SEC Launches Formal Investigation into McAfee Stock Options

June 12, 2006

McAfee Inc. said that securities regulators have opened a formal investigation into the possible manipulation of the company’s stock options — an area of concern that recently prompted the software maker to fire its top lawyer.

The Securities and Exchange Commission notified the Santa Clara, California-based company of the investigation in a subpoena delivered Wednesday, according to regulatory documents filed Friday.

The documents provided no details other than that the inquiry revolved around past stock option grants to employees, a popular employee incentive that has come under scrutiny at dozens of companies nationwide because of suspected abuses in the way the rewards were priced.

McAfee spokeswoman Siobhan MacDermott declined to comment.

The SEC opened the investigation a week after McAfee fired its general counsel, Kent Roberts, after concluding he had been involved in an improper incident involving stock options six years ago.

When it announced Roberts’ ouster, McAfee acknowledged it was in informal discussions with the SEC and the U.S. Justice Department about the pricing of its past stock options.

McAfee, a leader in computer security software, is just one of many companies whose stock option practices are either under federal investigation or have sparked internal inquiries. The list is dominated by high-tech companies, where stock options are widespread.

Investigators are trying to determine if company insiders manipulated the timing of stock option grants to increase the likelihood that management would reap huge windfalls.

Under the practice, the options are backdated to an ebb in a company’s stock price instead of pegging the exercise price to the prevailing market value at the time of the award.

Stock options become more valuable as the market price rises above the exercise price, so backdating fattens the recipient’s profit.

Backdating isn’t necessarily illegal if the activities are fully disclosed to shareholders and the financial impact is accounted for correctly. If the backdating isn’t recorded in a company’s books, the omission can exaggerate earnings and cause taxes to be underpaid.

McAfee’s shares fell 13 cents Friday to close at $23.77 on the New York Stock Exchange

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