Options Backdating: SEC 200 Issuers 0

I'd like to pick up on the thread about how interactive data changes the regulatory playing field. Heron & Lie were referenced in "XBRL Spells New Tools for Data Miners" that article from Data Mining Today I pointed out a few days ago. One of the conclusions in their study was that about 20% of unscheduled at the money grants that were filed late were backdated.

There was another study out around the same time by Bebchuk, Grinstein and Peyer which concluded that “. . . a CEO's chance of getting a lucky grant increases when a preceding grant was lucky as well." They defined a lucky grant as one where the option price equaled the lowest stock price of the month so it appeard to be timed.

By definition a filing would have to be filed late to be backdated and earlier this year SEC officials in San Francisco confirmed that the SEC is using "V" charts to visually see the timing piece.

Back when these studies were published and Chairman Cox publicly stated that the SEC was actively using the Section 16 data to drive options backdating investigations these forms were filed late between 10% and 12% of the time every month. About 20,000 Form 4s come into EDGAR every month so over 2,000 are filed late. Now there are only 20 trading days most months. With that many late filings a fair number of companies would get unlucky. Because of a simple clerical error or someone was out or something got dropped they would have filed one or several of these forms late and by chance just happen to hit that lowest stock price. To the programs analyzing this data at the SEC these companies would have looked very interesting.

I'm not saying they would have automatically gotten a phone call from the SEC and of course we all trust our government to only prosecute the guilty but they were certainly inviting unwanted scrutiny by failing to file these forms on time.

But here's the thing. The number of Form 4s filed late in September '07 (the last month I have data for) was 11.5%. The issuing community hasn't changed their behavior at all since this information became available and the SEC is about to take a quantum leap forward in their ability to mine (investigate) the information coming into EDGAR by using XBRL to express GAAP financials.

Of course we (meaning Bowne) are getting involved with XBRL because you're going to have to file it. But we take it seriously because of these kinds of implications. And if we talk about seemingly esoteric XBRL factoids here on the blog it's because we believe even those bits of esoterica will have an impact on the quality of the data you submit to the SEC.

-- Ed Hodder