Stock Options: B y P A U l H. D A w E s A N D K O r y s O r r E l l al Street Securities in the Electronic Age The Rise and Recent Decline
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1 LAWYER Securities in the Electronic Age Wall Street Stock Options: Past Practices and Narrowing Choices Amid the Backdating Scandal B y P a u l H. D a w e s a n d K o r y S o r r e l l Paul H. Dawes is a partner, and Kory Sorrell is an associate, in the Securities Corporate Litigation Group in the Silicon Valley office of Latham & Watkins LLP. Mr. Dawes is also a member of the Editorial Advisory Board of Securities Litigation Report. Contact: Paul.Dawes@LW.com. The investigation of stock options backdating has now taken on towering proportions. As of September 6, over 100 companies are reportedly under investigation by the Securities Exchange Commission, the Justice Department, or both, and a recent academic study of options grants indicate that as many as 2,270 companies may have engaged in improper option grant practices at some point during the period Although most government investigations are still at an early stage, 15 securities fraud class action suits and 62 shareholders derivative suits have been filed in connection with options timing issues. We can expect many more.2 In this article, we first identify some of the antecedent causes that precipitated soaring interest in option grant practices by the SEC and DOJ and provide some indication of the scope and impact of the ensuing investigations. We then discuss a number of issues that are likely to emerge in the context of investigating any company s option grant practices. Companies subject to scrutiny for options backdating potentially face a panoply of accounting, legal and tax implications and must be prepared to respond not only to the SEC and DOJ, but also to stock exchange authorities, director and officer insurers, the Internal Revenue Service and individual and institutional shareholders. Finally, we focus on the broader consequences of the options backdating scandal and depict what the landscape will look like after the surge of interest in options backdating has receded. The Rise and Recent Decline of Stock Option Grants Stock option backdating refers to selecting the effective date of stock option grants retrospectively based on advantageous share price. The practice simultaneously provides potential financial gains to CONTINUED ON PAGE 3 Article REPRINT Reprinted from the. Copyright 2008 Thomson/West. For more information about this publication please visit ARTICLE REPRINT
2 West LegalworksTM offers you more 2008 Thomson/West. This publication was created to provide you with accurate and authoritative information concerning the subject matter covered, however it may not necessarily have been prepared by persons licensed to practice law in a particular jurisdiction. The publisher is not engaged in rendering legal or other professional advice, and this publication is not a substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorney or other professional. For authorization to photocopy, please contact the Copyright Clearance Center at 222 Rosewood Drive, Danvers, MA 01923, USA (978) ; fax (978) or West s Copyright Services at 610 Opperman Drive, Eagan, MN 55123, fax (651) Please outline the specific material involved, the number of copies you wish to distribute and the purpose or format of the use. With over 400 events annually, West Legalworks gives you more opportunities to learn from our over 2,000 world-class speakers and faculty. Choose from any one of our events covering business of law, practice of law, and other legal and business topics. See what we have in store for you. Visit us at westlegalworks.com/events. For subscription information, please contact the publisher at: west.legalworkspublications@thomson.com Editorial Board CHAIRMAN: John F. Olson Gibson, Dunn & Crutcher Alexander C. Gavis Vice President & Associate General Counsel Fidelity Investments Jay B. Gould Pillsbury Winthrop Shaw Pittman LLP San Francisco, CA PROF. Joseph A. Grundfest Professor of Law, Stanford Law School Micalyn S. Harris VP, General Counsel and Corporate Secretary Winpro, Inc. Prof. Thomas Lee Hazen University of North Carolina Chapel Hill Allan Horwich Schiff Hardin LLP Chicago, IL Teresa Iannaconi Partner, Department of Professional Practice KPMG Peat Marwick Michael P. Jamroz Partner, Financial Services Deloitte & Touche Stanley Keller Edwards Angell Palmer & Dodge LLP Boston, MA Cary I. KlaftEr Vice President, Legal & Government Affairs, and Corporate Secretary Intel Corporation Bruce W. Leppla Lieff Cabraser Heimann & Bernstein, LLP San Francisco, CA Simon M. Lorne Vice Chairman and Chief Legal Officer at Millennium Partners, L.P. Michael D. Mann Richards Kibbe & Orbe Joseph McLaughlin Sidley Austin, LLP New York, NY William McLucas Wilmer Cutler Pickering Hale & Dorr, LLP Broc Romanek General Counsel, Executive Press, and Editor