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The Internal Revenue Service has also joined a number of investigations due to the tax implications of options backdating, both with respect to the individuals who received the backdated options as well as the corporations that failed to account properly for the options when they were granted.
Of course, disparity between a reported grant date and the actual grant date is not always intentional.
Class actions ostensibly are brought on behalf of the shareholders of the company who have been impacted by the option grants.
Shareholder claims typically are grounded in some allegation of misrepresentation.
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.
“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.
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.Not surprisingly, the defendants themselves earned millions of dollars from backdated options.Another troublesome outcome for a corporation is that the SEC will bring civil fraud charges stemming from options backdating in all cases where criminal charges have been filed.As in other enforcement areas, the SEC has a penchant for pursuing through civil actions matters that involve blatant and intentional misconduct.Of course, the imposition of an officer and director bar against those who are intimately involved with the backdating process can result in a corporation losing its founder or other key management personnel.