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A Secaucus, N.J.-based retail clothing chain appears to have gotten caught up in the sweeping national SEC investigation into improperly backdated stock options. The Children’s Place Retail Stores Inc. announced last Wednesday that the Securities and Exchange Commission was looking into the way the company handles its stock-option grants. Susan LaBarr, Children’s Place’s investor relations manager, said the results of an investigation by its outside counsel, Stroock & Stroock & Lavan, indicate that previously issued financial reports will likely have to be restated. The SEC is engaged in a nationwide probe that has included, in some cases, the Justice Department and Internal Revenue Service. More than 100 companies are under investigation for allegedly changing stock option grant dates to make them more valuable. The company, which owns and operates 831 Children’s Place stores and 328 Disney Stores in the United States and Canada, says it plans to cooperate fully with the SEC investigation, but it has not released many details about the options issue. Through a spokeswoman in New York, Stroock declines to comment about the internal probe, launched in August at the request of the audit committee at Children’s Place. The company said the accounting options investigations have kept it from filing the SEC quarterly 10-Q report for the period ended July 31. But observers, including research analyst Leah Townsend, who issued a report about Children’s Place in late August, say that delays in its SEC filings could suggest that the company was backdating options. “Under the Sarbanes-Oxley Act of 2002, publicly held companies are generally supposed to file a Form 4, or statement of changes in beneficial ownership of securities, with the SEC within two business days of issuing a stock option,” says Townsend, from the research company Glass Lewis & Co. “We find it unusual that some of Children’s Place’s Form 4 filings were not made within the required two-day deadline.” A stock option generally gives a holder the right to buy shares at a specified price for a set period. Generally, this “strike price” is equal to the stock’s price the day the option is created. If the stock price later goes up, the person holding the option makes money. But if the price falls below the exercise price, the stock option is worthless. To get around that, some companies turned to backdating, reducing the strike price of the option by resetting the creation date to one on which the stock traded at a lower price. This gives the stock option a built-in gain. Before Sarbanes-Oxley, publicly held companies generally didn’t have to file a Form 4 until as late as 45 days after the end of the business’ fiscal year. But if a company has to report the issuance of stock options to the SEC in just two days, it has much less time in which to fiddle with the option creation date. As a consequence, it is tougher to build a gain into the option. In 2004, says Townsend, stock options were awarded to four Children’s Place executives. Three were filed in a timely manner. But one, for 100,000 shares issued to CEO Ezra Dabah, was filed on Oct. 22, more than two months late. “Coincidence or not, the grant was made near the stock’s 52-week low [of about $18 a share on Aug. 13, 2004],” says Townsend. “The stock had a strike price of $20.29 or a 10 percent premium to the fair market value of Children’s Place shares on Aug. 13. But the stock had jumped by 36 percent to $28.31 by the filing date of Oct. 22.” She says that’s significant because of the accounting rules that were in effect during 2004. “If the stock option grant, with a strike price of $20.29 was actually issued within two business days of the SEC Form 4 filing [when Children's Place stock traded in a range from about $25 to $30 a share], the grant would have a built-in gain and the company would have had to report the difference between the strike price and the fair market value as an expense,” says Townsend. “But since the strike price was higher than the market price on the reported transaction date, no expense was recognized. The question is: was the company just late in filing the Form 4 or was the reported transaction date incorrect?” Under accounting principles now in effect, companies generally have to recognize the cost of stock options regardless of the fair market value of the underlying stock. Townsend says Children’s Place followed a similar pattern through 2005. “Most of the grants made to Children’s Place executives were dated April 29, 2005,” she says. “But most of the Form 4s weren’t filed with the SEC until May 20, 2005.” Children’s Place’s LaBarr declines to elaborate on the issue. But “the combination of grant dates that coincided with significant events that moved the price, and the late filings could suggest that some of the company’s stock options were backdated,” says Steven Sholk of Gibbons, Del Deo, Dolan, Griffinger & Vecchione in Newark, who focuses on employment law and executive compensation. The SEC has also asked other New Jersey companies, including Medarex Inc. of Princeton, Kos Pharmaceuticals Inc. of Cranbury, Ulticom Inc., a Mount Laurel software provider, and DRS Technologies Inc., a Parsippany military product and service provider, for stock-option-plan data.

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