A Get Out of Jail Free Card

Are rich CEOs more likely to receive a fine, while those lower down in the corporation receive jail time? The result in the Brocade backdating case feeds into that supposition.

After a quiet stretch, last week was a big one on the backdating front. Stephanie Jensen, a former human resources exec at Brocade was convicted by a jury on backdating-related charges.

And former UnitedHealth CEO William McGuire agreed to forfeit
about $620 million in stock-option gains and retirement pay to settle civil and
federal-government claims related to backdating.

- WSJ Law Blog.

Why? FIrst, let me take a few misconceptions of the table:

1. Backdating is not a crime. How you account for options backdating is a crime.
   
   (Primer: An option is an option to purchase a stock in x number of years, usually at today's price. You are betting that the price goes up. For example, Google options issued at $10 a share 10 years ago are today worth over $700. If you have 10,000 of those...call me. Backdating an option happens when you say "I don't like today's stock price - but the price last January was good, so we'll issue the option today, but date it as of last January so you get that price.)
   
   This practice is shady, and is likely going to be illegal very, very soon. That said, it is not illegal now -- what is illegal is not accounting for it correctly. When you backdate an option as of last January, you have to go back to last January's financials and reflect the issuance of new equity options as of then. This is a BIG pain because you may have to restate your earnings, profits, cash flows, and (here is the kicker) amend your filings with the SEC -- which would let everyone know what you are up to. Companies didn't want to do that.
   
2. Backdating is not a crime. People claim that the CEO (the usual recipient of backdated options) is liable because he or she knew it was happening. Sure, but if the practice is not illegal (and the CEO would have been so told by company counsel), who cares? Now if someone told the CEO that it would not be properly accounted for...that's a different story.
   
3. This is not O.J. This is not a case where the CEO got a legal dream team and the accounting staff got the shaft. The company obtained counsel for both and paid for it, likely falling back on their director & officer insurer to foot the bill. Thus, the person likely got similar, if not the same, level of representation.

So perhaps this is just a case of intent. The accountant knew backdating options required a restatement and ignored it. The CEO? He or she must return the profits but lacks the intent necessary for criminal liability.