Options Woes Unlikely for Gaming Companies

27 July 2006

LAS VEGAS -- Nevada's gaming companies probably won't become ensnared in Wall Street's latest scandal involving stock options because of the heavy and transparent regulation they are subjected to by state regulators, industry officials and experts speaking on background said.

Executives for major gaming companies all declined to comment about the possibility of their companies coming under scrutiny for possible backdating or spring-loading of stock option grants, but the head of the state's Gaming Control Board said his agency is not aware of any such practices in the gaming industry.

The executive director of a nonprofit research organization agreed that the industry's argument makes intuitive sense, but noted there is no data to corroborate it.

With 10,000 publicly traded companies in the United States and only a few dozen under active investigation so far, the apparent innocence of gaming firms could be a statistical coincidence, said Corey Rosen of the National Center for Employee Ownership.

The Securities and Exchange Commission is examining whether companies have timed granting stock options to good and bad corporate news to help boost executives' compensation. Most of its interest has been aimed at the technology industry, which generally uses stock options more heavily to compensate its executives and employees than other industries.

Dennis Neilander, chairman of the Nevada Gaming Control Board, said state regulators are not aware of any federal investigations into gaming companies' stock option practices.

To date, Nevada officials have not been notified by the SEC or the U.S. Department of Justice of any such on-going investigations, Neilander said.

In some instances, the SEC would contact Nevada regulators and ask for their assistance with such an investigation, he said.

State gaming regulators also would be notified whenever the SEC was ready to wrap up a criminal or civil investigation involving gaming licensees, he said.

Any conviction or plea agreement involving stock option grants would be grounds for revoking the license of a gaming operator, Neilander said.

A fraud conviction involving options grants also could result in lengthy prison terms and multimillion-dollar fines, gaming officials said.

The recent federal investigations have centered on companies that have backdated their options to periods when their companies' stock prices were low and likely to increase.

But an SEC spokesman also confirmed that the agency has been looking into possible instances of so-called spring-loading, when companies schedule an option grant ahead of expected good news or delay it until after it discloses business setbacks that are likely to send shares lower.

There are also cases of bear options, when companies issue options after they know bad news is about to come out, confident in the knowledge stock prices will subsequently increase.

Amid allegations of financial abuses involving backdated stock options, the SEC issued new rules Wednesday, requiring public companies to publish additional information detailing their top executives' total compensation.

They will also be required to show the values of any options at the time they are granted.

SEC Chairman Christopher Cox said in a statement that options are a legitimate form of compensation but stressed that investors need a clear picture of executives' pay.

Cox has said in public statements his agency is very interested in both kinds of options abuse, but he acknowledged that it could be difficult to prove an improper connection between the timing of news and option grants.

In both cases, the idea is to increase the value of the option to the recipient in a way that is not evident to the board of directors, shareholders, workers or the public.

Sarbanes-Oxley, the corporate law enacted in the wake of Enron and other financial scandals, was supposed to clean up this kind of conduct.

But Rosen said corporate finance is following the map of campaign finance.

"The law only added incentives to find other ways around (standards of ethical conduct)," he said.

"The problem is we'll fix this, or some people will think it's fixed, and (companies) will just find another way around it," Rosen said.

Rosen said so far this year, about 60 companies have been tagged in investigations by the SEC or federal prosecutors for their options grants.

He said most of these are high-tech companies, a industry in which stock options are favored as way to motivate executives and reward them for a company's success.

The investigations have sparked a flurry of shareholder lawsuits, but none yet in Nevada, gaming officials said.


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