For its part, the company must report failure to comply on its annual proxy statement.But aside from Sarbanes-Oxley, whose effective date was after most of these practices were alleged to occur, there is a raft of potential other problems: As this was written in July, the many lawsuits that inevitably will be filed against companies accused of backdating had just started.Only 7.7% of companies filing within the new two-day reporting window for options grants show a pattern of backdating, compared to 19.9% of companies that did not meet the requirements.The results focused on the 51% of the grants during the period that were unscheduled and at-the-money.Some of the companies that get entangled in this may have been making honest mistakes, recording dates that were off by a few days because of inadequate administrative procedures.(The administrative problem could be resolved if more companies would hire people with the right skills for stock plan administration, such as those with certification from the Certified Equity Professional Institute at Santa Clara University.) There are also companies, such as Microsoft, that issued options broadly but were concerned that because of the volatility of their stock, an employee who joined the company on one day might get an option grant at a price very different from one who joined a few days earlier or later.Failure to address these issues proactively can lead to consequences ranging from negative press coverage to governmental investigations followed by class action or derivative litigation.Dozens of companies are under investigation by the Securities and Exchange Commission for backdating stock options. Alternatively, a company could hit a low without actually backdating its options by granting awards just before a major (positive) earnings announcement, a practice known as "spring-loading." A more extreme and more clearly illegal practice was to say that an award was exercised on a date other than its actual exercise date.
Key Issues Prior to the enactment of Section 403 of the Sarbanes-Oxley Act of 2002 - which requires disclosure by recipients within two days - it was possible for companies to delay weeks or months before disclosing publicly on Form 5 the date stock options had been issued.
So Microsoft, on the advice of its auditors, issued the option at the lowest price over a 30-day period.
Microsoft acknowledged doing this in 1999, stopped the practice, and restated its financials.
Thus, prior to 2002 it was possible as a practical matter for stock options to be issued with a retroactive effective date without raising any public attention because there was no expectation that the issuance of stock options would be contemporaneously disclosed.
This possibility - together with the allegations that a disproportionate number of companies issued stock options at particularly favorable times for executive grantees - raises several key questions: (1) What was the company's historical policy with respect to issuance of stock options and the propriety of backdating of options?