Houston-based HCC Insurance Holdings, Inc., after an internal probe of improper stock option pricing, said it may restate prior financial reports and it has replaced Stephen L. Way, its founder and chief executive.
The specialty insurer said in its Friday announcement that founder Mr. Way had resigned as CEO, to be replaced with board member Frank J. Bramanti. Mr. Way was immediately hired as an HCC consultant.
Mr. Bramanti, a board member since 1980, has held various positions with HCC from 1980-2001, including executive vice president, chief financial officer and interim president.
In addition, the company said that Executive Vice President and General Counsel Chris L. Martin resigned and agreed to pay the company for options he has exercised that were incorrectly priced.
Mr. Martin agreed, according to the company, that the new strike price for his unexercised vested options would be based on a new measurement date.
Although he has resigned as CEO, the company said Mr. Way will remain a company director and serve as non-executive board chairman. Mr. Way founded the company in 1974.
The company said its board elected J. Robert Dickerson as lead director nine days before Mr. Way's resignation as CEO. Mr. Dickerson has been on the board since 1981.
HCC, which went public in 1992, has assets of more than $7 billion and had gross written premium of $2 billion in 2005.
The company said it has "substantially completed" an independent board audit committee investigation of stock option granting practices from 1995 to the present using the Skadden, Arps, Slate, Meagher & Flom law firm as counsel and LECG Corp. as forensic accountants
HCC said the inquiry revealed that incorrect dates for stock option grants were used for "a significant number of employees" from 1995 through 2006.
The company said HCC and the special investigation committee are working with their advisors to determine the appropriate measurement dates and assess the related financial effects.
According to HCC the current estimate of the pre-tax financial impact of recording additional non-cash charges from stock option grants is not likely to exceed $37 million spread over the vesting periods of the options in question. The company said it expects that the errors will require some increased tax provision.
HCC said the company will determine whether a restatement of prior financial statements will be required.
The company also said that the Securities and Exchange Commission has an informal investigation of its stock option process underway, and that the firm is cooperating.
While accepting Mr. Way's resignation the company said it has given Mr. Way a consulting contract to provide assistance to Mr. Bramanti and guidance with respect to strategic planning.
Under the consulting arrangement, Mr. Way agreed he would get no further salary or bonus as CEO, his unvested options would be terminated, and he will pay the company for incorrectly priced options he has exercised. He also agreed prices for unexercised vested options would be based on new dates, the company said.
HCC said it has amended its option granting practices to provide for fixed grant dates, and the board will consider remedial measures to enhance the process for equity based compensation awards in the future.
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