SEC formally probing Activision

Last year, the Securities and Exchange Commission kicked off its informal inquiry into the stock option-granting practices of Activision. The SEC is apparently turning up the heat now, as a financial filing from Activision today confirmed that the commission is now formally investigating its practices.

When employees are granted stock options, they're given the right to buy shares in company stock at a fixed price, with the right to exercise those options--buy the shares from the company--over a predetermined period of time. The price is set based upon the stock's current market value at the time the options are issued. Recently, a number of corporations--including Take-Two, THQ, and EA--have come under suspicion of having executives backdate their options, altering the records of when the options are issued to a low point for the company stock, thus maximizing their value. The issue of backdated stock options extends beyond the gaming world, with more than 100 companies from Apple to GameSpot parent CNET Networks being the subject of SEC inquiries in recent years.

Activision's filing also included an update on the findings of a special subcommittee of its board of directors formed to investigate the scandal. The group reviewed 4,849 different grants, and found that 3,450 of them "required measurement date corrections." As a result, the company believes it was shortchanged $66.7 million by employees exercising improperly dated stock options over a 13-year period.

According to Activision, "The need for these measurement date corrections arose from failure to understand and apply the correct accounting rules, failure to establish and maintain adequate procedures and controls, failure on certain occasions to appreciate the implications of available information, and insufficient finality and documentation."

One thing Activision did not give as a cause for the problems was crooked employees. As previously reported, the subcommittee cleared a number of executives of any wrongdoing, including CEO Robert Kotick and cochairman of the board Brian Kelly. And while three former employees and a senior partner of the publisher's former outside law firm "bore significant responsibility, in varying degrees," the subcommittee made no finding on whether or not those individuals were guilty of intentional wrongdoing.

Earlier this year, Activision tweaked the stock option rights of Kotick and Kelley to address "potential adverse consequences" when it discovered that the exercise prices on their existing options were inappropriately inexpensive.