Misery Loves Company

More on Option Backdating

The announcement over the weekend that Home Depot (HD) backdated stock options in what appears to be an almost identical fashion as United Health Care (UNH) seems like pretty good news to us.

About 40 companies are currently under investigation by federal authorities looking into whether firms backdated options or otherwise gamed their timing to benefit insiders. In addition to Home Depot, that number also includes Microsoft.

The “Wall Street Journal” reported last week that Microsoft had previously disclosed to the SEC that they had engaged in a form of backdating before 1999 and had voluntarily stopped the practice at that time. Microsoft awarded options at monthly lows each July from 1992 to 1999, with varying dates, and also routinely issued options to new employees at the stock's lowest closing price in the 30 days after they joined. Those practices, which Microsoft ended in 1999 after seven years, amounted to a variation of backdating, since they couldn't be priced at the low for a month until the month was over. The big difference, of course, is that Microsoft voluntarily stopped the practice and disclosed it. In a news release issued on July 19, 1999, the company said it was ending the monthly-low policy and taking a $217 million charge.

It seems to us that these recent revelations are good news for UNH because, in this case, misery should indeed love company. Apparently all of the boards of these 40 companies approved these practices and all of the public accountants and lawyers signed off on them for many years until the Sarbanes-Oxley Act of 2002 apparently put a stop to it.

Does that make it right? Certainly not, but it seems like the whole options backdating issue could end up being pretty inconsequential, given its prevalence. In that case, the market will go back to looking at the fundamentals of each company’s franchise, and that will definitely benefit UNH. However, we still want to hear about the result of their internal investigation, before we take further action. We would expect an announcement sometime in the next month, when their second quarter results are made public.

Stay tuned.

Jack Falker

Note: At the time of publication, the clients of FalkerInvestments Inc. and Jack and Peter Falker were long UNH.