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In the spring of 2001, the two founders and co-chief executive officers of Research In Motion Ltd. were each granted 100,000 stock options. Back then, the company relied heavily on stock options for its compensation, and often granted its executives 100,000 options at a time.

The timing was fortuitous for the executives. RIM's share price was $33.60 on April 2 when the options were granted -- its lowest point so far that year and its lowest level since the previous May, almost a year earlier.

By the time investors learned of the grant when it was disclosed publicly on June 8, the share price had climbed to $50, an increase of $16.40. That means within five weeks of the grant date, each CEO already had seen a gain of $1.64-million in the value of his options.

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It wasn't the first time RIM had granted its CEOs options before a healthy climb in the company's share price. In 1998 and 1999, RIM granted options at a particularly low point, just prior to an increase in the share price.

How did this good luck come about?

This is the question being pondered by investors and regulators. The company itself has launched an internal review of its past stock option grants. RIM is not saying anything about what it is specifically examining, but co-CEO Jim Balsillie has said that RIM is "in the same position as a lot of other companies" these days.

Canadian companies haven't been drawn into the stock option backdating scandal that has swept through the United States, where regulators have launched more than 180 investigations of backdating cases, and many top executives have been forced to resign in disgrace.

But legal and accounting experts believe Canada will not remain immune to the scandal. They say many Canadian companies have quietly launched internal reviews of their options practices to determine whether they have scandals lurking in their corporate closets. And while Canada had tougher rules for options than the U.S., these same experts believe they do not prevent options backdating.

Backdating involves manipulating the date that stock options are granted to executives. Normally options are granted at the price of the company's stock that day. That means the options only have value if the share price climbs in the future. Many companies, including RIM, don't allow executives to cash out options right away, often making them wait several years.

Companies involved in backdating use the benefit of hindsight to look back and choose a date when their share price was low, then falsely claim that the options were granted on that date. It's as if a participant in a hockey pool could retroactively pick winners of games after they were played.

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A Report on Business review of option grants to CEOs at more than 30 large Canadian companies between 1997 (when company filings were first available electronically) and 2005 found numerous examples of especially well-timed option grants just before an increase in the company's share price. But it is hard to draw conclusions from individual examples because an outsider cannot easily determine which cases were lucky timing and which, if any, were manipulation.

Some studies have suggested there is a problem in Canada based on a broader market review. Independent analysis firm Veritas Investment Research, for example, looked at all companies comprising the S&P/TSX 60 index and examined their option grants between 2003 and 2006. It concluded option timing "is alive and well in Canada," with stock prices over all tending to drop toward the date of option grants and climb afterward.

University of Manitoba economists have done a more detailed review of the same period, examining 5,644 options granted to senior executives by companies listed in the S&P/TSX 60 between June, 2003, and October, 2006.

According to a preliminary review of the data, "the evidence is suggestive of the occurrence of backdating in Canada," the researchers found.

"We expected to find nothing with that kind of data, and the fact that we found something is sort of like, wow," said Lindsay Tedds, an assistant professor who led the study. Ms. Tedds said the results don't confirm that backdating is necessarily occurring, but she added: "There's something going on. We didn't expect to find much of a pattern in this aggregate data."

Ms. Tedds said she started the study by looking at RIM. She found that eight of RIM's 11 option grants between 2003 and 2006 were made when the company's share price was at its lowest in the window between the grant date and the date the grant was publicly disclosed.

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Her team is doing a further review and a final paper is due soon.

Michel Magnan, an accounting professor at Concordia University in Montreal, has analyzed stock option grants by Nortel Networks Corp. and believes the timing of option grants was beneficial during the era between 1997 and 2001.

"If you look at stock option grant dates and you look at stock returns around these dates, it's funny because on average the company had been poorly performing for the month before the grant date, systematically, and the stock rebounded right around the grant date," he said.

