Backdating law

Subsequently, the Securities and Exchange Commission (SEC) took an interest, followed by the securities plaintiffs’ bar and many corporations. The practice of options backdating, apparently widespread from 1996 through 2002, is widely believed to have been short-circuited by the enactment of Sarbanes-Oxley in 2002.Although backdating had not yet been recognized as a problem, the provisions of Sarbanes-Oxley requiring that insiders report the acquisition of securities, including options, within two days of receipt greatly hindered the ability of corporations to backdate options.Does it matter if this effective date is prior to the date the parties actually entered into the agreement?And if so, is this ‘backdating’ problematic or even potentially illegal?Finally, although ERISA preempts or supersedes state laws relating to pension plans, it generally does not preempt state criminal laws as they may be applied to the act of fraud, embezzlement or otherwise interfering with a participant's rights or benefits.

Other similar practices are being reviewed by government officials as well.The purpose may be tax avoidance or the cash and assets may be the result of illegal activities such as payoffs to government officials, illegal drug sales and arms trafficking.Backdating can involve assigning an event “to a date prior to that of actual occurrence” or dating a document “to reflect an event that occurred prior to execution.” The propriety of backdating, says law professor Jeffrey L.Backdating allowed executives to choose a past date when the market price was particularly low, thereby inflating the value of the options.The process was illegal in many cases because documents were forged, the options were not properly accounted for, and the backdating was not clearly communicated to the company’s shareholders.

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