TheCorporateCounsel.net

Last week, the SEC announced the settlement of options backdating actions against Mercury Interactive (now a subsidiary of Hewlett-Packard) and Brocade Communications Systems. In these enforcement actions, the SEC reached settlements with the companies themselves for the payment of civil penalties and the entry of permanent injunctions against future violations. In the settlements, Mercury agreed to pay a whopping $28 million penalty, while Brocade agreed to pay a $7 million penalty. Up until now, options backdating settlements have focused on the individuals involved, while the SEC’s Commissioners pondered what sort of penalties should be imposed on the companies where backdating occurred.

Back in January 2006, the SEC published a framework for how it would assess whether and to what extent civil penalties should be imposed on companies. This document resulted from some discomfort among the SEC Commissioners on when to penalize a company (and in turn its shareholders) for wrongdoing. The options backdating cases have proven to be difficult to evaluate from a penalties perspective, as evidenced by this Bloomberg article from January 2007 discussing the delay in consideration of Brocade’s settlement.

With the announcement of last week’s settlements, perhaps the logjam will be broken and more backdating settlements will come closer to resolution in the coming weeks. [Broc’s Ten Cents: “The D&O Diary” Blog has some interesting analysis about these new settlements – such as all 45 of Mercury’s option grants during the period 1997 to April 2002 were backdated; Kevin also has blogged about the emerging backdating case theme of blame the gatekeeper.]

Options: More Congressional Interest

This morning, the Senate’s Permanent Subcommittee on Investigations (which is a subcommittee of the Committee on Homeland Security and Governmental Affairs) will hold a hearing entitled “Executive Stock Options: Should the IRS and Stockholders be Given Different Information.”

Among the things the Subcommittee plans to look into are: the role of stock options in executive compensation, the incidence of stock option abuses, and the difference between GAAP and federal tax reporting of compensation from stock options. Panelists will include, among others, Acting IRS Commissioner Kevin Brown and Corp Fin Director John White. In his testimony to the Subcommittee, John White provides an overview of option compensation trends, a discussion of past abuses and a description of the disclosure, accounting and tax requirements applicable to options.

The Permanent Subcommittee on Investigations has wide-ranging interests that sometimes touch on SEC and IRS regulations. Last summer, the Committee’s Staff put out a report on the abusive use of off-shore tax havens, citing as one of its case studies the activities of the Wyly family in using 58 offshore trusts and corporations to transfer stock option compensation offshore.

Earlier this year, Senator Carl Levin – who serves as Chairman of the Subcommittee – introduced a still pending bill entitled the Stop Tax Haven Abuse Act that would, among other things, create a rebuttable presumption of control for any offshore entities operating in secrecy jurisdictions, and impose a penalty of up to $1 million per violation of U.S. securities law on public companies or their officers, directors, or major shareholders who knowingly fail to disclose offshore holdings that should have been reported to the SEC.

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– Dave Lynn