Research In Motion Ltd. (RIM) executives have been fined with a total of more than $75 million in restitution and dues by Ontario Securities Commission (OSC), for back dating stock options which makes it the largest individual settlement levied by the regulator.
James Balsillie, Mike Lazaridis and Dennis Kavelman, executives at RIM must pay a combined C$9 million ($7.3 million) in fines and legal costs. They also have to repay the company an additional C$68 million to settle charges they benefitted from improperly priced stock options. In total the figure adds to up be approximately $75 million.
In addition to the fines, executive Jim Balsillie will step down from the technology firm’s board for a minimum of one year. This move is also part of the settlement agreement with Canadian regulators over a stock-options controversy.
The OSC accused Balsillie, Lazaridis and other RIM executives of receiving backdated stock options over 10-years, ending in July 2006.
The maker of the BlackBerry smart phone showed a “fundamental failure of governance” by backdating stock options, Ontario Securities Commission Vice Chairman James Turner said at a hearing in Toronto today. “This was not fraud, rather it was negligence.”
“RIM is pleased that the parties have resolved matters with the OSC and looks forward to resolving matters with the SEC,” said John Richardson, RIM director. RIM has also made a settlement offer to U.S. Securities and Exchange Commission (SEC), which SEC staff has recommended the agency approve.
The question lurking in my mind is how will RIM set up repayment terms with the OSC. In times of economic downturn the sum is hefty but has to be paid.
For many of us terms such as “back dating” and “stock options” are not familiar territory. Stock options give share holders the option to buy shares in a company further down the road at a locked in price. They work on the principle of a raincheque at Safeway for your favourite cereal on sale, that could be bought at the discounted price later on.
Backdating creates an option on a certain day, but pricing the stock option at a price sometime in the past when shares were even cheaper, makes the potential profits higher.
The legal loophole here is that backdating technically “rips off” the company’s existing shareholders by offering an undisclosed, artificially created price to an exclusive group of shareholders usually the executives of the company, who have access to insider information.
RIM is not the only organization convicted for backdating. Leading technology company Apple’s Steve Jobs also captured the attention of the OSC, which began investigating RIM’s accounting practices for wrongdoing and lead to a settlement.
“RIM repeatedly made statements in many of its filings, including prospectuses, financial statements, annual reports, and management information circulars, that contained the misleading or untrue statement that options were priced at the fair market value of RIM’s common shares at the date of the grant and were granted in accordance with the terms of the plan,” the OSC said in its final statement of allegations publicly release.