Fallout over the way stock options were handed out to some electronics industry managers reached new heights last week, with the news that Vitesse Semiconductor Corp. was being investigated by both the Securities and Exchange Commission (SEC) and the U.S. Attorney's Office. Vitesse--which earlier in the week dismissed its CEO and two lieutenants--could be delisted from the Nasdaq exchange as an indirect consequence of internal investigations into the options issue.

Two other prominent technology companies, Altera and Brooks Automation, also face the prospect of delisting.

Stock options have come under intense scrutiny of late. The controversy centers not on the options themselves, but on the practice of backdating them. A hangover from the boom years of the 1990s, backdating involves granting options dated retroactively to times when a company's stock price was relatively low (thus increasing the option holder's potential for profit), without notify- ing investors.

The practice raises tax issues, provokes shareholder unrest and may be a violation of the 2002 Sarbanes-Oxley financial-accountability act.

Published reports indicate that the SEC has been looking into the matter since at least 2004.

Companies that have failed to properly disclose the practice of backdating are likely to face SEC investigations, tax repercussions, restatement of quarterly financial statements, plunging stock prices and shareholder lawsuits, said Corey Rosen, executive director of the National Center for Employee Ownership, a nonprofit consultancy based in Oakland, Calif. "Are you going to go to jail over it? No," Rosen said. "Are you going to go to court? Yes."

Vitesse (Camarillo, Calif.) announced last Wednesday that it had fired CEO Louis Tomasetta as well as its chief financial officer, Yatin Moday, and an executive vice president, Eugene Hovanec. Vitesse placed the three on leave on April 18 in connection with an internal investigation into stock options granting practices. Interim CEO Christopher R. Gardner, most recently general manager of Vitesse's Network Products Division, was named new chief executive.

The next day, the company disclosed it was also being investigated by both the SEC and the U.S. Attorney's office of the Southern District of New York. In the latter instance, Vitesse disclosed that it had received a grand jury subpoena "requesting documents from 1999 through the present referring to, relating to or involving the granting of stock options." For its part, the SEC's Division of Enforcement requested documents from Jan. 1, 1995, through the present, also relating to stock options.

Vitesse, programmable-logic heavyweight Altera Corp. and semiconductor fab automation provider Brooks Automation Inc. have all been notified by Nasdaq that their securities could be delisted for failure to file their most recent quarterly reports in a timely manner. All three companies have said they plan to hold off submitting the reports to the SEC pending internal investigations of how stock options were granted. Their stocks will remain listed on the Nasdaq pending individual hearings.

Questions about historical practices in the granting of options have hovered over the high-tech industry since the 1990s and recently bubbled to the surface in a case involving Analog Devices Inc. (Norwood, Mass.). Last November, ADI settled with the SEC in a stock option investigation that was first disclosed in the company's Nov. 30, 2004, 10-K filing. That inquiry centered not only on backdating, but also on the granting of options to employees and directors prior to the release of favorable financial results. The settlement cost the company $3 million in civil fines, while the options granted in certain years to ADI's directors and its president and CEO, Jerald Fishman, had to be repriced. Fishman was also ordered to pay a $1 million civil penalty and had to make a disgorgement payment for options granted in certain years. He and the company settled without either admitting or denying the SEC's findings.

Questioned by EE Times about the current spate of investigations, a spokesman for the SEC said it is against agency policy to comment on the existence or nonexistence of any investigation. The spokesman said that whether options backdating at a particular company violated any laws or SEC regulations would depend on the circumstances of the individual case. The SEC, he said, has no statistics to indicate how widespread a problem backdating may be.

Vitesse, Altera and Brooks Automation--along with chip supplier Power Integrations Inc. and contract services manu- facturer Jabil Circuit Inc.--have all indicated that they variously are investigating their historical options practices internally, are being formally or informally investigated by the SEC, or both.

Altera chairman and CEO John Daane recently declined to say whether backdating was at issue for his company. He told EE Times that Altera (San Jose, Calif.) would remain mum about the options-granting practices it is examining.