Sox and backdating
All of which will tend to encourage CEOs and CFOs to resist restating flawed financial statements and/or to game the timing of their compensation and stock transactions relative to any such restatements.I'm unaware of any attempt to use the Section 304 clawback to recapture CEO and CFO compensation in any of the option backdating cases to date.
Under SOX Section 304, in the event a corporation is obliged to restate its financial statements due to "misconduct," the CEO and CFO must return to the corporation any bonus, incentive, or equity-based compensation they received during the 12 months following the original issuance of the restated financials, along with any profits they realized from the sale of corporate stock during that period.It has been big news that the former chairman and CEO of United Health, William W.Mc Guire, has agreed to settle a backdating case with the SEC and, as part of the settlement, to pay $468 million.The SEC’s opinions regarding backdating and fraud were primarily due to the various tax rules that apply when issuing “in the money” stock options vs.the much different – and more financially beneficial – tax rules that apply when issuing “at the money” or "out of the money" stock options.Options backdating occurs when companies grant options to their executives that correspond to a day where there was a significantly lower share price.
It is suspected that these situations are not a coincidence and that the board or executives were granted options based on a past date in order to make these options more profitable.
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.
This is the provision that requires the CEO and CFO to "reimburse" the company for certain incentive/equity based compensation or stock sales in the aftermath of a restatement that resulted from "misconduct, with any financial reporting requirement under the securities laws,"All fairly impressive numbers.
But in fact, Mc Guire will actually disgorge nothing.
At first glance, call options represent the perfect way to tie an executive's level of compensation to the company's performance because as the company's share price increases, so does the payoff the executive will receive.