Six More Semi Companies Under Options Scrutiny

Staff Reporter -- Electronic News, 5/23/2006

Merrill Lynch has identified six semiconductor companies with suspicious stock options grants and pricing in a new report it issued this week.

The analyst firm undertook its own analysis of semiconductor and semiconductor equipment companies that comprise the Philadelphia Semiconductor Index (SOX), in the wake of reports of suspicious options grants and dating at several companies, and subsequent investigations.

“What we're interested in understanding is the extent to which stock price performance subsequent to options pricing events diverges from stock price performance over a longer period of time,” said analyst Joe Osha in his report.  “That's the easiest and simplest way to measure how aggressive the timing of options grants has been. Theoretically, companies should not be generating any systematic excess return in comparison to other investors as a result of how options pricing events are timed.”

Merrill Lynch identified six companies – KLA-Tencor, Marvell, Novellus, Linear Technology, Broadcom and Maxim Integrated Products. – as the top companies generating excess returns.

“The results are notable - for the 1997-2002 interval that we studied, the stocks comprising the SOX have consistently generated excess returns during the 20-day period following options grants,” Osha said. “It is difficult to avoid concluding that the timing of options pricing for the period we studies has been very advantageous for executives that received options.”

Osha noted that the excess returns calculation falls off sharply once one moves further down the list of companies.

“Just for curiosity's sake we ran our analysis on Vitesse Semiconductor as well - Vitesse is already the subject of an SEC investigation related in part to the timing of options grants,” Osha said. “The results place Vitesse right at the top of the table, which tells us that we're capturing something meaningful with our analysis. We think that investors need to be aware of the possibility of regulatory activity at other companies that turn up high on our ranking.”
      
Following the report's release, Novellus issued a response: "Novellus has reviewed its process of granting options to the named executive officers in the report and has not found any irregularities."