Stock option backdating illegal
The answer to these scenarios is the practice of granted stock at more frequent intervals and in smaller amounts.We have for years encouraged companies to implement a theory similar to risk-averse investing (predetermine amounts and dates each month, quarter or year).Board Directors better get ahead of this wave or risk lawsuits and personal liability.OTHER ARTICLES BY Keith Kefgen, New York CFO Compensation in the Gaming Industry Can We Have Compassionate Leaders In A Dog-Eat-Dog World?Spring loading options is the practice of granting options just prior to issuing good news (financial performance, merger/acquisition, positive news regarding a regulatory approval and so forth).If spring loading is deemed to be illegal, it could cause an even worse situation, as spring loading has been common practice in corporate America. Any person who willfully violates ' any provision' of the Securities Act or the Exchange Act and ' any rule or regulation thereunder' commits a criminal offense, and could be subject to substantial fines as well as imprisonment. Two of these new regulations may give rise to liability, but only for backdating that occurred after August 29, 2002, the effective date of the amendments. Section 302 requires the principal executive and financial officers of publicly-traded corporations to certify each annual or quarterly report filed with the SEC. The officers also certify that they are responsible for establishing and maintaining internal corporate controls to ensure the proper disclosure of all material information. In addition, regardless of the GAAP accounting method the company used, the company must have recorded some sort of compensation expense for the discounted options. Additional Liabilities Under Sarbanes-Oxley When Congress and the SEC approved the Sarbanes-Oxley Act to amend the Exchange Act, they created additional financial regulations for publicly-owned corporations. Section 403 significantly shortened the time companies are permitted to wait before disclosing transactions involving management or principal stockholders, including option grants. This shortened time frame essentially removes the significant benefits of backdating because the limited volatility most stocks experience over the course of two days narrows the potential discount margin between the market price on the grant date and the strike price. This certification represents that the officers reviewed the company's financial data, and that it presents the financial condition of the company in all material respects. Certain 'performance-based' compensation payments are not counted toward the cap, including stock options that are granted with an exercise price equal to or greater than the FMV of the companies' shares on the date of the grant.
Furthermore, the IRS has decided that employees who cashed in on backdated options may have increased tax liabilities and face significant financial penalties. The Judge in the Delaware decision, Chancellor William B.Apple CEO, Steve Jobs, was recently cleared by an internal investigation, but the former CFO and General Counsel were not so lucky. It is the practice of issuing stock options or grants to employees and artificially picking a past date. When a company picks a date when the stock price is lowest, the option has more value.Unfortunately, it circumvents the law and the original intent of the option.In his decision, Chancellor Chandler stated, “It is difficult to conceive of an instance, consistent with the concept of loyalty and good faith, in which a fiduciary may declare that an option is granted a “market rate” and simultaneously withhold that both the fiduciary and the recipient knew at the time that those options would quickly be worth much more”.This puts a spotlight on compensation committees that determine executive compensation and their own compensation as directors.