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A word on options backdating

Former Brocade CEO, Greg Reyes, went to court Monday to face the music for options backdating. His trial is the first of over 100 cases against companies accused of options backdating and the results could signal a collapsing house of cards for the technology industry. The criminal indictment against Reyes charges him with conspiracy to commit securities fraud, mail fraud, making false statements in filings with the SEC and falsifying books and records. He faces decades in prison and millions of dollars in fines if convicted.

Options backdating refers to the practice of reaching back to a date when the company’s stock price was at a low, and selecting that date for the option grant’s exercise price, or the price an employee will pay for the stock. The goal is to boost the potential windfall for the recipient. It’s said to have been common practice during the hay days of the dotcom era to lure talented employees. The criminal part of this action is when a company hides this practice from its shareholders, therefore not having to pay the correct compensation on options at the time they were awarded.

But the trial is not about whether Greg Reyes did this or not. His signature is all over hundreds of documents signing off on the practice. The question is whether he knew it was wrong, but did it anyway. Reyes’ defense says that he didn’t know he was doing anything wrong.

So, for the sake of argument, let’s say he was totally clueless and scribbling over financial statements and falsifying board meeting documents seemed perfectly normal to him.

Now think about this. The IRS calls to audit your taxes and they discover you claimed more than you should have. Can you say sorry officer, the rules are so complex, I must have filled out the form wrong? From my limited knowledge of tax laws, even if you get the wrong information from an IRS agent, you are still liable!

The most complex part for the government in this case is proving intent. And Reyes claims he didn’t profit personally from any options backdating. That may be so, but what about his staff and close associates? Should they be called to account as well?

I was talking with a friend in the business world about this topic and he says that CEOs hire legal advisors and executive management to advise them on such matters, as they themselves cannot be expected to know, in detail, every aspect and legal loophole of the law.  So where are these guys then? Perhaps they should be in the dock?  My friend also felt that with hindsight it’s clear that backdating was a nefarious practice, but at the time, it really didn’t appear to be.

In high-profile trials such as Reyes’, the defense and prosecution legal eagles will spend weeks jousting over semantics. In the end the jury will get worn down by the attorneys, who will create enough confusion and doubt in their minds as to Reyes’ actions, and he will be let off, perhaps with a slapped wrist and a fine. That’s my bet.

In the meantime, is it possible for the legal system to monitor the business world a little more closely and for the business world to try to act ethically, to prevent years of wasted legal wrangling and millions of dollars in fees? Or am I just hopelessly optimistic that things can change for the better? Anyone have any thoughts?  

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"Ignorance of the law is no defense": this maxim is almost universally respected. Why should it be any different for a highly-paid, highly-educated, and well-resourced corporate leader? The excuse that, "Golly, I had no idea that falsifying documents was wrong, let alone illegal", is disingenuous and makes a mockery of the legal system.