• Stock Options Probe Intensifies
  • September 26, 2006
  • Law Firm: Nixon Peabody LLP - New York Office
  • The US Securities and Exchange Commission (SEC) and federal prosecutors have recently focused on the dating of and accounting for stock option grants made by public companies. The SEC is reportedly investigating more than 100 public companies nationwide in connection with their stock option grant practices. Charges alleging the backdating of stock options are being brought in certain cases against companies, their executives, and even human resource professionals in the widening probes.

    SEC Chairman Christopher Cox’s strongly-worded statement in announcing recent charges sends a clear message about just how important the SEC believes this issue to be:

    [O]ptions backdating strikes at the heart of investor confidence in our capital markets. It deceives investors and the market as a whole about the financial health of companies that cheat in this way. It understates a company’s compensation expenses and overstates the company’s income. In many cases, it makes a hash of the financial statements. It is poisonous to an efficient marketplace. The Securities and Exchange Commission is committed to bringing it to an end nationwide.

    Nixon Peabody is currently representing clients in a number of stock option investigations, including some that have been very prominent in the press. The firm has a team of lawyers with deep experience in SEC investigations, white collar defense, securities litigation defense, and internal corporate investigations.

    The facts and legal issues involved in the stock option investigations vary widely. Company counsel should consider the following in evaluating the potential exposure of the company and/or its directors and personnel:

    • The process by which options were granted. For example, was approval of each grant obtained from the Board of Directors (or a committee), or did management grant the options?
    • How was the strike price set? What was the relationship between the strike price and the closing price of the securities on the date the grant was approved?
    • How did the company account for the options (and what were the applicable accounting standards at the time of the grants)? For example, did the company record an expense for the option grant if the strike price was lower than the market price on the date of the grant?
    • What disclosure did the company make to the public regarding its option grant practices and accounting treatment for options?
    • Did the option grant practices conform to such disclosure?
    • Records regarding hiring/promotion dates should also be examined.
    • Controls regarding the granting of options, accounting for options, and HR-related records also should be evaluated.


    IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.