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This is not always the case, according to a ruling by federal judge William Alsup of the U. District Court for the Northern District of California.According to Alsup’s reasoning and subsequent ruling, it is improper to infer fraudulent activity based solely on the occurrence of options backdating – further facts must be present and proven before the act can be considered to be fraudulent.Although many companies have been identified as having problems with backdating, the severity of the problem, and the consequences, fall along a broad spectrum.
Academic researchers had long been aware of the pattern, exhibited by some companies, of share prices rising dramatically in the days following grants of stock options to senior management.
There is a five-year statute of limitations for securities fraud, and under the Sarbanes-Oxley Act of 2002, option grants to senior management must be reported within two days of the grant date.
This all but eliminated the opportunity for senior management to engage any meaningful options backdating.
However, in late 2005 and early 2006, the issue of stock options backdating gained a wider audience.
Numerous financial analysts replicated and expanded upon the prior academic research, developing lists of companies whose stock price performance immediately after options grants to senior management (the purported dates of which can be ascertained by inspecting a company's Form 4 filings, generally available online at the SEC's website) was suspicious.
Corporations, however, have defended the practice of stock option backdating with their legal right to issue options that are already in the money as they see fit, as well as the frequent occurrence in which a lengthy approval process is required.