Pass the tums, please: a brush with backdated options shows how precarious board service can be.(SUTTON'S LAWS)

A PANEL OF SEC LAWYERS would like to have you appear before them," our corporate counsel-told me.

"Gee, that sounds fun," I replied. "What for?"

"They've read the report on backdated options, and have some more questions."

Great. This all started 10 months before. An analyst wrote a report suggesting a company, where I'm on the board, might be backdating options.

And so the process began. First our law firm sent in their expert, a guy who probably hadn't heard the word "backdating" a year before. I sure hadn't. But he was in demand and would end up costing our shareholders his share of the $800,000 in fees, copies, and forensic accounting chores that we ran up.

Of course there's no way to tabulate the management distraction. With independent outsiders reading everybody's email history, there were months of distraction.

Since I'd been on the board during the suspected time frame, and sat on every committee, the outside experts suggested that I be excluded from all top management discussions. That felt special.

This gave me a few months to ponder. What if somebody did do something? And if something bad was done, am I then the target of a shareholder suit? If I'm sued, will our D&O carrier refuse to defend me on the grounds I was negligent for not catching this subterfuge?

Pass the Turns, please.

Several months passed. I was invited back into the management discussions after nothing suspicious was found that could have reasonably been related to me.

But more months passed with verifying actions, interviews with attorneys asking for details about certain hires and promotion dates.

So, a group of us directors traipsed off to the SEC's Los Angeles office for the review. They asked their questions. We gave our answers. In less than a day it was done.

Out of some 3,000 stock options granted during a fast-growth period years before, four were found to lack adequate documentation. In a worst-case scenario, it's possible that those four option grant dates might have varied from the start dates by several days. That's possible.

The effect, however, in the worst case of all four was entirely, totally immaterial. They couldn't have, in total, made a difference of a penny a share.

Here's the rub. The analyst who suggested we might be backdating options neglected to mention the fact that he was a former employee. He also apparently felt it not necessary to reveal that he'd been fired for cause.

This went unmentioned since, legally, it is not relevant.

Here's a second irritant. This took place at the same time Apple was backdating options for Steve Jobs, putting an extra $20 million in his pocket. A committee of outside directors, headed by Al Gore, investigated and concluded that there was "no mismanagement by current management." Oh yeah, they had thrown their CFO and in-house counsel under the bus.

But with 6,428 backdated options at Apple--for gains of $105 million--and a faked meeting with minutes that never really occurred approving Steve Jobs' options, it sure looks like everybody knew the game.

And Steve Jobs, who has a reputation as the world champion of micromanagers, didn't know?

Sorry, Al.

It's precarious out there. It's sometimes more political than legal. If you hear of any board openings, please do not call.

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Gary Sutton has been a CEO and director of a number of private and public companies in his career as a specialist in startups and turnarounds. He is the author of Six-Month Fix.

The author can be contacted at garysutton@san.rr.com..

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