Vendor Options Draw SEC Scrutiny

Broadcom's disclosure today that it will restate earnings is the latest example of the stock options plague nibbling at the edges of the storage world. (See Broadcom to Restate Earnings.)

Outside of switch vendor Brocade, no pure-play storage company has been implicated yet in an options backdating scandal. (See Backdating Backlash.) But chip maker Broadcom is among at least six vendors that have moved into storage to expand their business and coincidentally have been caught in the options snarl.

Broadcom today said it discovered questionably timed stock options issued between 2000 and 2002 and will restate financial results for the years 2000 through 2005 and the first quarter of 2006, which ended in March. The company will assign new accounting measurement dates to the options, resulting in extra non-cash expenses of roughly $750 million, by the company's preliminary estimates.

Broadcom began a voluntary review May 18 of awarded options grants that appeared to be backdated. Regulatory questions arise when this happens, since backdating can increase the value of options to recipients. The Securities and Exchange Commission (SEC) announced an informal inquiry into Broadcom's books June 12. (See SEC Investigates Broadcom.).

Other companies that sell storage products sullied by internal or SEC investigations include software vendor CA; chip vendors Vitesse Semiconductors, AMCC, and Marvel Technology Group; and network accelerator/WAFS vendor F5 Networks.At this stage, it probably wouldn't shock anyone if other companies join the list.

"What I want to know is, how did this practice become so pervasive?" asks analyst Steve Berg of Punk Ziegel and Co. "How did they all decide to do this?"

Brocade, the first storage company involved, might soon be the first to put its options problems -- or at least most of them -- behind it. Brocade CEO Greg Reyes stepped down in January of 2005, and the SEC launched an investigation later in the year (See Brocade Switches CEOs, Restates , SEC Gets Formal With Brocade, and Brocade Being Investigated.) Brocade has discussed a settlement with the SEC since early this year, and the vendor put at least $8 million aside for a possible fine. (See Brocade Eyes SEC Settlement and Brocade Boasts Big Quarter.)

Brocade could still face class action suits from investors who claim the company misled them during the periods for which it's restated earnings. (See Brocade Hit With Class Action Suit.) As for Reyes, he's on his own. Brocade removed him from the consultant role he was supposed to play after quitting as CEO, although that could also lead to a legal showdown. (See Options Preserved.)

Meanwhile, last month, storage and network software vendor CA said it would delay filing its latest earnings report and will likely restate previous reports in part because of an internal review of options grants. (See CA Files Form 8-K.) CA has other problems; its former CEO pled guilty in April to security fraud, perjury, and obstruction of justice charges. CA has already restated earnings five times in two years. (See CA Delays Earnings Report.)Vitesse has perhaps been hit hardest so far. Since it launched an internal investigation into stock option grants April 18, Vitesse has fired CEO Louis Tomasetta, CFO Yatin Mody, and EVP Eugene Hovanec. The company has also received a grand jury subpoena from the U.S. Attorney for the Southern District of New York, and gotten itself delisted from public trading by the SEC because it hasn't been able to file its earnings due to the investigations. (See Vitesse Fires CEO, Hires New One, Vitesse Gets Subpoenaed, and Vitesse Getting Delisted.)

Earlier this week, Robert Chapman -- manager of a hedge fund that owns a 7.3 percent stake in Vitesse -- called for management to auction the company off. (See Hedge Fund Vents on Vitesse.)

In other news, AMCC said June 12 it received a letter of inquiry from the SEC and received a subpoena from the U.S. Attorney for the Northern District of California requesting documents relating to its option practices. AMCC faces delisting. (See AMCC Gets Subpoenaed, SEC Investigates AMCC, and Nasdaq Warns AMCC.)

Marvell Technology Group Ltd. disclosed July 5 it received a letter of inquiry from the SEC and a grand jury subpoena from the U.S. Attorney's office for the Northern District of California requesting documents related to its option grant practices. (See Marvell Joins Options Fun.)

F5 Networks also received a grand jury subpoena issued by the U.S. District Court for the Eastern District of New York and notice of an SEC inquiry May 18 requesting documents related to the granting of stock options from 1995 through the present. (See F5 Receives Subpeona.)Dave Raffo, News Editor, Byte and Switch