Sarbanes oxley backdating options
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.Professor Lie concluded that the robust profitability of so many options was statistically impossible absent some artificial influence such as backdating.Subsequently, the Securities and Exchange Commission (SEC) took an interest, followed by the securities plaintiffs’ bar and many corporations. The practice of options backdating, apparently widespread from 1996 through 2002, is widely believed to have been short-circuited by the enactment of Sarbanes-Oxley in 2002.That means that if an option is in the money as a result of backdating, the company forfeits its tax deduction for the covered employees, explains Lehman Brothers tax expert Robert Willens.If the court finds that Brocade knowingly took a deduction it was not entitled to have, the company or executives involved could be guilty of tax fraud, as well.For example, the IRS disallows certain corporate tax deductions for in-the-money options, but it allows them for performance-based pay.Furthermore, since 1995, when FASB issued FAS 123, Accounting for Stock-Based Compensation, companies have been required to record in-the-money grants as a compensation expense.
“Spring loading” involves the issuance of options immediately prior to the announcement of favorable financial news expected to have a positive impact on the underlying share price, thereby providing an immediate profit to the option holder. As a consequence, the option is immediately profitable, or “in the money,” to the option holder. 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.the release of bad news that cause the stock price to take a temporary dip, which increases the probability that the option will become profitable in the short term.With its attendant investigation, legal actions and executive fallout, the practice of options backdating is expected to have a short shelf life.
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The cascading litany of alleged charges is not likely to stop with the Brocade case.