At last, a fine for options back-dating

Brocade (NASDAQ: BRCD) has agreed to settle its options back-dating issues with the SEC by paying a fine of $7 million. With over a hundred companies still working out accounting problems and, in some cases, SEC problems with back-dating, the settlement may open the door to these issues to move toward resolution.

As The Wall Street Journal pointed out [subscription required], the SEC had to debate several tough questions before coming to an initial decision about how to handle all of the companies involved in the practice: "Were shareholders actually hurt by the backdating of options, by the revelation of potential wrongdoing or by being deceived about how executives were compensated??

Investors were hurt. For one, when executives exercise options, the company is paid the amount of the strike price. If that price has been lowered, the company receives less money. Public companies are also supposed to account for options as an expense. Changing options grant dates can lead to restatements of financial reports, which does not inspire investor confidence.

And, perhaps most important, there is the matter of the time and cost to board for examining options issues. It is not only a distraction, it is a cost. So, it is not simply a question of deception. There is a very real cost to options back-dating.

Douglas A. McIntyre is a partner at 24/7 Wall St.