Tax consequences of backdating options

However, prior to reviewing the litany of potential legal issues, we think it is important to draw a line (similar to that drawn in GAAP between “errors” and “irregularities”) between circumstances involving serious legal/governance issues and technical noncompliance issues that many, if not most, companies will confront when reviewing their historical option grant practices.

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Regulators and criminal prosecutors have a wide array of civil and criminal actions they can pursue and various remedies they can seek for option grant abuses, including criminal indictments, civil injunctions and administrative cease-and-desist orders, disgorgement, financial penalties, and bars precluding service as an officer or director of a public company.As noted above, on July 20, 2006, the United States Attorney’s Office for the Northern District of California, the SEC, and the FBI announced the filing of civil and/or criminal securities fraud charges against former executives of Brocade Communications Systems, Inc., a company that had been under investigation prior to the current spate of inquiries.In some cases, the options may be grandfathered from the new rules or may be eligible for special transition relief before January 1, 2007.Otherwise, the options must be substantially amended prior to January 1, 2007, in order to comply with the new law, or significant tax penalties could be imposed on the optionees.Criminal proceedings for violations of the conspiracy and mail and wire fraud statutes are also possible.

Improper disclosures or accounting for options could render statements in a company’s proxy materials false or misleading.Although many of the alleged abuses under investigation took place prior to the Sarbanes-Oxley requirement that option grants be reported within two business days after grant and prior to the implementation of FAS No.123R, Share-Based Payment (requiring companies to expense the grant-date fair value of all stock options rather than just those granted below fair market value), we believe the procedures outlined in this Commentary continue to provide relevant guidance to public companies today.As noted below, the failure to record income tax expense properly can also trigger a restatement. Stock options granted at a discount, whether due to backdating or otherwise, may result in tax issues.Discount options are not exempt from the

Improper disclosures or accounting for options could render statements in a company’s proxy materials false or misleading.Although many of the alleged abuses under investigation took place prior to the Sarbanes-Oxley requirement that option grants be reported within two business days after grant and prior to the implementation of FAS No.123R, Share-Based Payment (requiring companies to expense the grant-date fair value of all stock options rather than just those granted below fair market value), we believe the procedures outlined in this Commentary continue to provide relevant guidance to public companies today.As noted below, the failure to record income tax expense properly can also trigger a restatement. Stock options granted at a discount, whether due to backdating or otherwise, may result in tax issues.Discount options are not exempt from the $1 million cap on certain executive pay.However, the potential consequences of such actions should be carefully considered.

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Improper disclosures or accounting for options could render statements in a company’s proxy materials false or misleading.

Although many of the alleged abuses under investigation took place prior to the Sarbanes-Oxley requirement that option grants be reported within two business days after grant and prior to the implementation of FAS No.

123R, Share-Based Payment (requiring companies to expense the grant-date fair value of all stock options rather than just those granted below fair market value), we believe the procedures outlined in this Commentary continue to provide relevant guidance to public companies today.

As noted below, the failure to record income tax expense properly can also trigger a restatement. Stock options granted at a discount, whether due to backdating or otherwise, may result in tax issues.

Discount options are not exempt from the $1 million cap on certain executive pay.

However, the potential consequences of such actions should be carefully considered.

million cap on certain executive pay.However, the potential consequences of such actions should be carefully considered.