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Backdating Stock Options

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All companies have a certain degree of discretion when it comes to determining when stock options will be awarded. In most cases, the price of employee options will be dictated by the market price of the underlying stock on the day it was granted. However, some companies choose to backdate options, which means that the reported date of a grant will differ from the date on which the option was actually awarded. While backdating stock options is not technically against the law, it can lead to other actions that are considered fraudulent. To ensure that your company is not backdating options in a manner that is unlawful, please contact an experienced white collar crime lawyer who can advise you.

Legal Backdating Practices 

Backdating a stock option is not necessarily illegal. In fact, as long as companies take the following steps, they should be able to avoid prosecution for backdating stock options:

  • Refraining from forging documents;
  • Approving and disclosing the practice to interested parties;
  • Treating the options in accordance with the stock option plan;
  • Complying with proper tax procedures; and
  • Accounting for and disclosing the practice in financial reports.

When these conditions are not met, companies could face charges of fraud and tax evasion, both of which can have serious consequences, including jail time.

Legal Issues 

Companies that use stock option backdating practices are often suspected of having inadequate internal controls and disclosure procedures, especially if inaccurate compensation statements are submitted to the SEC. Failing to have proper procedures in place can also lead to accusations of tax fraud. This is because options that are granted at less than fair market value do not qualify as incentive stocks and so are subject to income tax and other withholding requirements when the options are eventually exercised. Furthermore, when options are granted at less than fair market value because they have been backdated or because board approval was not obtained, companies could face sanctions for violating the terms of their own option plan. This would also result in the invalidation of the options themselves.

Companies that fail to comply with these tax procedures could be charged with tax fraud or tax evasion and face monetary penalties and restitution, while officers could face criminal liability, especially if there are accusations of falsifying financial documents. Those who are accused of violating the Securities Exchange Act, for example, face up to five years in prison and a $10,000 fine if convicted. However, before a person can be convicted, prosecutors will need to prove that the defendant acted willfully, which is generally understood to mean that the defendant knew that the conduct was wrong.

Call Today to Speak with an Experienced White Collar Crime Attorney 

Backdating stock options, while not technically illegal, can lead to other white collar crime charges. As such, if your company currently uses a backdating practice or you have already been charged with a fraud-related offense, please contact Jeffrey S. Weiner, P.A., Criminal Defense Attorneys at 305-670-9919 to discuss your case with a dedicated Miami white collar crime lawyer.

Resource:

law.cornell.edu/uscode/text/26/7201

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