Corporations Prepare for More Federal Fraud Investigations

By Katie Hauser

Published on September 07, 2006

While some companies have voluntarily launched such investigations, others have been prompted to do so by the Securities and Exchange Commission (SEC).

Technically, the backdating of stock options is not illegal. The term refers to altering the date a stock option was granted so it appears the stock was at a lower price at the time of the grant. Thus, when the options are exercised, the stock reaps a much higher payoff.

The problem currently under investigation by the SEC is that firms have not been properly documenting and disclosing information regarding the reward of these benefits, in turn risking violation of securities regulations, tax laws, and fraud statutes.

Recently the former chief executive of Brocade Communications Systems, Gregory Reyes, pleaded not guilty to charges of fraud filed by the Justice Department in collaboration with the SEC. The matter is being viewed as a test case and harbinger of future investigations into the practices of other IT companies.

Currently, over 100 companies are under investigation by the SEC for alleged fraudulent reporting of stock option grants. Representatives of the Senate Finance Committee, SEC, the Internal Revenue Service, and the Department of Justice say they cannot be sure of how many companies suspected of backdating stock options will face investigation.

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