Options gone wild!
Separating the flagrantly illegal from the merely slimy.
By Adam Lashinsky, FORTUNE senior writer

(FORTUNE Magazine) -- Think of the options-backdating brouhaha as corporate America's steroids scandal: Before the rules changed, the abuses went on for years.

And separating who broke the rules from who merely engaged in icky behavior is tougher than it looks.

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Options have long been used to attract and retain people from CEOs on down. Companies give employees the right to buy a set number of shares at a fixed price for several years. The price is generally where the stock trades when the options are granted.

Simple, right? If only. As common as options have become, doling them out is something of a black art. Some companies have ultrastrict rules, and some give management wide latitude. Still others followed what they thought were acceptable practices, which now turn out to be potentially illegal.

"There is very little law on this," says Jordan Eth, a lawyer with Morrison & Foerster in San Francisco, whose firm is working for companies that are investigating their options programs. "A year ago this wasn't a front-burner issue. It wasn't even a middle-burner issue."

Joe Grundfest - Stanford law professor and Silicon Valley's leading voice on securities law - divides problematic behavior into three broad categories:

Time-travel grants: Also known as backdated or "look-back" options, and almost certainly illegal.

Someone chooses a date earlier than when the options were approved because the stock has since run up. Doing that lowers the exercise price of the options so grantees can enjoy a bigger haul.

These are the goodies that Amnon Landan, the CEO of the software company Mercury Interactive (Charts), allegedly awarded himself and other employees. (Mercury's board has since fired Landan.)

Forward-dating, springloading, bullet-dodging: These schemes involve looking forward rather than looking back.

Some companies purposely adopted policies that priced options at a future low point in the stock. Others "springloaded" their grants by awarding them just before good news hit (boosting the stock) or engaged in "bullet-dodging" by holding off on grants until after releasing bad news so employees would get lower-priced options.

If companies followed disclosed policies and properly accounted for them, says Grundfest, it's unclear they've violated the law, no matter how unseemly the practices may appear.

Honest screwups: Options could be mispriced, says Grundfest, simply because a director was slow to sign a document, resulting in a grant date that's different from what the board intended. Hey, it happens.

So the options scandal isn't one-size-fits-all. "It's a much more complicated constellation of facts and circumstances than people make it out to be," says Grundfest.

That's what they're saying about baseball's problems too.  Top of page