TheCorporateCounsel.net Joel Michael Schwarz Attorney, U.S. Government Steven W. Stone Morgan Lewis LLP Laura S. Unger Former SEC Commissioner and Acting Chairman John C. Wilcox Senior VP, Head of Corporate Governance TIAA-CREF Joel Rothstein Wolfson Banc of America Securities LLP ADVISORY BOARD: Brandon Becker Wilmer Cutler Pickering Hale & Dorr, LLP Blake A. Bell Simpson Thacher & Bartlett New York, NY Steven E. Bochner Wilson Sonsini Goodrich & Rosati Palo Alto, CA Edward H. Fleischman Linklaters New York,NY West Legalworks 395 Hudson Street, 6th Floor New York, NY One Year Subscription n 12 Issues n $ (ISSN#: ) Please address all editorial, subscription, and other correspondence to the publishers at west.legalworksregistration@thomson.com For authorization to photocopy, please contact the Copyright Clearance Center at 222 Rosewood Drive, Danvers, MA 01923, USA (978) ; fax (978) or West s Copyright Services at 610 Opperman Drive, Eagan, MN 55123, fax (651) Please outline the specific material involved, the number of copies you wish to distribute and the purpose or format of the use. West Legalworks offers a broad range of marketing vehicles. For advertising and sponsorship related inquiries or for additional information, please contact Mike Kramer, Director of Sales. Tel: mike.kramer@thomson.com. This publication was created to provide you with accurate and authoritative information concerning the subject matter covered. However, this publication was not necessarily prepared by persons licensed to practice law in a particular jurisdication. The publisher is not engaged in rendering legal or other professional advice, and this publication is not a substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorney or other professional. Copyright is not claimed as to any part of the original work prepared by a United States Government officer or employee as part of the person s official duties.
3 recipients (at shareholders expense) and allows companies to grant in-the-money options without having to recognize any expense on their income statements.3 Option grants surged in popularity in the 1990s as young firms and start-up companies with little revenue, but potentially lucrative futures, latched on to stock options as a means to attract and compensate talented executives. At the time, stock options were widely touted as a way to align the incentives of shareholders and management, while also taking advantage of valuable tax deductions. In May 2005, University of Iowa Professor Erik Lie published a study that cast a long shadow over corporate practices involving stock option grants.4 Looking at 1,668 option grants during the period 1992 to 2002, Lie found that stocks involved in option awards tended to go down before the date reported for the option and that the stocks returns in the 30 days after the grant date were on average 5% better than market returns. Lie believed that someone at every fifth company he reviewed, if not more, was backdating options to set a lower strike price for option exercises.5 On March 18, The Wall Street Journal extended Lie s research by examining stock option grants to top executives. The Journal quantified grant patterns by comparing how much each company s stock rose in the 20 trading days following grants to the stock performance in the 20 days following all other trading days of the year. The results were striking. The analysis demonstrated that such favorable patterns of grant dates were extraordinarily unlikely and, in the case of Jeffrey Rich, former CEO of Affiliated Computer Services, the likelihood of his grant date pattern was approximately 1 in 300 billion. Similarly, for Louis Tomasetta, president and CEO of Vitesse Semiconductor, the odds were 1 in 26 billion.6 Considering the fact that executives would require preternatural foresight in order to forecast accurately and consistently when their companies hit market lows, the Journal s study galvanized immediate regulatory, shareholder, and media interest in option grant practices. The Significance of Stock Option Timing Issues Interest in stock options grant dates and employee stock option plans may appear petty in the era of corporate scandals like Enron and World- Com, but investigations have already had serious consequences and the future is portentous. As of May, shareholders have witnessed the loss of nearly $35 billion in stock market value at companies that have acknowledged investigations by either the SEC, the DOJ, or by special committees.7 Mercury Interactive Corp. stock, for example, fell 25% on news of backdating instances and executive resignations; and Comverse stock fell 22% after the company stated on March 14, that a committee of outside directors was reviewing the accuracy of stated dates of option grants.8 Although the overall economic impact of options backdating is extremely difficult to predict, one analysis indicates that the total cost of stock option backdating may