We caught a lot of flak from the self-styled guardians of corporate governance for our repeated insistence that the Great Backdating Scandal of 2006 was overwrought. The financial press treated backdating as if it was a new form of embezzling even though it was, typically, nothing more than a quite common workaround of complex accounting and tax rules that made granting “in the money” options more costly, at least on paper, than “at the money” options. Our sober take on backdating was seen as an endorsement of corporate fraud by our critics.
So what ever happened to the Great Backdating Scandal? It looks like it has largely fizzled. The Securities and Exchange Commission has ended several investigations without filing formal charges, the Wall Street Journal reported yesterday. And despite the fact that scores of companies engaged in backdating, no one expects any more a handful of additional serious civil or criminal cases to emerge from this affair.
Which is not to say that the backdating scandal has been costless. More than 80 companies have had to restate their financials and dozens of executives were dismissed at the height of the affair. Companies and executives have spent millions of dollars and untold hours complying with investigations and fending off possible cases.
[More on the deflating backdating panic after the jump.]
The most egregious victim of the backdating panic seems to be n Gregory Reyes, the former head of Brocade Communications , who was convicted on criminal charges relating to backdating in August. Others have been forced to settle with prosecutors and regulators, sometimes pleading guilty to criminal charges. One executive has been living in exile, no doubt hoping to let the worst of the backdating panic pass.
And, of course, the plaintiff’s bar has been busy, bringing more than 160 derivative cases. The courts have begun dismissing these cases but the overwhelming majority continue. In those that have settled, the amounts paid by the companies have been very small, according to the Journal. But always enough to pay the lawyers for their time, of course. The lawyers always get paid.
Interestingly, the trial lawyers have not brought as many class action suits on behalf of investors because they haven’t been able to show investors were damaged. It’s hard to show how shareholders were materially damaged at all since the alternative to backdating would have simply been to expense “in the money” options. And even when news of backdating came out, share prices did not significantly drop at most companies. We expect that defending against derivative lawsuits, class action suits and government investigations will almost certainly cost shareholders more than backdating itself.
The panic over backdating did not even have the benefit of putting an end to the practice, since the practice had already stopped after disclosure rules were changed to require companies to announce executive options grants soon after they were made. The public never was very much interested in backdating, so it cannot be said to have learned much from the affair. Has the financial press had learned something from the backdating panic? It would be pretty to think so.
Firms Settle Backdating Suits [Wall Street Journal]
Hat tip: The bursting of the backdating balloon [Ideoblog]