Plaintiffs’ lawyers have seized upon this issue as yet another opportunity to bring cases against corporations and their officers and directors.
Such cases are brought under the guise of both class actions and shareholder derivative proceedings.
The SEC is investigating many companies, ranging from small to Fortune 500 companies, for options irregularities.
Similarly, the FBI has reported that it has 52 companies under criminal investigation. Department of Justice has said it will bring criminal charges where defendants falsify corporate books and records; issue false financial statements; lie to boards of directors, auditors or the SEC; or file false reports.
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.
Although backdating had not yet been recognized as a problem, the provisions of Sarbanes-Oxley requiring that insiders report the acquisition of securities, including options, within two days of receipt greatly hindered the ability of corporations to backdate options.
However, the fact of the option grants, their strike price and their eventual profitable exercise are in most instances disclosed.
Public announcements that a company or the SEC is investigating possible backdating issues have spawned a rash of civil suits.
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.
Under previous regulations, corporations could wait 45 days or, in some cases, over a year to report options, thus providing ample time for backdating.
Other similar practices are being reviewed by government officials as well.