Under previous regulations, corporations could wait 45 days or, in some cases, over a year to report options, thus providing ample time for backdating.
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.
And in addition to officer and director bars imposed by government authorities, internal investigations have led to numerous officer resignations from at least 25 companies including Quest Software, KB Homes, United Health Group, Inc., Mc Afee, Inc., CNET Networks, Inc., and Monster Worldwide.
Even Apple Computer CEO Steve Jobs was implicated by an internal investigation into backdating, although he apparently did not receive, or otherwise benefit from, the backdated grants.
But even if no criminal charges are filed, the SEC still can bring a civil fraud action in federal court.
This sort of case can be brought against the corporation and its officers and directors and can result in the disgorgement of profits, stiff monetary penalties, and prohibitions against officers and directors serving any public company in those capacities in the future.
Plaintiffs’ lawyers have seized upon this issue as yet another opportunity to bring cases against corporations and their officers and directors.
Such cases are brought under the guise of both class actions and shareholder derivative proceedings.
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.