Backdating Investigations

Investigators allege companies may have backdated stock options by taking a 'look back' to a date when stock prices were low to retroactively set a strike or exercise price. Usually, a strong upward run in the stock price followed the low price period, allowing holders of the stock options to reap no-risk profits. The alleged evil and potential crime is not in the backdating itself but in the accounting and public disclosure of the options award. The main issue revolves around whether companies appropriately booked option grants as compensation or as true incentive grants which need not be treated as compensation. Moreover, these regulatory actions and criminal cases are being touted as easy to prove, a cinch for a lay juror to understand, and a virtual 'slam-dunk' conviction for government prosecutors and regulators. Suffice it to say, an option backdating investigation can wreak havoc upon a company's bottom line, stock price and morale.

Such multi-front investigations, which can in turn spawn complex litigation across several jurisdictions, can be challenging for corporate or general counsel to handle. The purpose of the this article is to briefly explore the issues generally presented in an option backdating investigation, to suggest possible methods of approach for counsel to effectively respond to an investigation and to predict where the option compensation issue will move in the future.