ATC committee finds defective options grants, but is against management terminations
November 8, 2006 - American Tower Corp. said today an internal review of its stock option granting practices found the company maintained inadequate controls and failed to properly account for its options grants.
Although the special committee investigating ATC's questionable option granting practices began six months ago, it has not yet finalized its remediation recommendations. However, it did note that no terminations or changes in responsibilities of current executive management should be made as a result of its findings.
In May , ATC said federal regulators were probing their grants of stock options to executives, joining a growing list of companies caught up in a rapidly expanding SEC investigation of options practices.
Some execs were aware of backdating
Chief Financial Officer Bradley Singer said this morning that the SEC inquiry is still open and it is not known what expenses the company will incur during the investigation. American Tower said it did not report its full financial results for the third quarter, due to its internal stock options granting review.
In the third quarter American tower incurred $8.2 million of additional costs related to the review of stock option granting practices and related legal and governmental proceedings.
A review by ATC's audit committee said some members of current management
were made aware of the use of lookbacks for certain option grants, and certain of them should have been aware of the accounting or legal issues or inquired further.
The findings also indicated that one or more outside lawyers for the company were, on multiple occasions, told of the lookback practice and did not advise the company of the accounting and legal problems with that practice.
Stock options backdating occurs when an exercise price is set at a point lower than the prevailing market price, which can inflate the recipient's award. While the manipulation itself isn't necessarily illegal, securities laws require companies to properly disclose the practice in its accounting and settle any charges that may result.
The committee said with the likely exception of one past member of management, the evidence does not indicate that management at the time in question was aware that, in looking back to choose a past grant date with a more favorable closing price, the company was failing to take necessary accounting charges or acting contrary to the company's disclosures. However, they said, certain members of past management who initiated and were involved with the option practices should have been aware of the accounting or legal issues or sought legal and accounting advice as to the practice.
In the period from June 1998 to 2004, American Tower said certain grants were backdated to use a lower exercise price, and were not consistent with disclosures that the grants were made at fair market value. The company said the grants were issued using "lookbacks" ranging from a couple of days to eight weeks.
The company also said it doesn't expect to be able to file its restated results and quarterly report for the period ended Sept. 30, 2006 by the Nov. 9 deadline, but does expect that all reports will be filed by the end of November.
The special committee also found:
The option grants involving lookbacks were inconsistent with the company's disclosures that option grants were made at fair market value, were not accounted for properly and, to the extent they involved incentive stock options, violated the requirement under the company's 1997 Stock Option Plan that they be at fair market value.
Stock options were granted by management pursuant to authority they believed had been delegated by the Compensation Committee, but that delegation was not adequately documented, and therefore the necessary legal approval of some grants did not occur until they were subsequently approved by the Compensation Committee.
The process by which members of the Compensation Committee formally approved option grants involved the signing of unanimous written consents that included schedules of option grants approved by management for the preceding quarter. The company typically used the date set forth in the schedules attached to the written consents as the option grant date. However, all necessary corporate action had not been taken until the written consents were actually signed by all committee members, which typically did not happen until later, sometimes resulting in a delay of many months between the date recorded by the company as the option grant date and the legal grant date.
The company's flawed option practices began with past management, whose members frequently looked back to select option grant dates. Current management's efforts to improve and formalize procedures for option grants since early 2004 have had the effect of eliminating the practice of lookbacks. In addition, the evidence does not indicate intentional misconduct by any member of current management.
The Board of Directors and the Compensation Committee failed to adopt adequate procedures to ensure that Compensation Committee members understood the company's 1997 Stock Option Plan and that it was properly administered.
From 1998 through 2005, the company's processes, procedures and controls were inadequate, although management steadily improved the processes beginning in 2001. In 2006, the Compensation Committee revised its procedures for approving stock option grants in an effort to ensure compliance in the future.
The company also had inadequate controls relating to, and failed to account properly for, certain modifications of outstanding stock option rights.
The Special Committee will recommend to the company's Board of Directors a remediation plan to address the issues raised by its findings.