Taking Care in Making Accusations of Wrongful Conduct in the Option Backdating Cases

An editorial in the New York Times  today decries the widening scandal in corporate America over backdated options, noting that over 100 companies are under government investigation or conducting internal inquiries regarding their options practices.  The article goes on to argue that this is not a victimless crime. 

True enough, however, the Post editorial is based on the troubling and incorrect assumption that backdating options is always illegal.  It is not.  As SEC Commissioner Paul Atkins commented in a July 6, 2006 speech:  “[b]ackdating of options sounds bad, but the mere fact that options were backdated does not mean that the securities laws were violated.” No doubt, Commissioner Atkins is right.  There may be instances where options were backdated and there is no violation of the law.  In other instances, such as when the accounting is done incorrectly or disclosure is absent or inadequate, backdating may result in violations of accounting standards or the securities laws. 

As the investigations into company option practices continue certainly a question raised in this blog before will resurface:  Where were the lawyers and where were the accountants?  Such professionals are the gate keepers to ensure the company complies with the law and accounting requirements.  Then where were the professionals when the options being examined at the 100 companies under inquiry were issued?  As a start, the Comverse case [see Blog entry of August 10, 2006] names the company’s former General Counsel as a defendant in what the government claims is a massive and illegal backdating scheme.  Press reports and rumors that counsel for other companies involved in the backdating inquiries may be the focus of government investigators also suggests an answer.

In the days to come surely we will hear more on the role of the professionals in these matters.  As those events unfold, however, it is critical that the underlying conduct be examined carefully and unlawful activity not be assumed from the mere fact of backdating or using an “as of” date.  Government prosecutors must be mindful of the fact that a mere accusation of wrongdoing from them can destroy an otherwise impeccable reputation.  For professionals whose careers hinge largely on their reputation government accusations can prove the death knell of a long and hard built career – even if those accusations later turn out to be unfounded.