approach one $100 billion.9 This figures includes not only losses in market capitalization, but also expenses associated with initial investigations, communication expenses, audit fees, restatement costs, taxes, fines and legal fees.10 This analysis relies on numerous assumptions, but is surely suggestive of the potential magnitude of options timing issues in economic terms. Potential Issues Arising in the Context of Backdating Much of the challenge of addressing potential options backdating lies in the panoply of related issues that are apt to surface during the course of an investigation of company practices. These include the following: Accounting Rules for Option Grants Under Accounting Principles Board Opinion 25, (APB 25) the compensation cost of stock option grants must be measured using either fixed or variable accounting. Fixed accounting applies when both the number of shares granted and the purchase price of the shares are known at the time of grant. In this situation, the grant date is the measurement date and the compensation cost to the company is fixed and measured as of that date. The
4 cost to the company is the excess of the fair market value of the stock over the exercise price on the date of grant. This method of valuation typically provides favorable results for the company: the exercise price of stock option grants is usually equal to the market price on the date of grant and the compensation expense is therefore zero. But if a company grants in-the-money stock options as of the date of grant, then the company must record a compensation expense because options priced below the stock s fair market value when awarded bring the recipient an instant paper gain. If the company failed to include this expense on its books, then it will have overstated its profits for each year in which it granted in-the-money options and may have to restate its financial results.11 Where either the number of shares or the exercise price is not known, or where an exercise price was modified subsequent to the grant date, variable accounting may apply to stock option grants.12 Variable accounting potentially imposes dramatic accounting charges to a company s earnings because any increase in the price of the shares underlying the option granted must be charged against earnings on a periodic basis for the life of the option. The more the company s share price increases in value, the more costly option grants subject to variable accounting become.13 Companies that have backdated stock option grants, or modified the exercise price subsequent to the grant date, may also have failed to apply variable accounting to the applicable accounting periods, thereby misstating earnings in each of the years in which variable accounting applied, and again financial restatements may be required. False or Misleading Disclosures Options backdating raises other significant disclosure issues in addition to financial statements because companies also routinely provide descriptions of their stock option plans in their SEC filings, including the compensation committee s policies and objectives. If a company fails to disclose the fact that it backdated employee stock options, or if the company has deviated from its stock option plan in its granting practices, then its SEC filings may be found to be false or misleading in these respects. Exchange Listing If a company learns of backdated options prior to submitting a filing with the SEC and cannot resolve the issue before the filing deadline, then the company may have to forego the filing and miss the deadline. In this situation, the company will have to request a hearing from the exchange or face delisting. The company also may face a suspension until it releases a restatement of prior earnings if it fails to show adequate progress. And de-listed companies have historically suffered considerable loss of share value. Fiduciary Duties Because of their ability to control the business and corporate affairs of a company, officers and directors owe the company fiduciary obligations that include the duty of care, loyalty and candor. The duty of care imposes on executives and directors the obligation to perform their duties with the same care that an ordinary, prudent person would exercise in a like position or under similar circumstances, including the obligation to reasonably inquire. Where issues arise involving the potential backdating or misdating of stock option grants, officers and directors may have failed to exercise the required level of care by failing to investigate or monitor stock option grant practices. Moreover, should officers or directors materially gain from backdated stock options, then these individuals may well have violated their duty of loyalty to the company. Tax Adjustments If a company grants inthe-money stock options, then the artificially low exercise price may alter both the company s compensation expense and capital gains for the options recipient. If the options were effectively inthe-money on the decision date, then the award may also not qualify for tax deductions and the company will need to make an adjustment.14 This is potentially significant, and the problem arises because tax law does not allow publicly traded companies to deduct more than $1 million per year paid to top executives unless the payment is performance based. For stock options to qualify as performance based, the compensation must be based solely on increased value of the stock subsequent to the grant date. If the grant date differs from the date of authorization and places the options in-the-money at the time of
