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. As a consequence, the option is immediately profitable, or “in the money,” to the option holder.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.
And in addition to officer and director bars imposed by government authorities, internal investigations have led to numerous officer resignations from at least 25 companies including Quest Software, KB Homes, United Health Group, Inc., Mc Afee, Inc., CNET Networks, Inc., and Monster Worldwide.
Even Apple Computer CEO Steve Jobs was implicated by an internal investigation into backdating, although he apparently did not receive, or otherwise benefit from, the backdated grants.
But even if no criminal charges are filed, the SEC still can bring a civil fraud action in federal court.
This sort of case can be brought against the corporation and its officers and directors and can result in the disgorgement of profits, stiff monetary penalties, and prohibitions against officers and directors serving any public company in those capacities in the future.
With its attendant investigation, legal actions and executive fallout, the practice of options backdating is expected to have a short shelf life.
But while options backdating may have a truncated life expectancy, its current impact is robust.
Class actions ostensibly are brought on behalf of the shareholders of the company who have been impacted by the option grants.
Shareholder claims typically are grounded in some allegation of misrepresentation.
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.