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The Corporate CounselorLJN NewslettersNewsSections

Backdating Investigations

By Charles A. Ross
April 30, 2007

As federal investigators examine the stock option programs of more than 160 companies, innumerable other companies launch internal investigations. As top executives resign, shareholders file dizzying numbers of derivative class action suits. Finally, as the Securities Exchange Commission and Department of Justice bring enforcement actions and criminal charges, the media is vilifying the so-called stock option backdating scandal as the biggest example of corporate abuse since Enron. The option backdating media frenzy focuses upon investigations by federal prosecutors and other regulatory agencies into public companies that have employed stock option compensation plans for corporate executives and employees.

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.

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