Litigation Services Handbook, 2014 Cumulative Supplement: The Role of the Financial Expert, 5th Edition

CHAPTER 34A

THE FINANCIAL ILLITERACY DEFENSE: OPTIONS BACKDATING

Jennifer C. MillironRoman L. Weil

CONTENTS

34A.1 Introduction

34A.2 Background

(a) Development of Accounting Principles for Employee Stock Options

(b) Evolution of GAAP from the Mid-1990s through 2007

34A.3 Through 2005, No Clear Measurement Date in APB 25 Applied to As-of Grants

(a) Review of Accounting Industry Guidance on the Accounting for Employee Stock Options

(b) SEC Guidance on Measurement Date

(c) Pervasive Financial Illiteracy in Employee Stock Options

34A.4 Ambiguity in GAAP for As-of Grants Until 2006

(a) