Lie Research Uncovered Backdating Scandal
Academic researchers typically work in obscurity, but in a growing number of celebrated cases their relentless sleuthing is prying the lid off industry-wide financial fraud and improprieties that manage to elude the watchful eye of regulators. A professor at The University of Iowa, Erik Lie, found that corporate executives were backdating option grants. His study, published in 2005, showed that when companies reported stock options the same day they were granted, no pattern of rising share prices resulted. The story was much different, however, among firms that delayed reporting options. In these cases, he found that Yermack's pattern intensified. Lie did not mention any companies by name. But after his study appeared, The Wall Street Journal published an article in March 2006 that used its own analysis to identify six companies with suspicious options-backdating practices. The case caught the eye of the media and blossomed into a backdating scandal in which more than 130 companies came under federal investigation by the Securities and Exchange Commission and the Internal Revenue Service, and more than 40 executives stepped down under pressure or were fired. At last count, about 80 cases remained open.