In the end, if the Do J proves that the Brocade executives deliberately orchestrated a scheme to mislead investors and regulators by falsifying documents and forging financial statements, it could amount to criminal securities fraud, contends Kenneth Lee, a securities litigator in the New York office of Thacher Proffitt and Wood.
But the prosecutors would have to show that the backdating process was a deliberate attempt to mislead investors, rather than neglect on the part of the executives to properly understand and implement backdating.
Furthermore, since 1995, when FASB issued FAS 123, Accounting for Stock-Based Compensation, companies have been required to record in-the-money grants as a compensation expense.
That promise is considered to be an in-the-money options grant.
In-the-money options are different from performance-based compensation in the eyes of the Internal Revenue Service and the Financial Accounting Standards Board.
The date chosen could be one when the company’s stock was at a low, so the options can be in-the-money at the time of granting itself.
The practice is illegal if it is not followed by proper disclosure and related expenses are not recorded in financial statements.