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The Honolulu Advertiser
Posted on: Saturday, June 10, 2006

Corporate directors snared in latest round of scandals

By Marcy Gordon
Associated Press

WASHINGTON — As the scandal widens involving stock options that may have been manipulated to enrich top executives, investors are wondering anew whether corporate directors have been complicit or negligent in allowing questionable practices yet again.

With a single vote, the directors of Cyberonics Inc. are said to have approved options grants that netted the chief executive a paper profit of $2.3 million overnight. At other companies ensnared in the affair, executives may have acted without board approval to improperly grant themselves stock options, or may have recorded dates differently from what the board approved.

Already, 15 senior executives or directors — including four CEOs, four finance chiefs and three general counsels — have been fired or have stepped down at seven companies.

"Boards are going to be forced to seize more control from management" and give executives less leeway in setting compensation, said Ted White, a consultant to the Council of Institutional Investors and a former California pension fund official.

A "deeply troubling" aspect of the stock options controversy, he said, is "the possibility that some boards were complicit in this."

A growing number of public companies — there are at least 31 — are being investigated by the Securities and Exchange Commission or federal prosecutors for possible improper backdating of options grants to executives.

But in a new twist, the Cyberonics case is said to have involved a different sort of timing: not backdating options to a low point in the company's stock price, but granting them shortly after the company received positive news certain to boost the share price. Many academic studies have shown that options grants often appear to have been carefully timed around good and bad news.

Cyberonics, a medical-device maker based in Houston, on Thursday called the assertions of unusual timing made by Wall Street analyst Amit Hazan "inaccurate and without merit." Company shares tumbled in trading after the comments by Hazan, who also downgraded the stock, were published.

The SEC has begun an informal inquiry into stock options practices at Cyberonics, The Wall Street Journal reported online yesterday.