SiliconBeat

Silicon Storage Technology (SST) finally became up to date in its financial filing requirements with the SEC on Friday when it posted its quarterly 10-Q reports for the first three quarters of 2007. That followed the filing on Wednesday of its long-delayed 10-K report covering fiscal 2006, which also contained a summary of the findings by the chairman of its board on his investigation into the company’s historical stock option practices.

The picture isn’t pretty.

After investigating every option grant since SST went public in November 1995 through 2007, the company said it found “a number of occasions on which we used an incorrect measurement date for financial accounting and reporting purposes.” That’s an understatement.

What was stunning, reading through the company’s findings, was that in so many instances it was the company’s routine practice to pick more favorable dates. For example, when giving out option grants to new hires or for promotions or for merit during the first nine months of 1997, “our practice was to grant stock options with an exercise price based upon the lowest closing price of our common stock in the month of hire, promotion or merit increase.”

If looking for the best price in a month got you a better price, why not expand that pool of dates to a full quarter? That’s what the company’s “practice” was on a routine basis from the fourth quarter of 1997 through 2002.

The practice extended all the way up into the board room. “We determined that certain grants were made to members of the board of directors on discretionary dates rather than the non-discretionary prescribed dates under the 1995 Non-Employee Directors’ Stock Option Plan” which spelled out specifically when grants to directors were supposed to be made. “The members of the board of directors who received such grants have agreed to reprice upwards such grants and to pay us the difference between the original exercise price and the restated exercise price for options that have been exercised.”

SST also employed a trick we don’t recall previously being reported by other companies who investigated their stock option practices. From “1997 to 2003 and in 2005, the final number of shares that an individual employee was entitled to receive was not determined and/or the proper approval of the related stock option grant was not formally obtained until after the stated grant date.”

The company also found instances where “the exercise date of cash exercises of stock options appear to have been improperly reported which may have provided tax benefits” to the person doing the exercising.

Here’s the paragraph we liked best, however: (The italics are ours):

“The Chairman carefully considered the involvement of current members of management and the board of directors in the stock option grant process and concluded that they were either unaware of the methods by which the exercise price for such options was determined and/or that such exercise price would have a financial statement impact. The Chairman did not reach any conclusions regarding former members of management. There is evidence, however, that a former non-management employee was aware of the methods by which the exercise price of such options was determined and that this employee may have been aware that the use of such methods was improper.”

With that level of accountability, is it any wonder that the company is still under informal
investigation by the SEC?

After recording $42 million in additional charges related to stock-based compensation from 1997 through 2005, and having spent $9.1 million through the end of November conducting its review, the company faces further costs to help its employees with potential income tax liabilities, not to mention more legal expenses related to ongoing and potential new law suits.