Other companies want to give employees the opportunity to become equity owners.Companies also use stock to retain key employees by granting awards that they'd forfeit if they left the company. In addition, any inadequate internal controls that led to the inaccurate reporting would constitute a separate violation. Intent Requirement For Securities Fraud Under the securities acts, a defendant must act 'willfully' or 'willfully and knowingly.' See 15 U. This intent requirement is important in options backdating cases to determine whether executives may face criminal, rather than merely civil, penalties. If an executive who participated in backdating certified the company's financial reports, and those reports did not disclose and account for backdating, then he would be liable for making a fraudulent certification. Though federal courts have inconsistently construed these terms, Where the statute requires the person acted 'willfully and knowingly,' however, some courts require the government to show not only that the defendant knew that backdating was wrongful (willfully), but also that it was unlawful (knowingly). Internal Revenue Code Section 162(m) Section 162(m) caps the annual deduction for compensation paid to top executives at one million dollars. The board’s action makes the option a non-qualified stock option because the exercise price does not equal the fair market value of the stock at the date of the grant.Non-qualified stock options require tax payment at the ordinary income rate for the difference between the grant price and the price at which the option is exercised (the gain).
An employee who anticipates that a restricted stock grant will appreciate significantly during the restricted period can send a written statement to the IRS within 30 days of the grant to make a Section 83(b) election.
Whether executives will be criminally liable depends on whether they were consciously trying to cover up the practice of backdating. Like securities fraud, the criminal tax fraud statutes require an intent element.
Securities Fraud The primary source of criminal liability for backdating are the federal securities acts, which regulate the sale of securities by publicly traded companies.
Backdating is dating any document by a date earlier than the one on which the document was originally drawn up.
Under most circumstances, backdating is seen as fraudulent and illegal, although there are some situations in which backdating can be used in a legal and beneficial way, such as backdating a claim for a past period.