Animation co. drawn into SEC probe
Maybe Pixar doesn’t walk on water.
John Lasseter and Ed Catmull, the forces behind the animation phenom, suddenly find themselves caught up in the so-called options-backdating imbroglio after a report uncovered that they once received stock options with suspicious dates.
Options backdating is a practice in which a company manipulates dates on stock options so execs can receive artificially high profits from a stock sale — and then doesn’t reveal the practice to Wall Street. It is not always illegal, but frequently can be.
Execs who were found to receive backdated options could be forced to forfeit gains, pay penalties and even face jail time if they are found guilty of deceiving investors.
Questions over options now engulf an estimated 80 firms, many of them in Silicon Valley, with execs at tech firm Brocade under criminal investigation. On Tuesday, Cablevision said it could not disclose earnings because it had been in contact with the SEC over options issues.
While the SEC has not officially said it is investigating Pixar, the evidence against the company appears to be strong.
One red flag for backdating are filings that reveal employees received options that were the lowest for a given period, and that the stock price shot up after the date on the options, or the “strike price” — suggesting not a lucky coincidence but that they were tampered with after the fact.
In Pixar’s case, after adjusting for a split, Catmull received 1 million options and Lasseter 2 million on Dec. 6, 2000, at the price of $13.25, according to SEC filings. Stock charts from that time show the opening price on that day was indeed the low for that period. Three weeks later the stock had gone up more than 20%, and by the end of January it was up nearly 50% to $19.50 — which means that if Catmull and Lasseter’s options were backdated, execs could have automatically pocketed, on paper, as much as $12 million in Lasseter’s case and $6 million in Catmull’s.
Story, which first surfaced via Bloomberg, also noted Lasseter received options in 1997, shortly before the company signed a deal with Disney that sent the stock skyrocketing. If deceit is found, those allegations could also be actionable, experts said.
A Pixar rep would only say, “We do not comment on personnel compensation.”
Steve Jobs’ other company, Apple, has announced an internal investigation and acknowledged “irregularities” at the firm. Jobs was not found to have questionable options.
While all the alleged events took place before Disney bought Pixar, disclosure comes at a sensitive time for the Mouse House. Bob Iger and other Disney execs will likely be on the spot on a call with analysts this afternoon as they try to sell their new austerity plans at the studio as part of their quarterly earnings call.
Experts caution that the fact that options coincide with a low stock price is, at best, circumstantial evidence.
And options are an arcane area of law that supporters of investigated companies say contain many shades of gray, including those which don’t involve wrongdoing. The SEC has said it will investigate cases only where it determines outright deceit.
But one expert says that even the circumstantial evidence doesn’t bode well for Pixar.
“Too many coincidences are too many coincidences,” said Steven Hall, managing director of Steven Hall Partners, a Gotham-based executive compensation firm.
“When these kinds of investigative reports are done,” he said, referring to the ones about Pixar, “it’s a smoke signal. Now what will happen is someone at the SEC will go in and see if there’s fire.”
Many execs in Silicon Valley have said that retaining talent during the boom was difficult, and benevolent options plans were one way to keep employees happy. Indeed, Pixar itself was sufficiently worried about a creative exodus at the time that it issued a warning to Wall Street that read:
“Our success depends to a significant extent on the performance of a number of senior management personnel. In particular, we are dependent upon the services of Steve Jobs, John Lasseter, Ed Catmull, Sarah McArthur and Ann Mather. … We believe that it may be particularly difficult to retain key employees, especially animators, creative personnel and technical directors, during periods in which we are not developing animated feature films.”
Lasseter’s standing has been essentially bulletproof since shepherding movies like “Toy Story” and “Monsters, Inc.” to box office success, and in turn directing Pixar to a decade-long hot streak that culminated in the company being bought by Disney earlier this year.
At the Disney annual meeting he received a standing ovation for the role he has played in the company’s recent fortunes.