“These prosecutions went out with a whimper rather than a bang,” said Christopher J. Clark, a criminal defense lawyer at Dewey LeBoeuf who has done work on backdating cases. “With few convictions and no substantial sentences, juries and the courts simply did not agree with the government’s position that stock option backdating represented a serious financial crime.”* * *
The backdating scandal was set off in 2005 after Erik Lie, a finance professor at the University of Iowa, published a study that showed an uncanny number of cases where companies granted stock options to executives right before a sharp increase in their stocks. The S.E.C. and The Wall Street Journal then began to look at individual companies. “I never expected my study would lead to anything,” Professor Lie said. “At the time we published the paper, it wasn’t clear that regulators would view the activity as illegal.”
That was a major challenge for prosecutors in these cases: The practice, which involved complex accounting, disclosure and tax issues, was not necessarily illegal. It was not the backdating that was against the law, but the improper accounting of it that was illegal. In a number of cases, convictions came not from the crime but the cover-up as the government charged several executives with lying to federal agents.
Lattman notes the SEC filed all of 50 cases despite Heron & Lie’s study (What Fraction of Stock Option Grants to Top Executives Have Been Backdated or Manipulated? 55 Management Science 513 (April, 2009)) finding backdating in 29% (more than 2000) of companies studied.
Critics of backdating prosecutions argued that the small number of criminal prosecutions resulting from the practice, given how widespread it was, exemplified the arbitrariness of prosecutions for alleged business crimes. “The corporate crime lottery was never cranked up more than it was in the backdating cases,” said Larry E. Ribstein, a law professor at the University of Illinois. “Concern about justice becomes most intense when you’re talking about criminal violations, and you don’t really don’t want randomness.”
It’s a fitting epitaph. It focuses on the problem: whatever was wrong with backdating, it never should have been criminalized. We’ll hear more, including from me, about what I think was primarily a government rather than private sector disaster.