To do his analysis, Prof. Magnan compared Nortel's stock price performance in the 60 working days before and after its option grants to that of other technology manufacturers at the same time. He determined Nortel consistently underperformed its peers prior to option grants, and equalled or outperformed afterward.

He also found that Nortel issued fewer press releases before option grants and far more afterward. He said this suggests the company was timing its option grants to correspond with news announcements.

A Nortel spokesman had no comment yesterday on the observations.

Canadian companies may not have disclosed cases of option backdating, but experts say many are now looking at past practices.

Jim Goodfellow, vice-chairman of Deloitte & Touche, says he knows of companies reviewing possible backdating cases, although nothing has been confirmed.

"We have, from an audit perspective, identified a couple of clients that might have issues here, and they're now going back and doing their own internal look-see to see if there is an issue," he said.

Lawyer Eric Belli-Bivar at Fasken Martineau in Toronto believes every major company that is cross-listed on a U.S. exchange is looking at past option grants before the audit season early next year.

"The corporate cultures north and south of the border are pretty similar and that being the case it would not be unreasonable to assume that there may be instances of backdating that have occurred in Canada," he said.

When the options scandal exploded in the U.S. earlier this year, many in Canada believed it couldn't happen here because of our different rules. Prior to 2002, for example, U.S. companies had more than a year to disclose option grants, giving them a huge window to backdate. In Canada, until 1999, executives had to disclose grants within 10 days of the end of the month of the grant. The rules were changed at the end of 1999 to require reporting within 10 days of the grant.

But experts say there was still some window of opportunity to backdate in Canada, even with shorter deadlines. Moreover, until a new electronic reporting system was introduced in 2003, paper filings were often submitted long past the required deadlines -- so the window to manipulate wasn't as short as it seemed officially.

"We have seen over the years many people who file very late," Prof. Magnan said. "It was not policed, and I don't think [regulators]had the resources to monitor what was going on, and the system was so poorly organized. I think from a regulatory angle, and from an incentive angle, I think it's likely there were backdatings in Canada."

Even with the introduction of electronic filing in 2003, the University of Manitoba study found 17 per cent of executives still report their trades late.

Compensation specialist Neil Brisley, a professor at the Richard Ivey School of Business, says Canada's shorter filing deadlines are not a clear deterrent. The new U.S. rules introduced in 2002, which require filing within two days, haven't even shut it down, he says.

Canada has another rule that differs from U.S. standards which may provide an extra disincentive to manipulation. The Toronto Stock Exchange bans listed firms from issuing stock options below the market price of the shares, whereas there was no clear prohibition to the practice in the U.S. as long as proper accounting charges were taken.

Compensation consultant Ken Hugessen said the extra barriers in Canada provide a stronger barrier to cheating, and make it unlikely backdating happened widely.

"It's possible, but it would be really tough, whereas it was dead easy for them to do in the U.S.," Mr. Hugessen says.

But other experts say companies willing to cheat would not have been greatly deterred by the TSX listing rule.

"I'm sure [the TSX]wouldn't do that much, if you look at the track record," Prof. Magnan said.

In Canada, regulators have said little about stock option backdating. The Canadian Securities Administrators, the umbrella group for provincial securities commissions, issued a statement in September noting that "historically different" regulations in Canada "may reduce the opportunity" for backdating. The CSA said if staff become aware of abuses, they may take enforcement action.

A spokeswoman for the Ontario Securities Commission said the OSC is monitoring options through its regular reviews of disclosure documents.

"By issuing [the CSA]notice, you can reasonably infer that we are looking at stock options in some way," she said. "And we are specifically doing that through our disclosure reviews."

Mr. Belli-Bivar said Canada's different approach to enforcement may result in fewer cases being uncovered, but he believes the practice has been as common in Canada as in the U.S.

"I would expect just on a statistical basis that the reality is that the prevalence for backdating is about the same as it is in the U.S. Whether anything is done here is another thing."

Following RIM's revelation in September of its internal probe, both the U.S. Securities and Exchange Commission and the OSC announced they are investigating the company.

