ERISA and Global Benefits

Another Stock Award Scandal?

November 14, 2014

The Global Compensation, Benefits & ERISA Practice Group

About a decade ago, a stock option scandal arose from academic studies showing that the grants had to have been backdated because the exercise prices were timed to market lows (in order to maximize upside gain for the recipients).  A new academic study[1] concludes “that CEOs strategically time corporate news releases to coincide with months in which their equity vests.”  Titled “Strategic News Releases in Equity Vesting Months,” professors from the London Business School, the London School of Economics, and the National University of Singapore’s Business School cite the following evidence:
“CEOs reallocate news into vesting months, and away from prior and subsequent months. They release 5% more discretionary news in vesting months than prior months, but there is no difference for non-discretionary news.”
There is reason to expect the SEC to pursue enforcement efforts. On the one hand, the SEC has recently announced[2] successful enforcement actions that arose from the use of “quantitative analytics” to identify individuals and companies with “especially high rates of [8-K] filing deficiencies.”  On the other hand, market practices tied to executive enrichment can be expected to attract SEC and public attention.

Public companies will be smart to take steps to minimize their exposure because the next executive compensation scandal to reach headlines could involve the selective use of corporate news releases to increase stock prices in months when executives are cashing-out their stock awards.  Developments such as these are often just right for inclusion in an annual (or more frequent) litigation update for audit and/or compensation committees.

[1] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2489152#

[2] http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542904678