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Thomas Russell

Backdating Brouhaha Bags Bed Bath & Beyond

Execs Get A Pass; $8 Million Adjustment Seen

Union, N.J. — Joining the ranks of more than 100 other companies being investigated as part of a widening probe involving the backdating of stock options to key employees, Bed Bath & Beyond said an internal investigation has turned up a sweeping pattern of backdating at the home fashions superstore, forcing an $8 million charge against profits during the third quarter of this year.

After the audit by a special committee of the board of directors found 44 examples of backdating since it became a public company in 1992, the retailer said it will reclassify about $66 million in the equity section of its balance sheet when it files its 10-K annual report for the current fiscal year, which closes March 3, 2007.

Acknowledging that the issue isn't going away quietly, BBB said the way it granted options is still being scrutinized; and said the federal Securities and Exchange Commission “indicated that it would commence an informal inquiry” into the company's past practices. The retailer said it “intends to cooperate fully” with the federal investigation.

The special committee also gave a pass to the retailer's co-founders and co-chairmen, Warren Eisenberg and Leonard Feinstein, as well as ceo Steven Temares. Even though they set the dates for the options grants, the committee said it “found no evidence that either the company or any person involved in the grant process had engaged in willful misconduct.” Instead, the committee said, the grant process was “characterized by informality” and “lacked safeguards.”

The federal investigation comes at an awkward moment for the retailer, just as the broad American retail community is coming under increasing fire from textiles and apparel suppliers for what they claim are abuses of the traditional system of chargebacks and allowances, a potentially explosive issue that threatens to erupt into the limelight, putting retailers and the way they make money under fresh scrutiny.

Underlining the growing seriousness of the options backdating scandal that threatens to swamp the boats and trim the profits of some of America's best-known companies, key figures at some companies have been forced out of their jobs because of the financial chicanery that took place on their watch, including the chief executives and general counsel of McAfee, the software security provider; the ceo of CNet, a group of technology news web sites; and the chief financial officer of Apple Computer.

A highly prized corporate perk involves giving executives the right to buy stock at its value on a specific date — which may or may not be a bargain. The practice of backdating involves looking back to when the stock was at a low point, and then adjusting the exercise date of the option, producing a windfall for the executive.

In its filing with the Securities and Exchange Commission, Bed Bath & Beyond said its special review committee uncovered 44 “deficiencies in the process of granting and documenting stock options and restricted shares,” involving 16 annual option grant dates, 26 monthly grant dates, and two special grant dates.

As a result, the retailer said it will take the $8 million non-cash charge against third quarter profits. At the same time, Bed Bath & Beyond emphasized the overall effect of the accounting issues “will not have a material impact on the company's financial position,” and said past financial statements will not be revised.

In the federal filing, the retailer said, “The company has followed a consistent practice of seeking low grant prices for the purpose of attracting and retaining employees.” Eisenberg, Feinstein, and Temares “were responsible for selecting the grant dates, though the responsibilities varied depending on the period.”

Based on the review, the special committee said it believes, “Some hindsight was used in selecting some annual grant dates.” Specifically, the SEC filing states: “Almost all annual grant dates in 1998-2004 likely were selected with some hindsight.”

The special committee said it determined that “the option granting process had control and other deficiencies,” and said “the company failed to maintain adequate controls” over the options granting process.

At the same time, however, the special committee said it “found no evidence that either the company or any person involved in the grant process had engaged in willful misconduct.” Instead, the committee said, “The grant process was characterized by informality which lacked safeguards to ensure compliance with applicable accounting and disclosure rules.” The committee also said it “found no evidence that those who were responsible for selecting option grant dates — the company's co-chairmen and chief executive officer — appreciated the accounting or disclosure implications of the practices used for selecting those dates.”

With the spotlight glaring brightly on companies snared in the backdating imbroglio, and on the behavior of their executives, the consequences are starting to be felt. Standard & Poor's, one of the three big credit watchdogs, rapped Bed Bath & Beyond on the knuckles when last Thursday it revised its outlook downward from “positive” to “stable.”

S&P said it is “concerned” about the lack of controls leading to the problem; the outlook isn't likely to be upgraded, said S&P, until the retailer overhauls its procedures.

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