I had lunch with a new colleague today, and we discussed both stock options and the SEC’s new Exec. Comp. rule. My colleague asked many good questions, not the least of which dealt with securities fraud. Given that I live alone, my conversation with my colleague was the first time I had tested out my “backdating is securities fraud” theory. My sense is that my stock option backdating qua securities fraud might not sit well with some of you, so I thought I would put it out there:
My view is that backdating options is clearly fraudulent b/c “[f]raud is . . . lying to someone to get them to give you their stuff.” Susan Koniak, Corporate Fraud: See Lawyers, 26 Harv. J.L. & Pub. Pol’y 195, 197 (2003). More specifically, why do companies backdate? To avoid the expensing, right? Well, why? Because it would convey a weaker picture to the market than the company would like to convey. Why is the company opposed to that?. . . . Hmmmm. . . . . The answer is “because it would turn some investors off and they would sell and/or not buy your stock or support your company.”
So what is a company doing when they are backdating options? They are (all together now) “lying to someone to get them to hold the company’s stock or buy more.”
Onto the SEC’s Exec. Comp. rule: I have vague recollections of Gordon Smith and. . . maybe Larry Ribstein (?) not being huge fans of the rule when it was proposed. My lunch companion brought up a point that I think either Gordon or Larry earlier raised: Doesn’t additional disclosure increase the risk that the investor will either not read the massive disclosure at all or will inappropriately weight some of the minutia of the disclosure? My response was two-fold: (1) At least if the Exec. Comp. disclosure is made, the investor has a fighting chance at receiving and processing the information (whereas, if the disclosure were never made, the investor would be doomed to be short on information) and (2) large institutional shareholders have increased in number and size over the past two decades, and these folks read the disclosure.