I am sure that from time to time we have all come across the vexed question of backdating documents. A client or, in the case of an in house. In the mids, an investigation by the Securities and Exchange Commission The essence of the options backdating scandal can be summarized simply as the income was in the form of stock options that were granted at a When those firms have no ethical boundaries, their wares become suspect. accused of backdating stock option grants to coincide with the dates of low closing. prices for the .. aside the legal and ethical issues concerning the practice, establishing option exercise. prices at, say, monthly .. 80 Health services 20
By faking the issue date, they could guarantee themselves in-the-money options and instant profits. They could also cheat the IRS twice, once for themselves, since capital gains are taxed at a lower rate than ordinary income, and once for their employers since the cost of the options would qualify as a corporate tax write-off. A Scandal Comes to Light A series of academic studies was responsible for bringing the backdating scandal to light.
- A Scandal Comes to Light
- Options Backdating
The study, published inidentified a strange pattern of extremely profitable option grants, seemingly perfectly timed to coincide with dates on which the shares were trading at a low. A series of two follow-up studies by professors elsewhere suggested that the uncanny ability to time options grants could only have happened if the granters knew the prices in advance.
Is backdating legal? - Lexology
As a result, firms restated earningsfines were paid and executives lost their jobs—and their credibility. The Bottom Line Betting on stock prices when you already know the answer is dishonest.
A business run without integrity is a scary proposition. From a consumer's perspective, customers rely on companies to provide goods and services. When those firms have no ethical boundaries, their wares become suspect. From a shareholder's perspective, nobody likes to be lied to when providing the financing and paying the salaries.
The Dangers of Options Backdating. In the early s, new accounting provisions were enacted that required companies to report their option grants within two days of their issue and also required that all stock options be listed as expenses.
For example, if a seller had sold his house in December then the seller could have taken advantage of certain tax benefits. However, he only realizes this in January and so wishes to backdate the document to December.
Is backdating legal?
The event did not happen during the time period required for the benefit so an attempt is being made to pretend that it did. This is a fraud on the tax authorities, a criminal offence and is likely to get the lawyer who prepared the document disciplined by his regulator and possibly also charged as a co-conspirator. For obvious reasons, any request to backdate a document for these reasons should be flatly turned down. However, an explanation often given by the person wanting to backdate the document is that the document is merely meant to reflect an oral agreement that has already been made and that this is just a way of documenting it.
In theory, this would appear on the face of it to be a reasonable request, as it is just a private arrangement between two parties.
Backdating: Insight Into A Scandal
The argument is obviously not valid if the transaction is one which is required by law to be in writing such as a transfer of land. This is not an agreement that could have been made orally. However, even if it is an agreement that could have been made orally the lawyer preparing the agreement has no way of knowing whether that is actually the case and that the agreement to be fully documented by him is the one that was reached at the earlier date.
He also has no way of knowing whether the backdating will be scrutinized by a regulatory authority or even a Court. Does he need to check to see whether that was actually the case or can he take an ostrich-like position and put his head in the sand and not ask any questions? What confirmation of the earlier agreement did the client or the company for which the client and lawyer works provide?