Options backdating: plenty to worry about; More than 80 companies are being probed for alleged abuse of backdating. Two attorneys review what's been happening and offer tips on what CFOs should do if they think company is at risk.

• Author: Armao, Joseph P.
• Position: Stock options

Many CFOs and other top finance executives have been treading water over the past four years as they negotiated the sea of Sarbanes-Oxley regulations. But just as they've started to make some headway, questions regarding the backdating of stock options threaten to immerse them and their companies anew in a wash of investigations by the Securities and Exchange Commission (SEC), federal prosecutors, the Internal Revenue Service (IRS) and shareholder-related class-action derivative suits.

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Ongoing news stories have turned backdating into a growing nationwide scandal. As of early August, more than 80 companies, particularly in the technology sector, had been targeted by federal and state authorities or had launched internal investigations into backdating practices. As a result, they are scrambling to institute damage control and are re-examining their own compensation and reporting policies to determine whether they backdated or otherwise manipulated the timing of stock options illegally.

Apple Computer made headlines earlier this summer when it announced it would be late in its quarterly filings to the SEC to give it time to restate earnings to take into account backdated options. Two executives from Brocade Communications have been indicted on criminal charges for securities fraud for possible manipulation of stock options, and the SEC has filed a civil complaint against the company.

Federal prosecutors have also filed charges against former executives (the former CEO, CFO and general counsel) of Comverse Technology, a New York-based communications software company, claiming the executives made misleading statements to the board and its auditors.

As is widely known, stock options allow the holder of the option to buy a certain number of company shares at a certain exercise price for a set period of time. The price is usually the price the stock traded at on the date the option was granted. If the stock price rises above the price at the option's grant date, the option becomes "in the money," and the holder of the option can buy the shares at the grant-date price, which is less than current market price.

Backdating of options occurs when a date earlier than the formal grant date is selected as the grant date for purposes of setting the exercise price of options. Backdating in itself is not illegal, as long as options are authorized and issued following correct corporate procedures, are adequately disclosed, accounted for...