Executive Response in Motion at RIM

The BlackBerry maker restated earnings by $250 million, and co-CEO James Balsillie stepped down as chairman. But business remains strong

by Arik Hesseldahl

Research In Motion (RIMM), the Canadian company behind the popular BlackBerry, tried to get past the appearance of trouble with its stock options grants with a series of moves aimed at bolstering investor confidence.

The company disclosed a $250 million earnings restatement for previous periods starting in 2004, and announced that chairman and co-CEO James Balsillie would relinquish his duties as chairman. RIM (RIMM) said its option troubles were due to some key differences between accounting rules in the U.S. and Canada, where it trades on the NASDAQ and Toronto Stock Exchange. The company said that in 321 cases, stock option grants were not accounted for properly under rules in the U.S.

In an interview with BusinessWeek.com, Balsillie said the company did not know it was running afoul of U.S. rules. "When we did this plan, there was a clause that said that if you got options for say, 100 shares, that were worth $1,000, and they increased in value to $2,000, you wouldn't have to write a check for the full $2,000 to exercise the shares," he said. "Instead, the company would give you the shares net of the difference. That's O.K. under Canadian accounting rules, but in the U.S. they have to be accounted for differently, as either a loss to income or a profit as the case may be."

Although Balsillie was at first directly involved in approving stock grants to employees, the company said, he became less involved as the duties were delegated to other executives. The mistake was missed at all levels of RIM's accounting processes, even by RIM's auditors, Ernst & Young International. "It's our mistake. We ran it through auditors, but everyone missed it," Balsillie said.

Taking Responsibility

The company said its internal investigation found no evidence of intentional misconduct.

While in some cases grants appeared to have been "spring-loaded"—granted in advance of runups in RIM's stock price—the company found no evidence of anyone at the company engaged in intentional spring-loading. The company didn't specify who benefited from the conveniently timed grants, and took pains to describe the events as having "created the impression" that some grants were spring-loaded.

Directors and C-level executives will return any profit from incorrectly priced options—the company didn't specify how much—and Balsillie and co-CEO Mike Lazaridis both pledged to contribute $10 million Canadian, or $8.5 million, to cover the costs of the investigation. "This happened on our watch, and we want to take responsibility for it," Balsillie said.

An informal inquiry has been under way at the Securities & Exchange Commission since the irregularities were first disclosed on Sept. 28, 2006. Additionally, the Ontario Securities Commission has been investigating and has issued a "management cease trade order," preventing senior executives from trading the company's stock. RIM had already issued its own order to this effect internally. The company says it continues to cooperate with regulators in both countries, but said it cannot predict what action if any those regulators may take as a result of the review.

New Directors

The $250 million noncash restatement affects fiscal periods starting in 2004 through the first fiscal quarter of 2007, which ended on June 3, 2006. Additionally, RIM said it would require further time to complete regulatory filings for its fiscal fourth quarter and fiscal year just completed.

Balsillie will relinquish the title of Chairman voluntarily. "Separating the jobs of CEO and chairman has been something that has been No. 1 on the mind of Canadian regulators, and in just about everyone's mind it's overdue," he said. Balsillie will retain his seat on the board.

Additionally, two directors, Kendall Cork, managing director of Sentinel Associates, and Douglas Wright, a president emeritus of the University of Waterloo, will not stand for re-election to the board.