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Attorney's Office in Northern California has launched a series of investigations and in July issued criminal and securities fraud charges against two top executives at Brocade Communications. National concern about the practice has been spurred by a series of articles in the Wall Street Journal. Companies found to have practiced this could be forced to restate their earnings. District Attorney's Office has also issued several subpoenas in launching a criminal probe. The typical practice was to record a felicitously timed prior date as the grant date, such as the point when the stock had been at its lowest in recent months, instead of the date when the award was actually granted.Some of the companies that get entangled in this may have been making honest mistakes, recording dates that were off by a few days because of inadequate administrative procedures.(The administrative problem could be resolved if more companies would hire people with the right skills for stock plan administration, such as those with certification from the Certified Equity Professional Institute at Santa Clara University.) There are also companies, such as Microsoft, that issued options broadly but were concerned that because of the volatility of their stock, an employee who joined the company on one day might get an option grant at a price very different from one who joined a few days earlier or later.On April 19, 2006, Minnesota Attorney General Mike Hatch asked to intervene in a shareholder lawsuit against United Health Group (Brandin v. Hatch said that the importance of the company to the state's health care system meant that if there were substantial and unjustified costs, Minnesotans could be harmed.The legal theory involved here could open the door for other interventions in potentially abusive executive compensation issues.The theory seems to be that a good CEO is worth any price a company will pay, no matter that the compensation might literally exceed the GNP of some countries or be enough to hire hundreds of talented employees.Any gain a company makes is assumed to be the sole result of the extraordinary wisdom of this one very special person, not the collective efforts of hundreds or thousands of employees.
Microsoft acknowledged doing this in 1999, stopped the practice, and restated its financials.
For its part, the company must report failure to comply on its annual proxy statement.