skip to content »

Backdating derivative

backdating derivative-35

, some company executives and directors are now beginning to suffer the consequences of a practice that saw several of them draw undue profits after issuing stock options on dates hand-selected to coincide with favourable exercise prices.The American Perspective The number of cases involving options backdating continues to rise in the United States.

Options backdating contravenes the very nature and purpose of stock option grants.Of late, Delaware's Court of Chancery has agreed to hear a shareholder derivative suit that is aimed at both the directors and the recipients of backdated stock options; the former for a breach of their fiduciary duty, and the latter for unjust enrichment.The case of former Comverse CFO, David Kreinberg, highlights the reality that repercussions may extend beyond civil liability.Beyond practices involving the modification of grant documents, the value of options may also be inflated by timing a grant in relation to the release of information that is likely to affect stock price.For example, "spring-loading" takes place when a grant is authorized prior to the publication of positive information that is likely to cause a rise in stock price.By drafting or modifying the grant document to reflect a past date associated with a favourable exercise price, one may create the illusion that the decision to grant options was, in fact, made on the indicated date.

While, according to the grant document, it appears that options are offered "at the money", meaning at a price equal to the share price at the time of the grant, the options are, in reality, offered "in the money".

S., the Canadian Securities Administrators (CSA) released a staff notice, which provides directors with certain guidelines intended to reduce the risk of non-compliance with securities legislation.

These guidelines include, among other points, (i) the establishment of a compensation committee; and (ii) the adopting of policies regarding corporate disclosure, insiders and "black-out" periods around earning announcements.

Having been the first to plead guilty to charges of fraud and conspiracy in relation to backdating, Mr.

Kreinberg was also forced to pay $2.4 million in order to settle civil fraud charges.

Just how high these numbers will climb is not yet certain; according to a study conducted by Professor Lie of the University of Iowa, an estimated 30%, or 2 300, American corporations have engaged in the backdating of stock options.