Thank you so much for spending time today on this important topic.
Because the backdated options’ strike price is lower than the market price on the actual grant date, the recipient has received something of greater monetary value (even if the options have not yet vested) than a correctly dated at-the-money option. Companies could reward executives with cash compensation or additional properly dated and priced incentive awards, including options, rather than engage in dubious backdating practices. It is clear that there must be reasons other than greed that have led so many to backdate executive options. Academics, regulators, and practitioners alike have tried to gain a better understanding of these incentives and the roles they have played in the backdating scandal; however, there is as of yet no consensus regarding the causes of backdating. This is problematic because policy, legislative, or regulatory changes are unlikely to be effective if the root causes are unknown. In 2008, the long-term capital gain rate for individuals in the lowest two tax brackets (currently 5% and 15%) was further reduced to zero.
From the supply side, the question is what motivates a firm to grant a backdated option, and from the demand side, what motivates an executive to demand (or, at the very least, accept) a backdated option?
Both sets of motivations arise from the quantitative and qualitative benefits, costs, and risks of issuing and receiving backdated options. Certain AMT may be carried forward and applied to reduce the general tax payable in subsequent years (to the extent that the general tax exceeds the tentative alternative minimum tax liability for the subsequent year).
My views are my own and do not necessarily reflect the views of the Commission or any other member of the staff. In addition to our investigations, there is substantial criminal interest in options matters from United States Attorneys' Offices nationwide.
In recent months, the SEC has brought two enforcement actions one relating to Brocade and another involving Comverse.