SEC wags finger at THQ, launches investigation

by Blake Snow { Aug 8th 2006 at 1:55PM }

THQ announced yesterday that the SEC has launched an "informal" investigation by requesting documents and information related to company options grants from 1996 to present. What the crap is an options grant, you ask? The Street writes: "Employee stock options typically grant insiders the right to buy their company's stock at a price equal to the market price of the stock on the day the options are granted. But with backdated options, companies are alleged to have assigned to the options a strike price equal to the market price on a date days or weeks before the grant date, which was known at the time of the grant to be a short-term low in the company's stock."

So basically, through the use of backdating, a company can fudge the numbers. In addition to THQ, both Activision and Take-Two are being scrutinized the by the SEC regarding options grants, to which all three companies collectively stated, "Don't hate tha playa, hate the game.*"

*Note: They didn't really say this.

Reader Comments (Page 1 of 1)

cringer8 @ Aug 8th 2006 2:13PM

Those wily bastards. Using hindsight to invest today's money in last week's stock value is brilliantly illegal. You could then sell the same stock on the same day and make instant profit.

"Honey, the mortgage payment is due and we're $200 short."

"That's no problem. We'll just take the other $1000 and buy stock at last week's price and then sell it at today's price and *poof* $200 out of thin air."

Someone's going to minimum security prison (or going on probation).

Thryon @ Aug 8th 2006 2:32PM

It would have been important to note that the practice is backdating is legal. They did nothing wrong. The problem is that they failed to take into account the value of the stock option against their income. It would be like you claiming you have $100 dollars, when in reality $65 belongs to another person. It makes you look "richer" than you are. Apple is going through the same SEC problems at this time.

cringer8 @ Aug 8th 2006 3:36PM

Thyron,

You're right, back dating is fine, as long you don't intentionally pick a date where the stock was at a temporary dip. That's where the illegality comes in.

If it's unintentional or circumstances beyond the board's control cause a delay in the grant, the date can be set back to the date it *should* have been granted. That's all well and good. But they can't do it intentionally. That is illegal.

cringer8 @ Aug 8th 2006 3:43PM

I guess, if the board asked the shareholders' permission for a backdated grant, and changed their earnings statements appropriately, they could do it legally...but this isn't the case with most of these companies. If they followed all of these steps, it wouldn't benefit them much to backdate the stock...so why would they do it?