MILSTEAD: Troubling signs in TeleTech report

By David Milstead, Rocky Mountain News (Contact)

Published February 27, 2008 at 12:05 a.m.

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In November, I highlighted TeleTech's apparent backdating of stock options. In fairness, I today bring you the results of the TeleTech board's internal investigation, in which outside attorneys found "no willful misconduct and no evidence of improper conduct by any current member of senior management."

Drill down beyond that opening statement, however, and you find several troubling elements of the report.

Let's quickly talk about option backdating. Companies typically grant options with an exercise price equal to the price on the day they're given out. That way, there's no unfair advantage for the executive.

It has become clear that many companies looked backward and selectively picked low trading points when setting options' exercise prices, giving the recipients built-in profit. Research firms and regulators have questioned more than 200 companies, and some egregious violators are headed to prison.

That's why TeleTech seems pleased to find no "willful misconduct." But the company goes further and reports "there was no regular or systematic practice of using hindsight to select grant dates and no pattern of consistently hitting 'lows.' "

Perhaps not "regular" or "systematic," but an examination of the company's grants found lows were hit nonetheless.

Of the 25 option grants since 1999, three came on a quarterly low for TeleTech's stock price. (The recipients included current CEO Kenneth Tuchman and Vice Chairman James Bartlett, who were specifically absolved of "misconduct." There were also grants on the third-, fifth- and eighth- lowest days.

TeleTech's investigation allows there were "episodic instances of selecting grant dates with some hindsight."

"Certain employees/officers . . . did not adequately meet all of the demands of their positions and/or did not adequately appreciate their responsibilities."

And, "certain employees involved in selecting grant dates . . . had some understanding of the accounting implications. . . . However, there was no conclusive evidence demonstrating that those involved in selecting dates knowingly and/or purposely violated accounting or disclosure rules." (Spokeswoman KC Higgins declined to elaborate on the disclosure.)

These employees are no longer with the company, TeleTech said. In the meantime, the company will restate its financial results. And the employees who got the backdated options? TeleTech has decided to pay all their extra taxes, plus tax gross-ups, "to make the employees whole" for the backdating.

Shareholders, who never got the chance to buy the stock with historical hindsight, remain uncompensated.

David Milstead and James Paton take turns writing Up and Down 17th Street. Contact Milstead at 303-954-2648 or milstead@RockyMountainNews.com.

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