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In addition, any inadequate internal controls that led to the inaccurate reporting would constitute a separate violation. Intent Requirement For Securities Fraud Under the securities acts, a defendant must act 'willfully' or 'willfully and knowingly.' See 15 U. This intent requirement is important in options backdating cases to determine whether executives may face criminal, rather than merely civil, penalties.
If an executive who participated in backdating certified the company's financial reports, and those reports did not disclose and account for backdating, then he would be liable for making a fraudulent certification. Though federal courts have inconsistently construed these terms, Where the statute requires the person acted 'willfully and knowingly,' however, some courts require the government to show not only that the defendant knew that backdating was wrongful (willfully), but also that it was unlawful (knowingly). Internal Revenue Code Section 162(m) Section 162(m) caps the annual deduction for compensation paid to top executives at one million dollars.
Criminal charges for backdating could include alleged violations of Section 17(a), 15 U. C.77q, which prohibits fraudulent interstate transactions, and Section 10(b), 15 U. This means a company must properly disclose and account for any backdating practices in its financial statements. Furthermore, the failure to record an expense for discounted options granted to employees might result in understated financials, which could in turn make other financial reports inaccurate, particularly net revenues.
This entry was posted in CEOs, Executive Compensation, Sarbanes-Oxley, Stock Options, Uncategorized and tagged executive compensation, options backdating, Sarbanes-Oxley, Securities and Exchange Commission, securities fraud, securities prosecution, stock options. Awarding employees with stock options those are dated prior to the actual grant date.The date chosen could be one when the company’s stock was at a low, so the options can be in-the-money at the time of granting itself.(In the real world, we would be adding several zeros to the end of all these numbers, but I’m keeping it simple for the purposes of conversation.) Why shouldn’t an executive take such a deal? 1) It’s dishonest and 2) it’s incredibly easy to get caught. Because they can pay compensation without 1) incurring a compensation expense (which has the effect of lowering earnings) and 2) disclosing to shareholders what they are paying their employees.The Securities and Exchange Commission has seen it all, and options backdating are among the simplest, most obvious ways of scamming the system.