Stock Option Backdating Cases Accelerating

Two of seven business executives prosecuted for stock option backdating pled guilty last week in prosecutions initiated by the Justice Department and the Securities and Exchange Commission. There appears to be enhanced momentum for the prosecutions initiated last year in these criminal matters that may transform into substantial business litigation by shareholders.

Stock options allow the recipients to buy shares of their company’s stock in the future at a set price. If the stock rises before the options are exercised, the employee can buy the stock at the previously established lower price and then sell it at the higher, current price , taking home the difference. Options are an appealing perk for business executives. The value of an option can become even more lucrative by backdating their exercise price to a historically low point in the stock’s value. Often , such backdating is illegal, especially if not revealed to the company’s Board, and can generate fraud charges if documents are falsified in a backdating scheme. These same actions often generate commercial litigation in the courts on behalf of shareholders or Boards of Directors.

The founder of the company that promoted the “Grand Theft Auto” video games into popular currency became the first CEO to succumb to prosecution in the scandal over questionable stock option awards to executives at scores of U.S. public companies. Ryan A. Brant, the former chief executive of Take-Two Interactive Software Inc., pleaded guilty on Feb. 14. The next day, a former senior executive of the company that runs the Monster job search Web site, admitted that he illegally backdated millions of dollars in stock option grants.

The inquiries appear to be accelerating as prosecutors focus upon cases at companies culled from the 130 or so under investigation by the Justice Department and the Securities and Exchange Commission. SEC Chairman Christopher Cox recently said the options scandal “appears to be a pandemic of crooked accounting.”