Stock Options

When Michael D. Eisner and Frank G. Wells took over as top executives at troubled Walt Disney Co. in 1984, they took smaller base salaries in exchange for a shot at lucrative bonuses and stock options. If they turned the firm around, the bonuses and stock options would kick in and earn them far more than what they gave up in base salaries. Such confidence has paid off handsomely for the Disney duo. The $40.1 million and $32.1 million that Eisner and Wells earned in 1988--mostly in bonuses and stock options--made them by far the highest-paid managers last year in The Times' annual survey of executive compensation at California-based, publicly held companies.

Imagine Los Angeles without Homeboy Industries. Imagine that the 350 or so men and women who work at Homeboy's various operations instead had no help finding jobs. Imagine that the 500 or so young people in the pipeline for work at Homeboy were suddenly deprived of that chance for gainful employment, security, support and stability. Imagine that the thousands of young men and women who every year have tattoos removed at Homeboy instead showed up for job interviews with necks and arms and shoulders boasting of a life they'd prefer to put behind them.

New Options Rules: The SEC said it has approved a phased-in system to allow stock options to be traded on multiple exchanges, opening the market to total multiple trading in less than two years. Under the ruling, each options exchange will be allowed on Jan. 22, 1990, to list up to 10 additional stock options classes that overlie stocks trading on other options exchanges on or before that date. On Jan. 21, 1991, no options exchange can limit its ability to list any stock options class because it is listed on another options exchange--thereby opening the entire system to total multiple trading.

A former KB Home executive who became a key prosecution witness in the stock-manipulation trial of the company's former chief executive was sentenced Wednesday to three years' probation. Gary A. Ray, KB's former vice president of human resources, had pleaded guilty to conspiring with former CEO Bruce Karatz to obstruct justice. U.S. District Judge Otis D. Wright II in Los Angeles also sentenced Ray to four months of home detention and 600 hours of community service and fined him $10,000.

A federal judge in Los Angeles has dismissed Broadcom Corp. co-founder Henry T. Nicholas as a defendant in a class-action lawsuit by shareholders over the backdating of stock options. Judge Manuel L. Real ruled that the 2008 lawsuit was filed beyond the statute of limitations, more than five years after Nicholas resigned in 2003 as chief executive of the Irvine chip maker. The plaintiffs allege that the company's stock price dropped on news and financial analysts' reports of problems with stock options in 2006.

Washington Mutual Inc., whose share price sank 70% last year as mortgage losses soared, said it awarded Chief Executive Kerry Killinger 3.2 million stock options for 2008. In a Securities and Exchange Commission filing, the largest U.S. savings and loan said its human resources committee granted the award to provide "a strong incentive to restore shareholder value." Killinger will not receive a bonus for 2007, the Seattle-based company said.

Citigroup Inc. awarded Chief Executive Vikram Pandit $26.7 million of shares and 3 million stock options, six weeks after he took over the largest U.S. bank and a week after Citigroup reported a record $9.83-billion quarterly loss. Citigroup said Pandit was awarded 1,094,949 shares under a company incentive plan adopted in 1999. He also received options to buy 1 million shares at $24.40 each, 1 million at $30.50 each and 1 million at $36.60 each.

These tables show 2006 compensation for chief executives of California's 100 largest public companies. The CEOs are ranked by total pay, which consists of cash pay (including salary and bonus), stock, stock options and other pay, which can include deferred compensation and such items as company-paid life insurance and the cost of an executive's personal trips on the corporate jet. The figures do not include deferred compensation cashed out in 2006 or profits from stock options exercised during the year because those things are considered to be pay from previous years.

The Justice Department's crackdown on stock-option backdating took a thunderous hit this month when U.S. District Judge Cormac J. Carney dismissed charges against three former Broadcom executives -- only one of whom was on trial at the time. The judge was so upset with the prosecutors' behavior, he even dismissed the Securities and Exchange Commission's lawsuit against the company. Carney's accusations of witness intimidation and tampering are serious enough to warrant an internal investigation by the Justice Department, and one is underway.

In a blow to the government, the first chief executive found guilty by a jury of backdating stock option grants has had his conviction overturned. Gregory Reyes, former CEO of Brocade Communications Systems Inc. of San Jose, will get a new trial after a federal appeals court in San Francisco ruled that his case was tainted by prosecutorial misconduct. Reyes, 46, was convicted in 2007 of conspiracy and fraud for backdating employee option grants in 2001 and 2002. The practice, widespread particularly in the technology industry, was a way to cherry-pick favorable exercise prices for the options, boosting their value to employees.

