Consequences of backdating stock options
Looking backward, I'll ruminate a little about how we got here, and finally, at the risk of appearing to be or worse, actually being the secular equivalent of a sanctimonious twit, offer some thoughts looking forward on lessons we might take away from all of this. I have reached the point in life where I view the world through ridiculously expensive progressive lenses, but I guarantee you these lenses are not rose-colored. To recap much of what you may already have read or heard, the Division of Enforcement is investigating over 100 matters relating to potential abuses of employee stock options.I should begin of course where I always do with a disclaimer. The investigations are being conducted by SEC offices throughout the country and are being centrally coordinated and tracked here in Washington. Thank you so much for spending time today on this important topic.I thought I'd talk a little about where we are from an Enforcement perspective.Furthermore, the Directive states the special requirements apply regardless of whether the issue arises from error or was the result of deliberate actions.The Directive instructs agents to identify the existence of any backdating issues at the beginning of any corporate examination. The Directive states that the backdating issue should be identified early in the audit process so as to "ensure proper statute [of limitations] procedures are in place to address this issue at the individual level." Thus, the Directive signals that the IRS intends to use its audits of corporate taxpayers as a tool for the timely identification of individuals who have benefited from backdating so that the IRS can pursue separate audits of such individuals before any relevant statute of limitations lapse.ESOs are usually granted at-the-money, i.e., the exercise price of the options is set to equal the market price of the underlying stock on the grant date.Because the option value is higher if the exercise price is lower, executives prefer to be granted options when the stock price is at its lowest.
In recent months, the SEC has brought two enforcement actions one relating to Brocade and another involving Comverse.The Directive is significant, nonetheless, in that it signals a nationally coordinated effort within the IRS to target transactions involving backdated stock options, and also establishes mandatory audit requirements and centralized reporting procedures within the IRS as relating to backdated stock options.As noted below, the directive also signals the IRS's intention to pursue the issue against individuals who received such options.Additions might include improvements to the property and subtractions may include affects the extent to which medical expenses, non business casualty and theft losses and charitable contributions may be deductible.It is also an important figure in the basis of many other individual planning issues as well as a key line item on the group who studies a number of companies and makes buy or sell recommendations on the securities of particular companies and industry groups.