Monkey in the middle…

October 19, 2006

We interrupt our regular trawl of the SEC filings this morning to talk about a new study by the smart people over at The Corporate Library. This morning, they released "The Spread of Options Backdating" which takes a closer look at the whole options backdating mess and finds a surprising link between many of the companies. Of the 120 found so far, the study found that over 40% have at least one director who sat on a board at two companies involved in options backdating. Six directors sat on the boards of three of the implicated companies. The bottom line is that options backdating seems to have spread via word-of-mouth from one director to the other.

The study also found that at the center of that circle — the monkey in the middle — seems to have been Silicon Valley power lawyer Larry Sonsini and other principals and partners at the law firm of Wilson Sonsini Goodrich & Rosati (WSGR). Though the report notes that there’s no evidence to suggest that WSGR invented options backdating or that WSGR attorneys did anything illegal, it does point to a number of odd coincidences. Here’s a snippet from the study:

  • In addition to representing either the company or the underwriter in a great many high-tech IPOs, WSGR partners have gone on to serve as either corporate secretary or as a non-executive director of many of these same companies.
  • At the same time, WSGR has continued to provide many of these firms with ongoing legal services, including the provision of formal opinions in support of various executive and director stock option plans.
  • In some of these cases, a WSGR partner was serving as an active director at the company, and was, therefore, a potential beneficiary of these plans. Such situations, of course, were fully disclosed in the appropriate SEC filings.
  • WSGR partners were also personally invested in many of these same firms, either directly or via one or more special WSGR investment partnerships.

    It’s been seven months (and one day) since the WSJ broke the first story on this and since then the number of companies involved — and the number of CEOs who have been asked to step down canned as a result — has only grown larger. Just this week, United Health (UNH) announced the resignation of Chairman and CEO Wiliam McGuire because of options backdating. Could there be even bigger fish to come?

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