Stock options backdating articles
Another troublesome outcome for a corporation is that the SEC will bring civil fraud charges stemming from options backdating in all cases where criminal charges have been filed.But even if no criminal charges are filed, the SEC still can bring a civil fraud action in federal court.In that case, corporate officers inserted backdated option grant dates into board of directors’ unanimous written consents that were transmitted to the compensation committee.Options were also backdated for new employees to dates prior to the date employment actually commenced.Companies might also need to consider disclosure about how the board or compensation committee considers such information when determining whether and in what amount to make those grants.Fifty-two companies currently under criminal investigation. Moreover, the company avoids having to expense the options as current compensation, thus increasing earnings in the near term.In addition, hundreds of thousands of backdated options were issued to fictitious employees and parked in a slush fund to be awarded at the CEO’s discretion.
The data appears to show that, at the companies in question, share prices tend to decline in the 90 days before grant and then rebound afterward much more than at comparable companies during the same period. The SEC’s complete overall of its proxy reporting rules, which occurred a few years late and included the CD&A requirement, suggested that companies disclose in their proxy statements whether they attempt to “time” the award of options to occur before or after the release of news to the market.
As a consequence, the option is immediately profitable, or “in the money,” to the option holder.
All stemming from the practice known as “options backdating.” Options backdating occurs when a company issues stock options on one date, but reports in its financials an earlier issue date to create a “strike” or exercise price equal to the earlier date’s lower price.
Similarly, the FBI has reported that it has 52 companies under criminal investigation. Department of Justice has said it will bring criminal charges where defendants falsify corporate books and records; issue false financial statements; lie to boards of directors, auditors or the SEC; or file false reports.
Two indictments have been issued and multiple guilty pleas have been entered in the most egregious cases. To a public corporation, the potential consequences of engaging in options backdating are manifold and can range from none whatsoever to having founders and CEOs going to prison. For example, in the case involving Brocade Communications, the SEC charged the former CEO and the former Vice President of Human Resources with criminally violating the securities laws.