.
Even when these tactics occur, there are gray areas about whether they are illegal, said Derek M. Meisner, a former SEC enforcement official, now a partner at law firm Kirkpatrick & Lockhart.
Also, Rosen points out, administrative problems could have been the cause of some questionable awards, especially in cases like Analog Devices where the grants were separated just days apart.
Securities attorneys say companies could avoid suspicion surrounding the timing of option grants if they award options at certain, fixed times of the year -- the end of a fiscal year, for example.
Analog first reported its tentative settlement with the SEC in securities filings in November, and said it continues to cooperate with the agency and expects the deal to be finalized soon.
In a press release, chairman Ray Stata said ``ADI and Jerry Fishman have agreed it is in the best interests of ADI's shareholders to put this behind us and settle this case on the proposed terms rather than face a protracted dispute with the SEC."
Ross Kerber can be reached at kerber@globe.com. 