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.
Another consequence is that the company underrepresents the real nature of an executive’s compensation, perpetuating the myth that options are performance-based incentive compensation.
With its attendant investigation, legal actions and executive fallout, the practice of options backdating is expected to have a short shelf life.
But while options backdating may have a truncated life expectancy, its current impact is robust.
But even if no criminal charges are filed, the SEC still can bring a civil fraud action in federal court.
This sort of case can be brought against the corporation and its officers and directors and can result in the disgorgement of profits, stiff monetary penalties, and prohibitions against officers and directors serving any public company in those capacities in the future.
Fortunately, the government appears to appreciate the difference between backdated options that involve the “intentional alteration of documents or faulty internal control and dating issues arising from ministerial or logistical delays.” Unfortunately, the plaintiffs’ bar is not so discerning.
Public announcements that a company or the SEC is investigating possible backdating issues have spawned a rash of civil suits.However, the fact of the option grants, their strike price and their eventual profitable exercise are in most instances disclosed.Thus, in the context of options backdating, substantial doubt exists as to the viability of shareholder claims.“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.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.Plaintiffs’ lawyers have seized upon this issue as yet another opportunity to bring cases against corporations and their officers and directors.