Fasb backdating stock options

However, prior to reviewing the litany of potential legal issues, we think it is important to draw a line (similar to that drawn in GAAP between “errors” and “irregularities”) between circumstances involving serious legal/governance issues and technical noncompliance issues that many, if not most, companies will confront when reviewing their historical option grant practices.

From our perspective, the key question (and distinguishing characteristic) between technical errors and more serious issues is whether the board of directors or the compensation committee knowingly approved the terms of stock option grants and the prices at which the options were exercisable.

Therefore, all or part of the spread when the option is exercised may not be deductible, depending on the circumstances.

Discount options will also fail to be exempt from the newly enacted, highly punitive legislation governing so-called nonqualified deferred compensation.

With the filing of civil and criminal complaints last week against executives of Brocade Communications Systems, Inc., and the SEC’s adoption of new executive compensation disclosure rules on July 26, 2006 (which will require companies to disclose information about their option grant practices), the SEC and the Department of Justice have made it clear that the federal government is committed to exposing and eliminating fraud and criminal misconduct associated with the timing of stock option grants.

With these baseline considerations in mind, a list of possible implications of option-granting errors or irregularities follows.

Regulators and criminal prosecutors have a wide array of civil and criminal actions they can pursue and various remedies they can seek for option grant abuses, including criminal indictments, civil injunctions and administrative cease-and-desist orders, disgorgement, financial penalties, and bars precluding service as an officer or director of a public company.

As noted above, on July 20, 2006, the United States Attorney’s Office for the Northern District of California, the SEC, and the FBI announced the filing of civil and/or criminal securities fraud charges against former executives of Brocade Communications Systems, Inc., a company that had been under investigation prior to the current spate of inquiries.

As noted below, the failure to record income tax expense properly can also trigger a restatement. Stock options granted at a discount, whether due to backdating or otherwise, may result in tax issues.

Discount options are not exempt from the

With these baseline considerations in mind, a list of possible implications of option-granting errors or irregularities follows.

Regulators and criminal prosecutors have a wide array of civil and criminal actions they can pursue and various remedies they can seek for option grant abuses, including criminal indictments, civil injunctions and administrative cease-and-desist orders, disgorgement, financial penalties, and bars precluding service as an officer or director of a public company.

As noted above, on July 20, 2006, the United States Attorney’s Office for the Northern District of California, the SEC, and the FBI announced the filing of civil and/or criminal securities fraud charges against former executives of Brocade Communications Systems, Inc., a company that had been under investigation prior to the current spate of inquiries.

As noted below, the failure to record income tax expense properly can also trigger a restatement. Stock options granted at a discount, whether due to backdating or otherwise, may result in tax issues.

Discount options are not exempt from the $1 million cap on certain executive pay.

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With these baseline considerations in mind, a list of possible implications of option-granting errors or irregularities follows.Regulators and criminal prosecutors have a wide array of civil and criminal actions they can pursue and various remedies they can seek for option grant abuses, including criminal indictments, civil injunctions and administrative cease-and-desist orders, disgorgement, financial penalties, and bars precluding service as an officer or director of a public company.As noted above, on July 20, 2006, the United States Attorney’s Office for the Northern District of California, the SEC, and the FBI announced the filing of civil and/or criminal securities fraud charges against former executives of Brocade Communications Systems, Inc., a company that had been under investigation prior to the current spate of inquiries.As noted below, the failure to record income tax expense properly can also trigger a restatement. Stock options granted at a discount, whether due to backdating or otherwise, may result in tax issues.Discount options are not exempt from the $1 million cap on certain executive pay.

million cap on certain executive pay.

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