Backdating employee stock options westminster md dating
In addition, any inadequate internal controls that led to the inaccurate reporting would constitute a separate violation. Intent Requirement For Securities Fraud Under the securities acts, a defendant must act 'willfully' or 'willfully and knowingly.' See 15 U. This intent requirement is important in options backdating cases to determine whether executives may face criminal, rather than merely civil, penalties.
If an executive who participated in backdating certified the company's financial reports, and those reports did not disclose and account for backdating, then he would be liable for making a fraudulent certification. Though federal courts have inconsistently construed these terms, Where the statute requires the person acted 'willfully and knowingly,' however, some courts require the government to show not only that the defendant knew that backdating was wrongful (willfully), but also that it was unlawful (knowingly). Internal Revenue Code Section 162(m) Section 162(m) caps the annual deduction for compensation paid to top executives at one million dollars.
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.
With more criminal charges in the pipeline, companies and executives need to understand the potential scope of criminal liability. ('Securities Act'); Securities Exchange Act of 1934, 15 U. Tax Fraud Executives who used backdating practices may also face criminal prosecution for federal tax fraud. Therefore, to be criminally liable under the Code's criminal statutes, a person must 'willfully attemptto evade or defeat any tax imposed by [the federal government].' I.
There are three major areas of potential criminal liability for former executives involved in stock options backdating: securities fraud, tax fraud, and mail or wire fraud. Backdating only becomes illegal when executives fail to disclose the practice in financial reports, and fail to properly account for backdated options according to Generally Accepted Accounting Principles (GAAP) and the relevant tax laws. Three possible violations of the Internal Revenue Code ('Code') could create criminal liability for backdating: (1) exceeding the compensation deduction limits of Section 162(m), (2) failing to qualify options under the rules that govern incentive stock options in Section 422, and (3) violating the provisions of Section 409A regulating deferred compensation.
In addition, regardless of the GAAP accounting method the company used, the company must have recorded some sort of compensation expense for the discounted options. Additional Liabilities Under Sarbanes-Oxley When Congress and the SEC approved the Sarbanes-Oxley Act to amend the Exchange Act, they created additional financial regulations for publicly-owned corporations. Section 403 significantly shortened the time companies are permitted to wait before disclosing transactions involving management or principal stockholders, including option grants. This shortened time frame essentially removes the significant benefits of backdating because the limited volatility most stocks experience over the course of two days narrows the potential discount margin between the market price on the grant date and the strike price. This certification represents that the officers reviewed the company's financial data, and that it presents the financial condition of the company in all material respects. Certain 'performance-based' compensation payments are not counted toward the cap, including stock options that are granted with an exercise price equal to or greater than the FMV of the companies' shares on the date of the grant.
This process makes the granted option "in the money" and of value to the holder.