Dec. 2011/Jan. 2012 / Features
Lessons from the Options Backdating Scandal
When the Wall Street Journal ran an article about backdating stock options in 2006 (“Perfect Payday”), it unleashed a torrent of internal investigations at hundreds of public corporations.
Billions of dollars in accounting restatements soon followed, along with shareholder and derivative lawsuits, SEC proceedings and a few criminal prosecutions.
According to the author, who represented clients caught in the backdating scandals, “you never know what obscure area of corporate policy is going to be the fuel for the next Bonfire of the Vanities.” In his opinion much of the energy devoted to options backdating litigation was a waste of resources.
What often emerges in such cases, he says, is that the options backdating story was complicated. The rules for pricing options and determining the proper date of the grant were complex, and responsibility for the process was widely diffused, with decisions being made by operational supervisors, finance, committees of the board, the whole board, and management. Even reputable auditors often failed to detect (or chose to ignore) options backdating that was going on under their noses. Under such circumstances, it is impossible to hold an individual outside director responsible.
He cites a recent appeals court ruling in one of his firm’s cases that exonerated the defendant, agreeing with the district judge that there was no evidence of wrongful intent. The court questioned the materiality of options dating disclosures, typically a sentence or two in a footnote to the company’s financial statements.
