Stock Option Fun

The Wall Street Journal had an article on Friday about Broadcom and the stock option backdating scandal. I can't link to the article since it requires a subscription but Leon sent me the text. My sister saw this in the print edition (front page!) and clipped the article to send me via regular mail.

On Jan. 4, 2002, the chief financial officer of Broadcom Corp. tapped out an email about stock options to his chief executive and others.

"I VERY strongly recommend that these options be priced as of December 24," he wrote.

They were, and that was fortunate for recipients. Broadcom's share price rose 23% between the two dates. The pretense that the options had been granted on the earlier date made them extra valuable.

It also violated the rationale of stock options. They give recipients a right to buy stock in the future at the price when the options are granted, so that recipients can profit only if the price of their company's stock goes up. Setting a lower "exercise price" for the options gives recipients a head start on profiting.

The Broadcom correspondence, found in an internal investigation at the maker of communication chips, is just one of a number of internal documents that have drawn the attention of federal prosecutors and Federal Bureau of Investigation agents in Orange County, Calif. Prosecutors are strongly considering filing criminal charges against the former Broadcom chief financial officer who wrote the email, William J. Ruehle, and at least one other former executive, according to people familiar with the situation.

It's all fun and games until someone goes to jail.


...a thousand words