Before the clamor about the lack of prosecutions from the financial crisis and the current crackdown on insider trading, the practice of backdating stock options came to light seven years ago and prompted a flurry of prosecutions.

Options backdating - Wikipedia

For those whose memories have faded, options backdating became known publicly in March when a Wall Street Journal article questioned whether executives selected an earlier date for the price at which options could be exercised, effectively giving them a lower price and making them more valuable. A number of companies — particularly those in the technology industry, which gave out stock options like candy on Halloween — began internal investigations into their awards.

Because publicly traded corporations must properly report the value of options on their financial statements, any backdating could result in a misstatement that can be the basis for a charge of securities fraud. Charges were eventually filed in a number of different jurisdictions against executives responsible for approving the practices, usually accompanied by a parallel civil enforcement action by the Securities and Exchange Commission.

But a few tied in with backdating were never accused of wrongdoing, like Steven P.

Apple's Options Backdating Scandal

That office obtained the most notable conviction from this era involving the former Brocade Communications chief executive, Gregory Reyes. But even that was not an easy case.

The conviction after his first trial was reversed on appeal. Not to be left behind, the Southern District of New York in Manhattan, which frequently pursues prominent securities cases, brought the charges against Dr. Hovanec in December One significant problem that prosecutors in New York faced was that Vitesse Semiconductor is based in Southern California, and almost no conduct related to the charges took place in New York.

End of the Options Backdating Era - The New York Times

After the first trial ended in April , Paul A. Crotty, a judge for the Federal District Court for the Southern District of New York, dismissed six of the seven charges in the case because no part of the securities fraud took place in the district, so venue was improper there.

The guilty plea Dr. Hovanec entered does not involve actual options backdating but instead their efforts to create a paper trail at the company to make it appear that the options were properly backdated. The cases show that prosecutors can be susceptible to jumping on a bandwagon when it appears that corporate misconduct took place. Among the chief executives convicted, in addition to Mr.

Reyes, were James Treacy of Monster Worldwide and Bruce Karatz of KB Home. Treacy received a two-year prison term, and Mr.

And much like the Vitesse Semiconductor executives, Mr. Karatz was convicted only on charges related to covering up the transactions. He was acquitted on 16 counts related to the actual backdating. Other cases were more problematic for the Justice Department. The prosecution of former Broadcom executives collapsed, and the case was dismissed after charges of prosecutorial misconduct by an assistant United States attorney. A jury acquitted the former general counsel at McAffe, after which the S.

In a civil enforcement action against a director of Engineered Support Systems, a district judge dismissed the S. The guilty pleas by Dr.

Hovanec are perhaps a fitting close to the options backdating era, admitting to the cover-up in exchange for a government recommendation that they receive probation for the violations. And the trials showed how difficult it was to prosecute senior executives for corporate misconduct that involves arcane accounting issues. Sections Home Search Skip to content.

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