As has been widely reported, more than 80 companies including heavyweights such as Home Depot, Apple Computer, and Barnes & Nobleallegedly backdated stock options or otherwise manipulated options pricing.Although the practice of backdating stock options itself is not necessarily illegal, it may lead to a host of tax and regulatory liabilities.In this article we explain the problem and see to what extent it may have an impact on the UK market. A stock option is a contractual right granted to executives to purchase a stock in the future at a fixed price: the "exercise" or "strike" price.
As with any scandal, backdating has triggered shareholder lawsuits, although so far they have been a trickle rather than a torrent.
About 20 class-action suits and 90 more limited suits have been filed.
Martin Sullivan, president and chief executive of the American International Group Inc., said the backdating situation is one his firm is monitoring closely but that it appears to be a “manageable issue.” An executive from an insurer ratings organization noted that there might be some claims, but Matthew Mosher, vice president with A. Best Co., commented, “I don’t know that it’s going to be a major issue.” There’s reason for insurers to be watching it closely.
Sullivan noted that when he asked his underwriters if they saw the backdating issue coming, they said no. Federal regulators have targeted close to 200 companies for allegedly backdating options.
Options give the recipient the right to buy company stock in the future at today's price.
At issue is whether people at the companies chose option-grant dates earlier than the actual award dates because the stock prices were low and executives could get shares at a bargain price.
If you deliberately burn down your house, your insurance company is likely to balk at writing a check to cover the damage.
Does that same principle hold true in the corporate world?
In-house corporate counsel have been implicated in certain of these investigations and suits.
Indeed, as of October 2006, at least seven general counsel had resigned in the wake of stock option investigations and several others have been suspended or fired. The recent million settlement of a civil lawsuit filed by the SEC against the former general counsel of Comverse Technology, Inc.
The insurance industry does not think the emerging scandal over backdating of stock options will reach a point where it will pose a major claims problem for insurers of directors and officers.