Financial Watch

In a week that saw Enron executives Kenneth Lay and Jeffrey Skilling found guilty for their roles in the collapse of the energy conglomerate, it is surprising to see a new scandal emerge in the press. It is becoming more apparent the growing controversy over excessive executive pay and more rigorous disclosure requirements brought forth following Sarbanes-Oxley did little to change the behavior in some corporate boardrooms. The latest scandal to hit Wall Street is executives backdating options. Although this practice is not outright illegal, it still raises strong ethical concerns. In an era of heightened disclosure for executive pay, regulators are examining whether some companies may have violated federal security laws by hiding the true value of options granted to executives.

At this time apprehension over backdating options are in most cases causes for concern rather than outright panic. This emerging crisis is more symbolic of the era we are currently in. At worst, some firms will be required to restate past earnings to account for this discrepancy. Any restatements will be minor in comparison to those we saw several years back following the dot-com collapse. Investors still should be concerned. From the information we have gathered at Financial Watch, it appears only a small number of companies have been exposed that have been using the practice of backdating options. Further, momentum investors with a shoot-first and ask questions later mindset will jump on any opportunity to profit from the slide in a company’s stock price that may be caught up in this scandal. In a rare case it is not inconceivable that a small number of high-level executives may be forced to resign as a result of accepting backdated options.

Financial Watch has been warning investors for the last half year to be cautious in investing in companies that heavily issue stock options. We expect to see these companies are the ones more likely to find themselves answer questions over their stock option practices. In general, tech stocks do not appear to be a great place to put money right now. There are some great bargains in the tech right now, but it will take until the fall before we see a genuine rally in that sector. In the overall market there has been few catalysts to buy upon lately. Where we go from here depends on the direction of the FOMC. Our economy is going through a soft patch right now. How dramatically the Fed wants to slam on the brakes will determine where the markets move from here.