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Lie: Backdating Sometimes Difficult To Detect

Pharmaceutical developer Sepracor Inc. has long rewarded its top executives with healthy salaries and stock options. Now, the company that plowed through years of losses before the asthma drug Xopenex and the insomnia treatment Lunesta pushed it to profitability in 2005 is among more than 30 companies nationwide under scrutiny from the U.S. Securities and Exchange Commission for the way those options were doled out. The unfolding national inquiry probes practices from the 1990s, when companies ramped up the use of stock options to attract, retain and reward managers. It has also spawned lawsuits alleging that some of those options were "backdated" to enrich executives -- potentially costing companies millions of dollars. As much as 10 percent of stock-option grants to executives nation-wide between 1996 and August 2002 may have been backdated, according to estimates made by ERIK LIE, an associate professor at the University of Iowa's business college who has studied backdating. Many of those cases may never come to light, he said. "It's hard to detect some of these patterns in some cases," Mr. Lie said. "Even if you backdate, it's not necessarily the case that the backdating is going to give rise to these very strong stock prices." The paper is based in Massachusetts.

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