COSTCO STOCK OPTION BACKDATING INVESTIGATION CLOSED
Costco Implements Enhanced Compliance Program with Independent Review
United States Attorney Jeffrey C. Sullivan announced today that the U.S. Attorney’s Office for the Western District of Washington has decided to close its two-year investigation of Costco Wholesale Corporation for improper accounting practices resulting from the issuance of backdated stock options by the retailer. In closing the investigation, the U.S. Attorney’s Office considered that executives who benefitted from the backdated stock options voluntarily reimbursed the company, declined bonuses, and chose to give up certain stock option benefits, and that the company has committed to implement an enhanced ethics and compliance program.
The two year investigation determined that between 1996 and 2003, Costco issued stock options to employees of the company, including executive officers. Some of the stock options were made effective as of a date on which Costco’s stock price was lower than the price on the date when the options were actually granted. As a result, Costco failed to properly account for the stock options on its books and records, including on financial statements filed with the Securities and Exchange Commission (SEC). The filings failed to recognize the full expense to Costco associated with the issuance of these stock options. In 2006, Costco self-reported the violation to the SEC and recorded an accounting charge for these options.
“I am pleased that Costco will significantly enhance its compliance and ethics program to assure its shareholders, and the investing public, that similar accounting errors will not reoccur,” said U.S. Attorney Jeffrey C. Sullivan. “This investigation, and the remedial steps taken by Costco, should send a message to other companies that it is critical to implement and maintain a robust compliance program.”
In deciding not to pursue a criminal case, the United States Attorney’s Office considered multiple actions taken by Costco executives, including the fact that Costco self-reported the backdating to the SEC. In addition, Chief Executive Officer James Sinegal and Chief Financial Officer Richard Galanti voluntarily chose to forego bonuses and stock option related benefits totaling in excess of $1.2 million. The company was fully cooperative with the federal investigation.
Costco’s commitment to enhance its compliance and ethics program includes appointing or retaining a Chief Compliance Officer who will directly report to the Nominating and Governance Committee of Costco's Board of Directors. The Chief Compliance Officer will ensure Costco has an effective compliance and ethics program throughout the company, including enhancing Costco’s training program and whistle-blower mechanism, and revising Costco’s code of conduct. The Chief Compliance Officer will work with the Controller and Chief Financial Officer in adopting written procedures to ensure that information is shared between internal departments responsible for Costco’s equity compensation program. Significantly, Costco has also committed to retain an independent auditor or law firm to review Costco's compliance and ethics program, to make recommendations as to any additional modifications to the program, and to conduct such an independent review at least once per year for a period of no less than three years.
The case was investigated by the FBI, the Internal Revenue Service Criminal Investigation (IRS-CI), and the Washington State Department of Financial Institutions (DFI). Assistant United States Attorney Jim Lord and DFI Senior Attorney Janet So led the investigation.
For additional information please contact Emily Langlie, Public Affairs Officer for the United States Attorney’s Office, at (206) 553-4110 or Emily.Langlie@USDOJ.Gov.