Ethics Newsline®

Stock options, auction-rate securities, and “moral hazard” of borrowing and bailouts highlighted in week’s news

VARIOUS DATELINES
Investment issues and attendant ethical problems were the subjects of several major reports last week. Among them:

• Former Apple general counsel Nancy Heinen settled charges with the U.S. Securities and Exchange Commission (SEC) that she had improperly backdated stock options when she worked at the company, according to a report from CNET. The SEC sued Heinen for allegedly choosing favorable dates for granting of stock options to Apple executives. Heinen will pay $2.2 million in penalties and fines to settle the suit, but will not have to admit or deny any guilt in the case, according to CNET. Backdating stock options is not illegal, but hiding the details of the arrangement and the income is. A stock option is an offer made by a company to allow someone to buy shares of stock in the future at a predetermined price. By backdating the date of the predetermined price to a time when stock prices were low, it is sometimes possible to artificially depress the purchase price of the stock.
• The Wall Street Journal reports that there is a feud growing between Wall Street firms that have agreed to buy back auction-rate securities and those who have not. The complex investments collapsed in February, and regulators later charged some investment banks and brokerages with civil fraud, claiming that they had been aware of the dangers but still hawked the securities. But while some Wall Street companies agreed to buy back the issues, some brokerages say they should not be obligated to buy them back because they were merely sellers of the vehicles, not the originators, saying they were kept in the dark about the problems as much as were customers, according to the Journal.
• Federal Reserve chairman Ben Bernanke last week proposed a broad system to police the credit markets and prevent a recurrence of the crises that have walloped the economy. The New York Times reports that among Bernanke’s proposals is a suggestion that regulators should more closely scrutinize lending practices to filter out risky loans. Critics have claimed that reckless and sometimes deceptive lending and borrowing practices set up the economy for a fall — and that subsequent bailouts had reinforced the “moral hazard” of removing risk from shaky transactions. Bernanke spoke at the Fed’s annual symposium at a Wyoming mountain resort.

Sources: CNET, Aug. 22 — Wall Street Journal, Aug. 22 — New York Times, Aug. 22.

For more information, see: Related Newsline story, Aug. 11 — Related Newsline story, July 14 — Related Newsline story, May 19 — Related Newsline story, Jan. 2, 2007 — Related Newsline story, Jan. 16, 2007.