5 authorization, then the option is not considered performance based. In that case, tax law would disqualify all the income from the exercise of the options from favorable tax treatment. The result is that the entire gain is subject to the corporate tax rate of 35%.15 Additionally, the IRS has determined that nonqualified deferred compensation treatment applies to options that become vested after 2004, even if granted before this date. If a recipient of stock option grants possesses any options that vested after 2004, then this portion of his income would be subject to an additional 20% penalty tax.16 The key issue is valuation under Internal Revenue Code Sec. 409A, which requires a fair market determination of the underlying stock in relation to the exercise price. Any difference or discount, where the fair market value is greater than the exercise price at the date of grant, will cause the nonqualified stock option to constitute deferred compensation that is subject to Sec. 409A because the holders have the discretion to elect when to exercise the right and to be paid the inherent compensation. The consequence of a violation of Sec. 409A is that the holder would be taxable on the value of the option or SAR at the time of vesting (without regard to when the right is exercised), at ordinary income tax rates, plus an additional 20% penalty tax rate. 17 Sarbanes-Oxley Reporting Requirements Prior to Sarbanes-Oxley, option grants could be reported on Form 5 reports up to 45 days after the close of the fiscal year, and option exercises could be reported as late as ten days after the month following an option exercise on Form 4. This extended period of time provided ample opportunity for company management to review stock performance for potentially attractive grant dates. Under current law, option grants and option exercises must be reported within two business days of the grant or exercise (effective August 2002) and failure to do so is a violation of the Act.18 Sarbanes-Oxley also imposes strict penalties on the chief executive and senior financial officers if an issuer is required to undertake an accounting restatement due to material noncompliance. The officers must reimburse any incentive or equity-based compensation or profits from stock sales during the 12-month period following the issuance of a financial document that must be restated due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws. 19 Sarbanes-Oxley appears to provide for strict liability of the CFO and CEO, even if they were not guilty of the misconduct leading to the restatement. There is currently significant uncertainty as to whether the disgorgement provision of Sarbanes- Oxley applies retroactively. Courts have not yet addressed a situation in which a company has made a restatement of financials after the effective date of Sarbanes-Oxley where the apparent misconduct that led to the restatement occurred prior to the effective date. The SEC has, however, taken the position that Sarbanes-Oxley applies retroactively.20 Moreover, courts may seek to avoid the retroactive issue by reasoning that the SEC already possessed the power to seek disgorgement, and courts the power to order disgorgement, prior to the enactment of Sarbanes-Oxley. The court would therefore not need to address the question of whether the disgorgement provision of Sarbanes-Oxley was intended by Congress to apply retroactively.21 Should courts side-step the issue in this manner, or determine that the Sarbanes-Oxley disgorgement provisions indeed apply retroactively, then the current CEO and senior financial officers of companies that restate financials as a result of misconduct may be strictly liable for profits received during the twelve month period following the restated financial, even if the conduct occurred prior to the enactment of Sarbanes-Oxley. Employee Agreements If a company determines in the course of an investigation that it may need to dismiss an employee connected with a backdating issue, then the company must examine the for cause clause in the employee s employment agreement to determine whether the employee may be severed for cause. If the circumstances of the dismissal are not covered by the agreement s for cause clause, then the company may have to dole out considerable employee compensation.
