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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.
“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.
the release of bad news that cause the stock price to take a temporary dip, which increases the probability that the option will become profitable in the short term.
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 SEC is investigating many companies, ranging from small to Fortune 500 companies, for options irregularities.
Similarly, the FBI has reported that it has 52 companies under criminal investigation. Department of Justice has said it will bring criminal charges where defendants falsify corporate books and records; issue false financial statements; lie to boards of directors, auditors or the SEC; or file false reports.
Professor Lie concluded that the robust profitability of so many options was statistically impossible absent some artificial influence such as backdating.
Likewise, in a case involving Comverse Technology Inc., the U. Attorney charged the former CEO, the former CFO, and the former General Counsel with violating securities laws.
In that case, corporate officers inserted backdated option grant dates into board of directors’ unanimous written consents that were transmitted to the compensation committee.
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.
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But even if no criminal charges are filed, the SEC still can bring a civil fraud action in federal court.