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Criminal proceedings for violations of the conspiracy and mail and wire fraud statutes are also possible.Improper disclosures or accounting for options could render statements in a company’s proxy materials false or misleading.Theories for Potential Civil and Criminal Liability.Because improper accounting and disclosure regarding a company’s option grant practices can have a material impact on the accuracy of its financial statements, claims under multiple federal and state statutory provisions, as well as common law, are likely if disclosure of improper practices becomes required.Accounting errors of this type may also give rise to a finding of a material weakness in a company’s internal controls, as well as possible forfeitures of option profits under Section 304 of Sarbanes-Oxley.At least one company has already disclosed a “significant deficiency” in its internal controls as a result of its backdating practices.The option-granting practices called into question by the regulators can be grouped into three general categories In view of the recent indictments, the intense media scrutiny of this issue, the inquiries now being routinely made by third parties, and the likelihood of auditor inquiries as part of 10-Q reviews and annual audits, we recommend that our clients educate themselves about the issues arising from the option grant investigations and review their past and current option grant practices.If a review reveals questionable options practices, the company board should consider what action to take, which in some instances may include director-supervised investigations.
Discount options will also fail to be exempt from the newly enacted, highly punitive legislation governing so-called nonqualified deferred compensation.
In some cases, the options may be grandfathered from the new rules or may be eligible for special transition relief before January 1, 2007.
Otherwise, the options must be substantially amended prior to January 1, 2007, in order to comply with the new law, or significant tax penalties could be imposed on the optionees.
However, the potential consequences of such actions should be carefully considered.
Potential Ramifications Options backdating in and of itself is generally not illegal under U. law, but the failure to disclose or account for backdated options properly can have significant implications.