6 Stock Option Plans A determination of options backdating may violate the terms of the company s plan and thereby invalidate the plan. The result may be that other employees also face suspension of stock option exercises and employee stock purchase plan purchases. Options will also have to be re-priced to reflect the fair market value of the actual grant date (potentially involving variable accounting). While this may seem to be a relatively minor issue, the adjustments required may be considerable, given the number of grants that may have been issued to a large number of employees over a number of years. The New Landscape of Stock Option Grants New SEC Disclosure Rules On July 26, the SEC voted to adopt changes requiring disclosure of executive and director compensation. The new rules are intended to provide investors with a clear and complete picture of how companies award stock option grants. The rules specifically require disclosure in table form of (1) the grant date fair value, (2) the grant date of the FAS 123R, (the Financial Accounting Standards Board s statement No. 123, concerning share-based compensation), (3) the closing price on the grant date if it is greater than the exercise of the award, and (4) the date the compensation committee or full board of directors took action to grant the award if that date is different than the grant date. If the exercise price of an option grant is not the grant date closing market price per share, then the company will also have to provide a description of the methodology by which the exercise price was determined. 22 Finally, the rules will require a plain English description of how a company selects particular dates of option grants.23 These new rules are intended to provide a single, bottom-line number for an executive s compensation (including stock options) and this number should be comparable from one company to another.24 Compliance with the new rules for Form 10-K will be required for fiscal years ending on or after December 15, Heightened Scrutiny of Outside Directors Although only corporate officers have thus far been charged in options backdating cases, the SEC is apparently considering charging outside directors. In a recent speech on How to be an Effective Board Member, SEC Commissioner Roel C. Campos stated that it wouldn t surprise me to see charges brought against outside directors where the facts permit.26 Campos also suggested several indicia of good corporate practice by outside directors with regard to stock option grants. First, he warned against using as of dates for stock option grants unless the consequences of using as of dates have been carefully considered and approved by legal counsel. As of dates are not per se illegal and the practice is pervasive, but outside directors should confirm that the as of dating serves a legitimate purpose.27 Second, Campos said that critical board functions should not be assigned to a committee of one unless additional checks and balances are also installed. Delaware law permits committees of one, but the SEC does not consider this best practice and considers such committees a signal that directors are not taking their obligations seriously.28 Finally, Campos enjoined outside directors to pay attention to stock option grant processes and procedures. Attending to simple logistics, such as properly signing and dating unanimous written consents, will help companies and directors steer clear of trouble.29 Campos concluded by emphasizing that the SEC is both aware of the unique role of directors in corporate governance and looks carefully at their actions. He said that the SEC brings cases only in egregious situations where there has been a clear violation of a director s fiduciary duty to shareholders. But we do bring them. 30 Consequently, it appears that even if few cases are brought against outside directors in the course of current investigations of stock option grant practices, outside directors are clearly on notice regarding their corporate duties in the future. Director and Officer Insurance We anticipate repercussions regarding D&O insurance in at least two ways. First, directors and officers involved in options backdating issues may face significant potential liability in subsequent class action lawsuits. D&O insurers are certain to review the information disclosed to them during the
