I have recently gone to work for a small business in which many entity changes were effected by a previous outside tax planner as of the end of 2011 and throughout 2012. During year 2012, four additional LLCs were created to conduct different lines of business for the same married owners.
In this way, the exercise price of the granted option can be set at a lower price than that of the company's stock at the granting date.Disordered, untimely paperwork was cited as the cause in some cases of unintentional backdating.Initially, lax enforcement of the reporting rule was also blamed for allowing many companies to sidestep the rule adjustment that stemmed from Sarbanes-Oxley.Now at year end 2012, after the outside tax planner who created all this is out of the picture, and I have walked into the scene, I find that one of the two companies that were split from the original S-corp on 12-30-11 has a significant loss.If I understand correctly, that loss could be netted against the profit of the other initial LLCs if we filed a “consolidated” return.Companies would simply wait for a period in which the company's stock price fell to a low and then moved higher within a two-month period.
The company would then grant the option but date it at or near its lowest point.
The problem is that, I believe, to enable this scenario to become reality, there should have been an amendment made to the original operating agreement for each of the six LLCs indicating a transfer of ownership from the husband and wife, to the S-corp, which is also owned 50/50 by the husband and wife.
As I understand it, this amendment should have been created and signed immediately after the original agreement so that this ownership would have been in effect for the entire year, or since inception in the case of the new entities.
The SEC would go on to investigate and sue companies and related parties that were found to backdate options, in some cases, as part of fraudulent and deceptive schemes.
For example, the SEC filed a civil lawsuit in 2010 against Trident Microsystems and two former senior executives from the company for stock option backdating violations.
The legal complaint alleged that from 1993 to 2006, the former CEO and the former chief accounting officer directed the company to engage in schemes to provide undisclosed compensation to executives and certain employees. Lin was accused of backdating stock option documents in order to give the appearance that options were granted on earlier dates than issued.