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ARTICLE · 08 AUGUST 2006

Options Backdating—D&O Insurance Issues

In recent months the U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ) commenced investigations into the practice of backdating options awarded to directors and officers. Investigators are exploring whether certain companies backdated options to a time when the share price was lower in order to maximize the recipient’s financial benefit while preserving favorable executive compensation tax treatment.

United StatesCriminal Law

In recent months the U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ) commenced investigations into the practice of backdating options awarded to directors and officers. Investigators are exploring whether certain companies backdated options to a time when the share price was lower in order to maximize the recipient’s financial benefit while preserving favorable executive compensation tax treatment.

The practice itself may not be illegal, but the conduct surrounding the options is subject to scrutiny. Investigators are seeking answers to certain key questions: Did the company forge documents to accomplish the backdating? Did the company communicate the practice to shareholders? Did the company properly report the option grants in earnings reports? Did the company properly account for the backdated options in its tax returns?

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