7 underwriting process with an eye for any material misstatements or omissions that would provide the insurer the right to rescind the policy. They are also likely to seek out various policy exclusions to deny coverage. But these exclusions require a final adjudication finding someone at fault and D&O insurance policyholders will therefore have ample incentive to settle shareholder claims before the case reaches a court.31 Second, companies linked to options backdating issues will likely face increased rates and potentially restrictive terms. Companies evincing no tie to options grant issues may also be subject to increased rates due to the increased risk associated with stock option grants.32 In either case, management in the future will need to be thoroughly prepared to demonstrate to insurers that their company is not, and will not be, ensnared in issues related to options backdating. This will require showing both that the company has adequate procedures for internally auditing option grants and that the company s executive compensation committee takes the issue seriously. Much, if not all, of what insurers will want to see will be required by the SEC and vigorously advised by outside counsel, but controlling D&O insurance costs will supply added incentive to otherwise reluctant management. [For more on insurance concerns, see Insurance Coverage for Options Backdating Claims by John E. Failla and Leza M. Di Bella, elsewhere in this issue.] Greater Institutional Investor Involvement In May, CalPERS, one of the country s largest institutional investors, asked companies whose stock-option grants are under review by federal investigators to provide information on their finances and executive pay. These requests included internal investigations and inquiries by the SEC or prosecutors, and CalPERS specifically wanted information regarding how backdating may affect earnings and assets.33 More recently, on June 7, CalPERS sent a letter to 24 firms urging directors to conduct independent investigations, disclose all findings, develop new board policies for option grants, refrain from using company resources to satisfy the liability of executives implicated in wrongdoing, and commit to having the company s external auditor ratified annually by shareholders.34 Directors who fail to respond to option inquiries and institutional shareholder suggestions will likely suffer for it. Investor Shareholder Services has announced similar recommendations to directors and expressly stated its intent to track companies that have disclosed option probes and to flag options-related issues in the future. ISS also said that it will consider companies response to options issues in the future when advising investors on director elections.35 Counsel Advising Conservative Grant Practices To satisfy regulatory authorities and avoid any tincture of impropriety from an accounting or shareholder perspective, clients will likely be advised to align their option grant procedures with standards of good corporate practice, which include, but are not limited to: developing a clear and comprehensive written policy for granting stock options; providing designated oversight of policy implementation by an independent body that reports to the Board of Directors or Audit Committee; allowing option grants only by the Board of Directors or by a Compensation Committee comprised of more than one member; granting options at actual meetings rather than by unanimous written consent; adhering to predetermined dates for option grants each year; granting only at the money options; requiring that grant dates coincide with the date of authorization and approval; granting options after reporting periods, during times of maximal disclosure, during an open window, to avoid the appearance of springloading and/or bulletdodging; implementing grants immediately and promptly notifying option grant recipients;
8 not modifying lists of grants subsequent to the meeting at which options were granted; implementing and strictly adhering to a document retention policy; and regularly reviewing grant practices until the SEC and public accounting community develop authoritative views on these issues and regularly thereafter. The above recommendations are admittedly conservative and in some instances go beyond what is required. But in the current climate, clients are seeking advice for how best to steer clear of any implication in options backdating issues, and counsel will likely advise clients to take additional precautions to render companies less vulnerable to regulatory, shareholder and media suspicion. Notes 1 Testimony of SEC Chairman on Options Backdating, Wall St. J. Online, September 6, 2006, online.wsj.com/article/sb html?mod=options; See also Perfect Payday: Options Scorecard, Wall St. J. Online, September 6, 2006, documents/info-optionsscore06-full.html. Erik Lie and Randall Heron estimate that 29.2% of firms manipulated option grants to executives at some point during the period 1996 to See Erik Lie and Randall Heron, What Fraction of Stock Option Grants to Top Executives Have been backdated or Manipulated?, July 14, 2006, pdf#search=%22lie%202000%20backdated %20study%22. 2 Backdating: Civil Litigation Scorecard, The D & O Diary, September 6, 2006, blogspot. com/ 2006/ 07/ counting- optionsbackdating-lawsuits.html#. 