Some of America's most prominent investment firms loaded up on shares in dozens of public companies even as the U.S. government stepped up probes into those companies use of option grants.
Fidelity Investments, the world's biggest mutual fund company, bought millions of shares of computer chip companies Maxim Integrated Products Inc. and Broadcom Corp., according to public filings.
Wellington Management boosted its stake in telecommunications equipment maker Redback Networks Inc. and T. Rowe Price added to its holding of telecom equipment maker Juniper Networks, regulatory filings show.
They are among more than 100 companies whose options practices are under investigation amid suspicion they broke accounting regulations, disclosure rules and federal laws by backdating and springloading options to boost their value for the recipients.
Backdating involves boosting the value of stock options by resetting their grant dates to coincide with a low-point in the price of the underlying stock. Springloading involves granting options on a date expected to be followed by a surge in the stock price.
Some corporate-governance experts say it would make sense for fund managers to avoid stocks in companies tainted by the scandal, rather than scoop them up.
You would think anyone in his right mind would want to sell these companies at a time they are being investigated because of the uncertainty and potential risk, said Alexandra Higgins, senior analyst at the Corporate Library, a corporate governance research firm.
But professional stock pickers often ignore these sorts of problems as they dig for companies that have fallen on hard times, betting their beaten down share prices will eventually recover.
The professional manager, in pursuing his or her fiduciary responsibility, has to be a little cold-blooded, said Kevin Landis, chief executive of Firsthand Capital Management.
Landis said he owns shares in VeriSign Inc. and Zoran Corp., which are under investigation.
Analysts and fund managers agree that in many cases the market may have punished companies too harshly for what Landis said might, in most cases, simply be technical violations.
That may be precisely what motivated Fidelity fund managers to nearly quintuple their holdings of Sunnyvale, California-based Maxim, analysts speculated.
Fidelity bought 14 million shares of Maxim in the second quarter, when the company was first linked to the options scandal and its share price fell roughly 13 percent, according to public records.
In July, Fidelity bought another 14.5 million Maxim shares, giving it a 12 percent stake. On Wednesday, Maxim traded at $31.44, having erased most of the losses suffered since early June.
Fidelity also tripled its holdings in Broadcom since the end of March, increasing its stake as the chipmaker said it would restate previous results because of mistakes accounting for options grants. Broadcom's share price has jumped 13 percent in the last month.
For Fidelity, buying these shares seems like a pure investment decision and that the company is being fairly agnostic on any ethical concerns, John Bonnanzio, group editor at independent newsletter Fidelity Insight said. They did the math and probably figured that any penalties may not be very severe and that it is worth jumping in now.
A Fidelity spokesman, sticking to company policy, said the firm does not comment on individual companies.
Fidelity wasn't alone in betting on scandal-tainted technology companies.
Wellington, for example, boosted its holdings of Redback Networks in July, buying 2.7 million shares in the company when its share price hit a six-month low after it disclosed that its options grants practices were under investigation by U.S. prosecutors. Wellington owned 13 percent of Redback as of July 31, according to a Securities & Exchange Commission filing.
A Wellington spokeswoman did not return a call seeking comment and the company has a policy of not commenting on its holdings.
The fund firms however were clearly selective and analysts and managers said professional money managers do not automatically snap up companies under a cloud.
If you feel that you just can't trust them, the reason you stay away is not out of any sense of moral outrage, Landis said. It's more like 'what else don't I know?'