Is backdating stock options legal
The purpose of backdating is straightforward: While not quantifiable in terms of dollars and cents, in some cases, the damage to the company's reputation could be irreparable. Annual and quarterly reports filed by the company did not include the compensation costs that stemmed from the options backdating incidents. The facts cannot be made unclear or confusing. In this litigious society, shareholders will almost certainly file a class-action lawsuit against the company for filing false earnings reports. How Big Is the Problem? This adjustment to the filing window came with the Sarbanes-Oxley legislation. While reports of past indiscretions are likely to continue to surface, the good news is that companies will be less likely to mislead investors in the future.
It allegedly failed to inform investors, or account for the options expense s properly. Companies would simply wait for a period in which the company's stock price fell to a low and then moved higher within a two-month period. In the end, if the DoJ proves that the Brocade executives deliberately orchestrated a scheme to mislead investors and regulators by falsifying documents and forging financial statements, it could amount to criminal securities fraud, contends Kenneth Lee, a securities litigator in the New York office of Thacher Proffitt and Wood. Disordered, untimely paperwork was cited as the cause in some cases of unintentional backdating. With respect to the more serious cases of backdating, it is likely that most of the criminal actions that the government intended to bring were brought in In essence, the revision enabled companies to increase executive compensation without informing their shareholders if the compensation was in the form of stock options contracts that would only become valuable if the underlying stock price were to increase at a later time. In this article, we'll explore what options backdating is and what it means for companies and their investors. In addition to Brocade, several other high profile companies have become embroiled in the backdating scandal as well. However, if the company granted options with an exercise price below fair market value, there would be a compensation expense that had to be recognized under applicable accounting rules. Companies sometimes give their employees the right to buy shares at a fixed price for a number of years while they are with the company. Some of the more prominent corporate figures involved in the controversy currently are Steve Jobs and Michael Dell. District Court for the Northern District of California. Indeed, if the practice was properly documented and disclosed in the financial statements, and given the appropriate tax treatment, there is an argument to be made that no law was violated, contends Lee. In , FAS was revised to require that all stock-option grants be expensed. But, there are also some companies out there that have bent the rules by both hiding the backdating from investors, and also failing to book the grant s as an expense against earnings. It also provides investors with timely access to grant pricing information. Most businesses or executives avoid options backdating; executives who receive stock options as part of their compensation, are given an exercise price that is equivalent to the closing stock price on the date the options grant is issued. Therefore, any criminal prosecution is likely to be based on option grants made before Sarbanes-Oxley took effect, and the deadline facing the government for bringing those prosecutions has already passed. This is thanks to Sarbanes-Oxley. Such backdating may be construed as illegally avoiding income recognition because falsely under-reporting the market price of such stocks makes them appear to have no value in excess of the strike price at the time the option is granted. However, since Sarbanes-Oxley, grants must be filed electronically within two business days of an issue or grant. Backdating is difficult to identify, however, and it is often unclear exactly which practices are intentional and illegal and which are genuine mistakes or miscalculations. Enforcement of Options Backdating Restrictions After the two-day reporting rule went into effect, the SEC found numerous companies were still backdating options in violation of the legislation. The facts cannot be made unclear or confusing. Why Would a Company Do This? Share Do you ever wish that you could turn back the hands of time?
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