3 See David Bassett & Jean-Louis Thiémélé, Center for Financial Research and Analysis, Options Backdating-Which Companies are at Risk (May 16, 2006), It is important to note that not all instances of backdating are illegal. If the backdating is clearly communicated to the company s shareholders, is properly reflected in company earnings, and receives appropriate tax treatment, then backdating is permissible. Issues arise only when companies fail to meet any of these conditions. 4 Erik Lie, On The Timing Of CEO Stock Option Awards, Mgmt. Sci., May 2005, SEC Looking At Options Backdating By McAfee, San Jose Mercury News Wire Services, May 26, 2006, at 1D. 6 Charles Forelle & James Bandler, The Perfect Payday Some CEOs Reap Millions By Landing Stock Options When They Are Most Valuable; Luck Or Something Else?, Wall St. J., Mar. 18, 2006, available at print/sf html. This article provides ample grist for plaintiffs shareholder derivative complaints. In Tope v. Lee, for example, plaintiffs allege that officers of Integrated Silicon Solutions, Inc. (ISSI) backdated option grants; and the plaintiffs claim that The odds that the pattern of fortuitously-timed stock option grants exhibited by ISSI is the result of chance are similar to, if not greater than, the one in several billion or more odds described by the Wall Street Journal. 7 David Henry, Backdated Options, Future Rules? The Latest Accounting Investigations Could Lead to a New Round of Regulations for Corporations and Undermine Investor Confidence, Bus. Wk. Online, May 23, 2006, com/investor/content/may2006/pi _ htm, available at WLNR James Bernstein, Three Top Comverse Execs Quit Software Company Founder, 2 Officers Resign 6 Weeks Into Inquiry Into Dates of Stock Option Grants, Newsday, May 2, 2006, at A36; Erik Lie, Backdating of Executive Stock Options (ESO s), backdating.htm (last visited June 27, 2006). 9 Current Estimate of Economic Impact of Options Backdating. current-estimate-pf-economic-impact-ofoptions-backdating.aspx. 10 Id. 11 See Staff Audit Practice Alert No. 1, Public Company Accounting Oversight Board, Matters Related to Timing and Accounting for Option Grants (July 28, 2006), available at pcaob.org/news_and_events/news/2006/07-28_ Release.pdf. 12 Id. 13 See Joseph Bachelder, Repricing Stock Options: Current Developments, May 31, 2001, available at html. 14 Id. 15 Kaye A. Thomas, Fairmark Press, Tax Goof Could Cost $560 Million A Little Cheating Can Cost
9 A Lot, April 24, 2006, news/060424a-unitedhealth.htm. 16 Id. 17 Section 409A Creates Tax Consequences For Stock Options, Valuation Researcher Alert, May 2005, news/2005_05.htm. 18 Ownership Reports and Trading by Officers, Directors and Principal Security Holders, Exchange Release No (Aug. 6, 2002) U.S.C.A Olann Kerrison, Enron Fraud Net Widens to Advisers as Merrill Charged, Int l Acct. Bull (Lafferty Pub. Ltd. Apr. 4, 2003). 21 For an example of a court holding that the SEC had the power to seek disgorgement prior to the enactment of a statute, see SEC v. Posner, 16 F.3d 520, 521 (2d Cir. 1994) ( We need not reach the issue of the applicability of the Remedies Act, however, since the court relied on a viable, alternative basis for the injunction its general equitable powers to fashion appropriate relief for violations of the federal securities laws. ); see also SEC v. First Pac. Bancorp., 142 F.3d 1186, 1193 n.8 (9th Cir. 1999). 22 SEC Votes to Adopt Changes to Disclosure Requirements Concerning Executive Compensation and Related Matters, sec.gov/news/press/2006/ htm. 23 Christopher Cox, Introductory Remarks at the SEC Open Meeting (July 26, 2006, gov/news/speech/2006/spch072606cc.htm. 24 Id. 25 Supra note Roel C. Campos, How to be an Effective Board Member, spch081506rcc.htm. 27 Id. 28 Id. 29 Id. 30 Id. 31 Jaclyn Marie, Backdating Flap Could Make Insurers Wary: Concerns about Shareholder Suits Involving the Stock Option Scandal Could Move D&O Carriers to Try to Rescind Policies, July 25, 2006, ?f=related. 32 Rachel Beck, Scandal Drives Up Insurance Expenses: The Abuse of Stock Options is Making it More Costly to Buy Coverage for the Officers and Directors of Corporations, July 5, 2006, htm?template=contentmodules/printstory.jsp. 33 SEC Looking At Options Backdating By McAfee, San Jose Mercury News Wire Services (California), May 26, 2006, at 1D. 34 CalPERS Memorandum to Members of the Investment Community. From Christanna Wood and Dennis Johnson. Subject: Stock Option Backdating Update, Aug. 14, 2006, calpers.ca.gov/eip-docs/about/board-cal-agenda/ agendas/invest/200608/item07c-01.pdf#search= %22calpers%20%22june%207%22%20options % ISS, An Investor Guide to the Stock Option Timing Scandal, Rev. July pdf/optiontiming.pdf#search=%22%22an%20i nvestor%20guide%20to%20the%20stock%20o ption%20timing%20scandal%22%22. 9
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