Sec rules backdating stock options
District Attorney's Office has also issued several subpoenas in launching a criminal probe. The typical practice was to record a felicitously timed prior date as the grant date, such as the point when the stock had been at its lowest in recent months, instead of the date when the award was actually granted. Nejat Seyhun of the University of Michigan for the newspaper showed that that options granting practices between 20 often failed to comply with the Sarbanes-Oxley requirement that grants of awards to executives be reported within two days of board approval (T"he Dating Game: Do Managers Designate Option Grant Dates to Increase Their Compensation? Prior research at Erik Lie at the University of Iowa found a pattern of probable options backdating in a number of companies prior to 2002.Whether executives will be criminally liable depends on whether they were consciously trying to cover up the practice of backdating. Like securities fraud, the criminal tax fraud statutes require an intent element. Securities Fraud The primary source of criminal liability for backdating are the federal securities acts, which regulate the sale of securities by publicly traded companies. In its most basic form, backdating can range from the blatant falsification of a document to take advantage of a lower stock price to allowing executives to select a grant date during a specified period, for example during the 30 days after the grant is approved by the board or committee.Although these practices involve different types of conduct, both create problems because the date when the exercise price is set is not the same as the date on which the option is awarded.
Advance planning is key for senior management and compensation committees alike to evaluate how a company's proposed, current and past compensation policies and practices will be affected by and disclosed under the Rules.The Rules generally are effective for Forms 10-K and proxy statements filed for fiscal years ending on or after December 15, 2006, and thus will apply to disclosures of 2006 compensation in calendar year companies' 2007 proxy statements.