From the moment reports surfaced suggesting that its executives had lined their pockets by backdating large options grants to favorable grant dates, Affiliated Computer Systems (ACS) engaged in a public relations offensive to downplay the significance of the scandal. Over the holiday weekend (a perfect time for a serial offender to release bad news), the company finally admitted what was obvious to independent observers: that top executives were guilty of intentional backdating.
ACS' attempts to whitewash the scandal began days after they received notice that the SEC was investigating its options practices. Using the boilerplate contained in the SEC notice, the company encouraged investors to ignore the investigation: "The Company was advised in the Commission’s notice that the Commission’s request should not be construed as an indication by the Commission or its staff that any violations of law have occurred; and nor [sic] should the request be considered an adverse reflection upon any person, entity or security."
Then, after University of Iowa professor Erik Lie calculated the odds of ACS stock grants falling on such favorable dates absent malfeasance to be an astounding 300 billion to one, or roughly 2,000 times more remote than winning the Powerball lottery, the Company denied any intentional wrongdoing. In a 10-Q report filed on May 10, 2006, ACS stated: "based on the initial findings of our internal investigation, we do not believe that any director or officer of the Company has engaged in the intentional backdating of stock option grants in order to achieve a more advantageous exercise price."
Now the internal investigation is complete, and the company has had to back down from that lie. It has finally admitted that "in a significant number of cases Mr. Rich, Mr. King and/or Mr. Edwards used hindsight to select favorable grant dates." The company also admitted that its May 10, 2006 denial was false:
Further, with respect to the Company's May 2006 Form 10-Q, the investigation concluded that Note 3 to the Consolidated Financial Statements which stated, in part, that the Company did "not believe that any director or officer of the Company has engaged in the intentional backdating of stock option grants in order to achieve a more advantageous exercise price," was inaccurate because, at the time the May 2006 Form 10-Q was filed, Mr. King and Mr. Edwards either knew or should have known that the Company awarded options through a process in which favorable grant dates were selected with the benefit of hindsight in order to achieve a more advantageous exercise price and that the term "backdating" was readily applicable to the Company's option grant process.
CEO Mark King and CFO Warren Edwards, both implicated in the wrongdoing, resigned immediately. The aptly-named former CEO Jeff Rich retired in the beginning of the year, but not before taking an $18.4 million buyout of his backdated options. Now that the internal investigation has concluded that the options were grossly overvalued by illegal backdating, will ACS go after this payment? We hope so, but the company's actions indicate it is more likely to sweep the problem under the rug.