409a backdating

According to Alsup’s reasoning and subsequent ruling, it is improper to infer fraudulent activity based solely on the occurrence of options backdating – further facts must be present and proven before the act can be considered to be fraudulent.

While this conclusion is logical in cases of options backdating in which executives knowingly participated in the criminal actions, options backdating can be a result of normal accounting or corporate policies that are not criminal in nature, and is a legal practice as long as the backdated contract is appropriately reported for tax purposes.

Cases of backdating employee stock options have drawn public and media attention.

According to a study by Erik Lie, a finance professor at the University of Iowa, more than 2,000 companies used options backdating in some form to reward their senior executives between 19.

In 1994, a new tax code (162 M) provision declared all executive income levels over one million dollars to be “unreasonable” in order to increase taxes on all applicable salaries by removing them from their previous tax deductible status 4.

For instance, public companies generally grant stock options in accordance with a formal stock option plan approved by shareholders at an annual meeting.

Academic researchers had long been aware of the pattern, exhibited by some companies, of share prices rising dramatically in the days following grants of stock options to senior management.

However, in late 2005 and early 2006, the issue of stock options backdating gained a wider audience.

Additionally, companies can use backdating to produce greater executive incomes without having to report higher expenses to their shareholders, which can lower company earnings and/or cause the company to fall short of earnings predictions and public expectations.

Corporations, however, have defended the practice of stock option backdating with their legal right to issue options that are already in the money as they see fit, as well as the frequent occurrence in which a lengthy approval process is required.

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