Deloitte Settles Again – Options Truth Remains Buried

Update: Some additional information about the Micrel case from Professor Erik Lie, including links to the articles about the IRS agent who originally blew the whistle.

“A particularly interesting example is that of Micrel Inc. For several years, Micrel allowed its employees to choose the lowest price for the stock within 30 days of receiving the options. After these stock option terms came to the attention of the IRS in 2002, it worked out a secret deal with Micrel that would allow Micrel to escape $51 million in taxes and required the IRS to keep quiet about the option terms. Remy Welling, a senior auditor at the IRS, was asked to sign the deal in late 2002. Instead, she decided to risk criminal prosecution by blowing the whistle. A 2004 NY Times article describes this case in greater detail (the article is available here), and so does a 2006 article in Tax Notes Magazine (available here). In a 2004 CNBC interview, Remy Welling said that “this particular — well, it’s called a 30-day look-back plan, is even widespread in Silicon Valley and maybe throughout the country.””

As I should have suspected, more than one Big 4 firm is involved…(From the Tax Analyst article linked above.)
“…the Micrel case was being handled on Micrel’s behalf by Jim Casimir — a former IRS national director of Appeals who left the IRS in 2000 to head PricewaterhouseCoopers’ IRS tax dispute resolution practice in Los Angeles — and that he ‘‘would stop at nothing’’ to seal the ISO deal.”

Deloitte & Touche settles suit alleging that it approved options “backdating“

“Last month, on the eve of a scheduled trial, the accounting firm of Deloitte & Touche quietly settled a malpractice suit that accused it of having approved a stock option pricing program that amounted to backdating. The plaintiff in the case, San Jose semiconductor maker Micrel Inc., disclosed the fact of the settlement — though none of its terms — last week in its 10-K filing with the SEC…hoping it would go to trial, because it would have finally shed some light on how Silicon Valley accountants were analyzing options backdating issues in the late 1990s. (Many of the court filings in the case were lodged under seal, and are consequently unavailable.)

The case was also intriguing because it was one of only two I know of so far — the other being Microsoft — where a company is believed to have actually secured the blessing of some outside “gatekeeper” ( i.e., an accounting firm or law firm) for a “backdating” scheme. At the outset of the options backdating scandal, there was much speculation that such gatekeepers had to be at fault, given how widespread backdating was prior to passage of the Sarbanes-Oxley law in 2002, but that theory has not yet borne much fruit.

What allegedly happened at Microsoft (according to Microsoft’s SEC filings and a June 16, 2006 Wall Street Journal article by Charles Forelle and James Bandler [behind a paying firewall]) and at Micrel (according to the complaint Micrel filed against Deloitte in April 2003) sound startlingly similar…It’s a tantalizing set of facts, isn’t it? But, alas, due to the settlement, that’s all we know.”
For the details, check the article, from CNN Money.

When will someone sue a firm for the loss related to an options backdating restatement and the facts be made public? We’ll have to wait for one to go to trial or for the SEC to help us out…