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.
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Fifty-two companies currently under criminal investigation. Moreover, the company avoids having to expense the options as current compensation, thus increasing earnings in the near term.
As a consequence, the option is immediately profitable, or “in the money,” to the option holder.
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.
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.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.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.Plaintiffs’ lawyers have seized upon this issue as yet another opportunity to bring cases against corporations and their officers and directors.