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.
To avoid criminal liability, the company must have disclosed the fact that it was backdating and explained particularly how the option strike prices had been determined. Previously, companies were allowed to wait until the end of their fiscal year before reporting these transactions. Now option grants must be reported to the SEC within two business days of the grant date.
Plaintiffs’ success on these fronts was resounding.Although accounting issues concerning stock options grants are complex, the documents and testimony plaintiffs acquired during discovery established a strong case regarding liability.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. All stemming from the practice known as “options backdating.” Options backdating occurs when a company issues stock options on one date, but reports in its financials an earlier issue date to create a “strike” or exercise price equal to the earlier date’s lower price.Another consequence is that the company underrepresents the real nature of an executive’s compensation, perpetuating the myth that options are performance-based incentive compensation.