A Calgary oil company is being accused of option backdating.
Ensign Energy Services is dealing with a lawsuit that alleges a number of board members, including chairman — and part-owner of the Calgary Flames — Murray Edwards, backdated stock options for Ensign’s shares over a period of 13 years ending in 2006.
Listen to the interview below for more on the story from CBC business reporter Tracy Johnson.
Court documents indicate that the potential financial gain to the board members and other Ensign personnel is as much as $8.7 million.
Ensign shareholder John Paquette is behind the action. He is being represented by London, Ont., law firm Siskinds LLP, which has been pursuing stock option backdating cases since at least 2007.
These allegations haven’t been proven in court. CBC News contacted Ensign about the story, but the company didn't want to comment on a matter before the courts.
Stock options are a very popular employee and executive incentive. The option gives the employee the right to buy a certain number of shares in the company at a set price, called the strike price.
The idea is that when the shares go up in value on the markets, the employee can buy shares from the company at the strike price and then sell them at the market price and make a profit. In Canada the options cannot be granted at a lower price than where the shares were trading the day before they were granted.
Option backdating is the practice of changing the date that a stock option was granted to make the strike price lower and the option more valuable.
Backdating came to the attention of the media and shareholders in the mid-2000s after a number of high profile companies, including the former Research in Motion, settled allegations of backdating.
The Ensign case goes back to 2011, when Paquette’s law firm hired Eric Lie of the University of Iowa to study Ensign’s stock option dating process. Lie has been at the forefront of option backdating research for a decade.
According to court documents, Lie did a statistical analysis of Ensign stock option grant dates from 1993 to 2010 and says that between 1993 and 2006, eight of the nineteen grant dates occurred at the lowest trading day of the month.
After 2006, when public scrutiny of option backdating increased, none of the options were granted at the lowest trading day of the month.
Sealing order lifted
After the lawsuit was filed in 2011, Ensign successfully moved to have the court documents sealed, with CBC News arguing against the sealing order. The documents were unsealed in 2013.
Also in 2011, Ensign hired retired Alberta Justice Dennis Hart to investigate its option granting. Hart then enlisted Ernst and Young to conduct a forensic accounting investigation.
According to an affidavit filed in late December 2013 by a member of Ensign’s board of directors, Hart found that Ensign’s stock option granting process was flawed between the period of 1993 until August 2006.
He calculated a cost to Ensign’s capital of $8.7 million and recommended that Ensign take steps to get that money back from four core insiders who had responsibility over the stock option granting process.
The core insiders are disputing some of the results of Hart’s investigation and negotiations between the board of Ensign and its own insiders have been going on since late 2012.
The Alberta Securities Commission has no public investigation ongoing against Ensign Energy Services.
Lindsay Tedds researches stock option backdating at the University of Victoria.
“In Canada, backdating is completely illegal, and it illegal because we believe stock options should be used solely to align the incentives of the management with the shareholders, instead of it being a compensation mechanism," said Tedds.
Option backdating is no longer considered a significant problem in North America. But forensic accountant Al Rosen says that Canadians still need to care about the issue.
“In the number of years that we’ve been involved, if it isn’t backdating, it’s something else and then a year later, it’s something else, and what’s missing is regulation.”