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As the current wave of stock option backdating investigations and shareholder derivative lawsuits sweeps through the D&O industry, this is a good time to step back, consider what is at stake in these cases, and anticipate some of the D&O coverage issues that will implicated by settlements of these cases.
D&O coverage may be sought for SEC investigations relating to option backdating practices, as well as for the few shareholder securities class action lawsuits filed to date.
While not necessarily illegal, some instances may result in tax penalties, accusations of securities fraud for failure to disclose and financial restatements, respectively.
Concerned about alleged misdeeds and an adverse impact on stock price, pension funds are lining up to bring suit.
Backdating and its variants constitute failure to disclose compensation, which violates generally accepted accounting principles and the Sarbanes-Oxley Act.
Such violations can necessitate restatements of the company's financial statements.
In order to lock in a profit on day one of an options grant, some executives simply backdate (set the date to an earlier time than the actual grant date) the exercise price of the options to a date when the stock was trading at a lower level. In this article, we'll explore what options backdating is and what it means for companies and their investors. Most businesses or executives avoid options backdating; executives who receive stock options as part of their compensation, are given an exercise price that is equivalent to the closing stock price on the date the options grant is issued.
This means they must wait for the stock to appreciate before making any money.
In all my reading of the backdating scandal coverage, I have yet to see a thorough analysis of the real victims of this scandal: shareholders.
Stock options are promoted by their supporters as the most effective way to align executive and employee interests with those of shareholders.
They are supposed to transform executives from fly-by-night plunderers in the mold of former Tyco or World Com executives into rational leaders who make prudent, long-term-oriented decisions with shareholder capital.
If the company sets the prices of the options grant well below the market price, they will instantaneously generate an expense, which counts against income.
The backdating concern occurs when the company does not disclose the facts behind the dating of the option.
It is impossible to tackle the merits of any one situation without sufficient information to evaluate a problem, if one exists, and assess economic damages to anyone found to have been harmed by backdating. D., CFA and Accredited Valuation Analyst, says that âdescribing the topic of executive stock option valuation as broad is like saying that Lake Michigan is a little body of water.