When is options backdating legal

01-Oct-2019 16:10

In addition, any inadequate internal controls that led to the inaccurate reporting would constitute a separate violation. Intent Requirement For Securities Fraud Under the securities acts, a defendant must act 'willfully' or 'willfully and knowingly.' See 15 U. This intent requirement is important in options backdating cases to determine whether executives may face criminal, rather than merely civil, penalties.

If an executive who participated in backdating certified the company's financial reports, and those reports did not disclose and account for backdating, then he would be liable for making a fraudulent certification. Though federal courts have inconsistently construed these terms, Where the statute requires the person acted 'willfully and knowingly,' however, some courts require the government to show not only that the defendant knew that backdating was wrongful (willfully), but also that it was unlawful (knowingly). Internal Revenue Code Section 162(m) Section 162(m) caps the annual deduction for compensation paid to top executives at one million dollars.

Of course, Sarbanes-Oxley, the massive rewrite of U. Securities laws that went into effect in 2002, was supposed to address options backdating by requiring companies to report grants of stock options within 48 hours.

Although this may have lessened the problem of options backdating, it certainly hasn’t completely been eliminated.

The right way: being a visionary leader who inspires others to do such a fantastic job of keeping customers happy that the company’s stock price goes through the roof, thereby increasing both shareholder value and the value of one’s own compensation package.

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The basic violation under these statutes is the same: an intent to defraud another by means of an untrue statement of material fact or an omission of a material fact necessary in order to make a statement not misleading. Regardless of which acceptable GAAP approach a company used in valuing options,a statement in a company's financials stating that the strike price was equal to the fair market value ('FMV') on the grant date would be false or inaccurate if the company backdated options. Aside from interest and penalties that might accrue if a company amends its income tax returns, executives who implemented backdating practices may also be criminally liable for willfully failing to pay taxes, see , e.g., I. C.7202, or providing fraudulent and false statements in a tax return, see , e.g., I.

Whether executives will be criminally liable depends on whether they were consciously trying to cover up the practice of backdating. Like securities fraud, the criminal tax fraud statutes require an intent element.

Securities Fraud The primary source of criminal liability for backdating are the federal securities acts, which regulate the sale of securities by publicly traded companies.

Here’s how it works: Say you’re CEO of ABC Widgets Inc., and the company has issued you options on 100 shares of company stock, which today is worth 0 a share.

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Once the share price goes up, you can exercise your options to buy the shares and sell them for the higher amount, thereby making a tidy profit. But three months ago, your company’s stock was trading at a mere a share.(In the real world, we would be adding several zeros to the end of all these numbers, but I’m keeping it simple for the purposes of conversation.) Why shouldn’t an executive take such a deal? 1) It’s dishonest and 2) it’s incredibly easy to get caught. Because they can pay compensation without 1) incurring a compensation expense (which has the effect of lowering earnings) and 2) disclosing to shareholders what they are paying their employees.

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