Even though it was not required to do so, RIM said it is reviewing problems with its stock option accounting dating all the way back to 1997, when it first went public. The company hasn't revealed any details, but has said it expects to restate its earnings by a total of $25-million (U.S.) to $45-million as a result.

"We're obviously in the same position as a lot of other companies, and we're addressing it appropriately," Mr. Balsillie told analysts in a conference call in late September, when RIM announced its internal options probe.

He noted that RIM had initiated the review itself "following the heightened public awareness and concern regarding stock option grant practices by publicly traded companies." And he said the company deserved credit for taking the lead "without being named in any academic report or being named in a newspaper or being contacted by any regulator."

When asked about its option timing, RIM issued a statement yesterday saying its "management-initiated, voluntary review" is continuing.

The U.S. stock options scandal

More than 130 American companies are under investigation on suspicion of having backdated stock options. At least two dozen executives or directors have been fired or resigned.

Comverse Technology Inc.

What Happened: Former CEO Jacob (Kobi) Alexander, above, former chief financial officer David Kreinberg and former general counsel William F. Sorin were all charged with conspiracy to commit securities fraud. The U.S. Department of Justice accused the men of "fraudulently backdating the options and operating a secret stock options slush fund."

Status: Mr. Sorin and Mr. Kreinberg have pleaded guilty to fraud. Mr. Alexander fled to Namibia and is still wanted in the U.S.

Brocade Communications Systems Inc.

What Happened: Former CEO Gregory L. Reyes, above, and former human resources vice-president Stephanie Jensen are charged by the SEC and by federal prosecutors with criminal and civil securities fraud. "The two routinely backdated stock option grants to give employees favourably priced options without recording necessary compensation expenses," according to the Department of Justice.

Status: The case is before the courts.

KB Home

What happened: The California home builder ousted CEO Bruce Karatz, above, after an internal investigation by the company's board concluded that the company used "incorrect" dates on some options, and that Mr. Karatz had selected grant dates.

Status: Mr. Karatz agreed to repay KB Home about $13-million (U.S.) to compensate for "options he has exercised that were incorrectly priced," the company said in a release last month. The SEC launched an informal probe.

UnitedHealth Group Inc.

What happened: Chairman and CEO William McGuire, above, is forced to resign after an outside investigation found his options grants "were likely backdated."

Status: Mr. McGuire agreed to have the exercise prices of all his options with grant dates from 1994 to 2002 reset to the highest share price during the grant year. UnitedHealth said in May that the SEC had started an informal inquiry.


RIM stock options

All RIM stock option grants to CEOs between 1998 and 2001:

Grant date: March 23, 1998

# of options for each CEO: 100,000

Exercise price: $6.00

Disclosure date: June 5, 1998

Price at disclosure date: $7.00

Difference: $1

Increase in value between grant date and disclosure date: $100,000

Grant date: March 3, 1999

# of options for each CEO: 100,000

Exercise price: $11.55

Disclosure date: April 23, 1999

Price at disclosure date: $16.20

Difference: $4.65

Increase in value: $465,000

(CEOs got no options in 2000)

Grant date: April 2, 2001

# of options for each CEO: 100,000

Exercise price: $33.60

Disclosure date: June 8, 2001

Price at disclosure date: $50

Difference: $16.40

Increase in value: $1.64-million

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About the Authors
Real Estate Reporter

Janet McFarland is the real estate reporter for The Globe and Mail’s Report on Business, with a focus on residential real estate trends. She joined Report on Business in 1995, and has specialized in reporting on corporate governance, executive compensation, pension policy, business law, securities regulation and enforcement of white-collar crime. More

European Correspondent

Paul Waldie has been an award-winning journalist with The Globe and Mail for more than 10 years. He has won three National Newspaper Awards for business coverage and been nominated for a Michener Award for meritorious public service journalism. He has also won a Sports Media Canada award for sports writing and authored a best-selling biography of the McCain family. More


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