MILSTEAD: TeleTech may dodge 'backdating' bullets
By David Milstead, Rocky Mountain News (Contact)
Published November 15, 2007 at 1:36 a.m.
The options backdating scandal has cooled off nationally, but it's heating up at TeleTech.
The Douglas County-based outsourcing company has been one of Colorado's hottest stocks in the past year. Tuesday, however, it said it won't be filing its quarterly report and an earnings restatement for 10 years of financials is likely because its audit committee is "conducting a review of the company's accounting for equity-based compensation practices."
TeleTech didn't use the word backdating, which has become a common term.
In early 2006, The Wall Street Journal, building on academic research, found companies that had mysterious patterns of handing out options.
It seemed grants purportedly occurred when the stock price was at a low point for the quarter or year, a statistically unlikely occurrence that served to boost executive pay. That's because the lower the exercise price on the options, the bigger the profits when they're cashed in.
Ultimately, more than 200 companies were flagged by research firms or disclosed problems they discovered in an internal review. Some of those companies revealed top executives had altered the option dates and faked documents to conceal their profit-maximizing ploy. Civil charges and some indictments followed.
TeleTech CEO Kenneth Tuchman told analysts Friday, the day after the company disclosed its problem, that its option review "was undertaken during the third quarter after we discovered some administrative errors in certain grant awards . . . it was self-initiated and not in response to any regulatory reaction."
Tuchman also said, "As much as we would like to give you additional information about the review of our equity compensation grant practices, because the audit committee review is not complete, we will not be able to comment further on this matter."
The review will likely find this bad fact: Of 25 option grants made by TeleTech in the past eight years, three came at the lowest stock price of the quarter:
* A 1999 grant of 40,000 options to Deborah Gentry, then the senior vice president of human resources, came Nov. 9 with the stock at $11.81.
* A 2001 grant of 420,000 options to Tuchman came Oct. 1, with TeleTech at $6.98.
* A 2005 grant of 250,000 shares to Vice Chairman James E. Barlett came May 13, with TeleTech at $7.34.
TeleTech had no apparent schedule to its option grants. In some years, grants were made in February. In others, they were sprinkled throughout the year.
Was there a pattern? Take TeleTech's stock prices for each quarter since 1999 and rank them highest to lowest. Of the 25 option grants, 20 came in the lower half of the prices, with only five coming in the upper half.
In addition to the three grants on the lowest day of the quarter, there were grants on the third-, fifth- and eighth-lowest days.
A rigorous statistical analysis may show there's a solid chance that all this is random. To be sure, the patterns are a lot less damning than those of Delta Petroleum, a Denver company that is the only other Colorado concern known to have looked into its own options issues.
After a research firm described Delta's options pattern as suspicious, a special panel of Delta Petroleum's board hired outside counsel to investigate.
In four of eight years, when Delta Petroleum granted stock options to its top executives, it issued them with an exercise price equal to the stock's 52-week low, the Rocky Mountain News found.
The board committee found "deficiencies in the documentation" of the option grants, but said "there was no evidence of option backdating or other misconduct by our executives or directors in the timing or selection of our option grant dates."
Delta Petroleum provided the results to the U.S. attorney, which had subpoenaed the company, and to the Securities and Exchange Commission. The company said in an August disclosure that it "has been orally informed through counsel that the U.S. attorney has closed the matter. The company further believes that the SEC has also closed its informal inquiry."
Delta Petroleum is not alone. An article Aug. 7 in CFO Magazine noted that the SEC dropped a backdating investigation for the third time in a week, "marking a decline in enforcement activity over backdating." Electronic Arts, NVIDIA Corp. and PMC-Sierra all dodged the bullets.
It suggests TeleTech may emerge from this with restated financials and no other ill effects.
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