Two former executives at Vitesse Semiconductor Corp. were indicted Friday by a federal grand jury on charges of defrauding investors in the Camarillo technology firm by overstating its revenue and manipulating stock options to secretly reward employees. Vitesse founder and former Chief Executive Louis Tomasetta and former Executive Vice President Eugene Hovanec were released on bond after pleading not guilty in federal court in New York. They are charged with securities fraud, falsifying corporate records and conspiracy.

Bruce Karatz, homeboy? The former KB Home chief executive, who is to be sentenced Wednesday on three felony convictions in a stock option manipulation case, has been volunteering his services for the last six months at the Homeboy Industries gang-intervention program in Los Angeles. Karatz has helped the financially troubled agency by "finding bold and creative ways to broaden our brand, increase the revenue in our businesses and invite more stakeholders to invest," said Father Gregory Boyle, Homeboy's founder and executive director.

Oracle Corp. plans to pay its newly appointed co-president, Mark V. Hurd, a base salary of $950,000 a year. The company also says the former Hewlett-Packard Co. chief executive, who was ousted by that company last month, was eligible for a fiscal 2011 bonus of as much as $10 million. Oracle released the details of Hurd's pay package in a filing with the Securities and Exchange Commission on Wednesday. The biggest part of Hurd's pay package will be the 10 million stock options Oracle plans to give him. The company said Hurd's options will carry an exercise price equal to the market value of the shares on the date they are granted.

By Kathy M. Kristof Thanks to the worst recession in decades, the titans of industry took a substantial pay cut in 2009. But it may just be a case of delayed gratification. The chief executives of California's 100 top companies collected an average of $8.4 million in total pay last year, down 11% from 2008, according to data compiled for The Times by research firm Equilar Inc. Nationwide, CEO pay dropped about 8%. But appearances can be deceiving. "This year, it looks like there's a reduction, but you will see a few years from now that it has not been the case at all," said Nell Minow, editor at Corporate Library, another compensation tracker.

Federal prosecutors decided Friday not to appeal a judge's recent dismissals of criminal stock options backdating charges against Broadcom Corp. co-founders Henry Samueli and Henry T. Nicholas III. The decision brought to a close a two-year legal battle between the billionaire executives and the Justice Department. Late Friday, Nicholas released a statement that said, "The decision by the Department of Justice reconfirms my faith in our criminal justice system." In December, U.S. District Judge Cormac J. Carney dismissed the charges against Samueli and Nicholas, accusing prosecutors of a "shameful" campaign to intimidate witnesses and obtain unjustified convictions.

One day after he was convicted on felony charges related to the manipulation of stock options, former KB Home Chief Executive Bruce Karatz and his legal team shifted their focus Thursday to a new legal battle: trying to keep him out of prison. Defense attorneys have said they intend to ask U.S. District Judge Otis D. Wright II to reverse the four convictions for lack of evidence. That motion is expected to be filed next month. Barring a reversal, Karatz's defense team has indicated that it will appeal.

The key prosecution witness against former KB Home Chief Executive Bruce Karatz admitted in cross-examination Thursday that he told numerous lies about the company's stock option practices during his initial meetings with the FBI and federal prosecutors. The concession by KB Home's former human resources chief, Gary Ray, came during five hours of questioning by Karatz's defense attorney. On Wednesday, Ray implicated Karatz in a scheme to conceal the backdating of employee stock options from authorities.

There are two basic types of options: non-qualified stock options, typically issued to workers, and incentive stock options, which are usually offered to executives. Non-qualified options are taxed sooner and at higher rates than incentive options, but incentive options can trigger the dreaded alternative minimum tax.

For an American public seething over the housing market crash and the financial and economic crises it triggered, Bruce Karatz's conviction Wednesday may offer some small hope that justice can and will be done. Karatz, the former chief executive of Los Angeles builder KB Home, wasn't on trial for crimes related directly to the housing market bubble. Rather, he was found guilty of fraud tied to the manipulation of stock option grants beginning more than a decade ago. But so-called option-backdating abuses — which mushroomed into a national corporate scandal in 2005 and have since been uncovered at hundreds of U.S. companies — involve some of the same basic issues that would be at the heart of any government prosecution of crime related to the financial crisis: disclosure (or lack thereof)