Thermo probe reveals Fisher options timing
An internal investigation into practices governing how stock options were granted at the former Fisher Scientific revealed that the Hampton-based company sometimes retroactively timed granting of the options to its executives’ benefit, according to documents filed with the Securities and Exchange Commission.
Thermo Fisher Scientific – the company that Fisher merged into last November – said that the audit committee’s “voluntary investigation” also found that other options were not sufficiently documented, that Fisher may have taken tax deductions on both options and bonuses that it shouldn’t have, and that the executives also might owe back taxes.
The audit focused on Fisher’s practices dating from January 1998 to May 2006, before Thermo Electron of Waltham, Mass., merged with the larger Fisher in a deal that roughly tripled the size of the company.
The audit did not look at former or current options practices at Thermo. Most of the top Fisher executives, after collecting millions of dollars in equity incentives, are no longer part of the Thermo Fisher team.
The SEC has been investigating options timing over the past few years, and Thermo launched the probe “because of increased attention” these practices have received, said spokesperson Lori Gorski, and not because of any SEC inquiry.
The internal investigation focused solely on Fisher because “we were already aware how Thermo operated, but we wanted to get a better sense of Fisher before the merger.”
Fisher allegedly backdated grant dates up to 30 days, primarily to new hires, according to Thermo’s quarterly filing. The executives would be able to buy the options at the lowest closing price in the period. Then, if the stock went up, they would be able to sell it at a greater profit.
Those profits could be a substantial part of an executive’s compensation.
For instance, on Aug. 15, Thermo’s current president, Marijn Dekker – who is not accused of any options timing wrongdoing — cashed in 150,000 in options. The options were granted at $22.47, based on the price in 2002, and then sold the same day at prices ranging from $51.66 to $52.61, the spread for one day.
At the lowest selling price, Dekker would make $4.38 million. However, if the selling was all timed at the highest price Dekker could make nearly $150,000 more.
Similarly, if Dekker were allowed to choose to time the purchase date of the stock so the share price was $1 lower, he would similarly be able to increase his profits by $150,000. But the spread over an entire month is likely to be higher than $1, so the profit differential would be greater.
(After the media reported Dekker’s stock cash-in, the company released a statement saying that Thermo’s CEO actually exercised 300,000 shares of his options over the Aug. 15-17 period and has adopted a plan for the future sale of up to 780,000 more options. Thermo added that Dekker entered the plan to “diversify his holdings,” although he would still retain 1.86 million shares in the company.)
Potential tax penalties
The investigation into Fisher’s practices did not disclose which Fisher executives were involved in the alleged timing. The executives who received the most options between 2003 and 2005, based on the last Fisher filing before the merger, were: Paul Montrone, former chairman and CEO (1.265 million shares); Vice Chairman Paul Meister (892,000 shares); President David T. Della Penta, (719,000 shares); and CFO Kevin P. Clark (472,000 shares).
The filing did not disclose the amount involved, but it did say it was not enough to materially affect the balance sheet of Thermo, which reported nearly $2.4 billion in revenues during the last quarter, or Fisher, whose annual revenues ranged between $2 billion and $5.5 billion during the period in question.
When the timing is corrected, that could result in tax penalties for Fisher executives who vested stock options after 2004. Thermo would pick up the tab, but the “option remediation program” might cost as much as $4 million in the second half of 2007, Thermo disclosed.
In addition, Thermo said that Fisher took tax deductions that may have been forbidden under the Internal Revenue Code. The Internal Revenue Service limits deductibility if the compensation is above $1 million and is not performance-based or not granted by a board committee comprised solely of independent directors.
The amount of these deductions was not material to Thermo’s bottom line, the company said.