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Chandler III, made it clear that backdating is illegal and that corporate boards need to act swiftly to rectify the wrong doing.What surprised many was his further discussion on “spring loading”. Criminal charges for backdating could include alleged violations of Section 17(a), 15 U. C.77q, which prohibits fraudulent interstate transactions, and Section 10(b), 15 U. This means a company must properly disclose and account for any backdating practices in its financial statements. Furthermore, the failure to record an expense for discounted options granted to employees might result in understated financials, which could in turn make other financial reports inaccurate, particularly net revenues. The basic violation under these statutes is the same: an intent to defraud another by means of an untrue statement of material fact or an omission of a material fact necessary in order to make a statement not misleading. Regardless of which acceptable GAAP approach a company used in valuing options,a statement in a company's financials stating that the strike price was equal to the fair market value ('FMV') on the grant date would be false or inaccurate if the company backdated options. Aside from interest and penalties that might accrue if a company amends its income tax returns, executives who implemented backdating practices may also be criminally liable for willfully failing to pay taxes, see , e.g., I. C.7202, or providing fraudulent and false statements in a tax return, see , e.g., I. In his decision, Chancellor Chandler stated, “It is difficult to conceive of an instance, consistent with the concept of loyalty and good faith, in which a fiduciary may declare that an option is granted a “market rate” and simultaneously withhold that both the fiduciary and the recipient knew at the time that those options would quickly be worth much more”.This puts a spotlight on compensation committees that determine executive compensation and their own compensation as directors.
OTHER ARTICLES BY Keith Kefgen, New York CFO Compensation in the Gaming Industry Can We Have Compassionate Leaders In A Dog-Eat-Dog World?Apple CEO, Steve Jobs, was recently cleared by an internal investigation, but the former CFO and General Counsel were not so lucky. It is the practice of issuing stock options or grants to employees and artificially picking a past date. When a company picks a date when the stock price is lowest, the option has more value.Unfortunately, it circumvents the law and the original intent of the option.Spring loading options is the practice of granting options just prior to issuing good news (financial performance, merger/acquisition, positive news regarding a regulatory approval and so forth).If spring loading is deemed to be illegal, it could cause an even worse situation, as spring loading has been common practice in corporate America.