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.
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.
Options were also backdated for new employees to dates prior to the date employment actually commenced.
In addition, hundreds of thousands of backdated options were issued to fictitious employees and parked in a slush fund to be awarded at the CEO’s discretion.
Professor Lie concluded that the robust profitability of so many options was statistically impossible absent some artificial influence such as backdating.
Two indictments have been issued and multiple guilty pleas have been entered in the most egregious cases. To a public corporation, the potential consequences of engaging in options backdating are manifold and can range from none whatsoever to having founders and CEOs going to prison. For example, in the case involving Brocade Communications, the SEC charged the former CEO and the former Vice President of Human Resources with criminally violating the securities laws.
In addition to the governmental investigations, more than 200 companies have completed, or are conducting, internal investigations — either because they want the comfort of knowing that they have not engaged in options backdating or they have an inkling that they did and want to be proactive in addressing the problem. In a follow-up study to his earlier work, Professor Lie estimated that 29 percent of 7,774 companies he surveyed backdated option grants to executives between 19. The facts of that case as set forth in the indictment were egregious.
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.