In recent weeks, the Wall Street Journal has been reporting on SEC investigations into the timing of options grants. It began with a particularly good run of luck for grants to senior executives at UnitedHealth, where the paper estimated that the odds of grants always being made at the stock price’s low point, as seemed to have happened, were astronomical. A few tech companies have also been brought into the investigation.

Now, writes Forbes commentator and former SEC Chairman Harvey Pitt, we are looking at the next big scandal. “Critics of executive compensation,” he says, ”should be content with corporate compensation decisions if they’re made by an effectively functioning, fully informed, truly independent and completely transparent compensation committee.”

Unfortunately, by backdating options grants to the optimal period, CEOs and other senior executives have been granting themselves stuff that’s as good as cash, irrespective of their or their companies’ performance.

Pitt, a lawyer, explains what’s wrong with backdating. It falsifies the proxy materials about what’s executives are being paid. It’s supposed to be at fair market value, which a backdated grant cannot be. And its a fraud on the IRS because it involves additional expenses that may be disallowed. And it casts doubt on the correctness of an audit.

One solution to some of these corporate governance issues was rule 10b5-1. That was the SEC regulation that allowed executives to make an orderly sale of large blocks of stock to diversify their portfolios without the suggestion that they were unloading stock that was about to go south. The idea was that a pre-arranged sell-down would be random.

Now, reports the Los Angeles Times, those sales might not be so random. A Stanford Business School study says that executives were twice as likely to be selling stock under these programs just before bad news than good news. The study examined stock sales at 191 companies from October 2001 to December 2003.

Professor Alan Jagolinzer, who conducted the study, speculates that the news may have been held up so as not to hurt pending stock sales. And, he also found evidence that executives terminate sales programs when the news is good and the price is about to push up. Ken Lay sold $100 million worth of Enron stock under such a plan. 

The rule was designed to allow executives with large options packages to unload stock without fear of insider trading. Companies are not required, though, to disclose the program sales but when they do, it is to calm the market’s fears that insiders might be dumping large amounts of stock because they know stuff that no one else knows. Last year, executives at booming tech companies sold tens and sometimes hundreds of millions of dollars worth of stock.