That's what Baruch Weiss, a former Assistant US Attorney in the Southern District of New York and a Treasury Assistant General Counsel for Enforcement, says recent studies are showing. Weiss, now in practice at Arent Fox [a Bisnow on Business sponsor] says this includes not only the backdating of the grant, to make it appear that the option was granted at an earlier date and at a lower price, but also in some cases the date of the exercise, so as to start the required holding period for long term capital gains period treatment earlier.
The SEC is investigating 160 companies for possible regulatory proceedings and penalties; the DoJ and US Attorneys are considering criminal liability in particularly egregious instances, and shareholders are filing derivative suits.
Why would it be so widespread? Does that suggest rampant dishonesty in the corporate suites?
Weiss thinks the explanation is more subtle. He believe the practice proliferated because directors often serve on multiple boards and, as other commentators have noted, inadvertently carry "infected" habits with them. There is a natural tendency, he says, to assume that if other corporations are doing something, it must be okay.
It is even possible this may constitute a defense in some cases, he says—if, for example, officials observed expert attorneys conducting or condoning the practice.
Do all these cases raise the specter of severe financial punishment and even jail time?
Not necessarily, he says. The remedy for many companies with material discrepancies will likely be the need to re-state earnings under their reporting obligations to convey truthful information to the public markets. The SEC has wide latitude because of its variety of statutes that have different mental-state requirements associated with them. Individuals may have obligations to file amended personal income tax returns if the originals were based on the apparent grant date rather than the actual grant date. They may also have additional tax liabilities.
If you think you have a problem, what should you do? Weiss suggests a four step action plan: