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There is no statute that explicitly outlaws backdating stock-option grants, but it seems virtually impossible to backdate options and achieve the ultimate goal of putting grants “in the money” without first deliberately falsifying documents and then covering up the sham.At least that seems to be the conclusion reached by the Department of Justice and the Securities and Exchange Commission regarding their first case against executives charged with fraud related to backdating.
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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.
Dozens of companies are under investigation by the Securities and Exchange Commission for backdating stock options. Alternatively, a company could hit a low without actually backdating its options by granting awards just before a major (positive) earnings announcement, a practice known as "spring-loading." A more extreme and more clearly illegal practice was to say that an award was exercised on a date other than its actual exercise date.
Other companies, however, may have followed the same pattern without making these changes.
Backdating is not per se illegal, but, under the Sarbanes-Oxley Act, top executives must report grants made to them within two days of the grant (before Sarbanes-Oxley, it was 45 days).
Last week the Do J brought criminal charges against two Brocade Communications Systems executives, while the SEC filed a civil suit against the same two and the CFO.
As expected, the charges focused on backdating stock options by doctoring employment documents, neglecting to record the stock-option expense on the company’s books, and misleading investors.
The cascading litany of alleged charges is not likely to stop with the Brocade case.
Indeed, with more than 80 companies being reviewed by the SEC for potential illegal backdating practices, and one academic study claiming that more than 2,000 companies have engaged in the practice, civil and criminal charges will probably mushroom in the next few months. The purpose of backdating is straightforward: it gives options holders an immediate paper gain, and a real gain once the option is exercised.
In the end, if the Do J 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.
But the prosecutors would have to show that the backdating process was a deliberate attempt to mislead investors, rather than neglect on the part of the executives to properly understand and implement backdating.
That promise is considered to be an in-the-money options grant.Tags: Adult Dating, affair dating, sex dating