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Not surprisingly, the defendants themselves earned millions of dollars from backdated options.

Another troublesome outcome for a corporation is that the SEC will bring civil fraud charges stemming from options backdating in all cases where criminal charges have been filed.

Fortunately, the government appears to appreciate the difference between backdated options that involve the “intentional alteration of documents or faulty internal control and dating issues arising from ministerial or logistical delays.” Unfortunately, the plaintiffs’ bar is not so discerning.

Public announcements that a company or the SEC is investigating possible backdating issues have spawned a rash of civil suits.

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Other similar practices are being reviewed by government officials as well.But even if no criminal charges are filed, the SEC still can bring a civil fraud action in federal court.This sort of case can be brought against the corporation and its officers and directors and can result in the disgorgement of profits, stiff monetary penalties, and prohibitions against officers and directors serving any public company in those capacities in the future. All stemming from the practice known as “options backdating.” Options backdating occurs when a company issues stock options on one date, but reports in its financials an earlier issue date to create a “strike” or exercise price equal to the earlier date’s lower price.Another consequence is that the company underrepresents the real nature of an executive’s compensation, perpetuating the myth that options are performance-based incentive compensation.

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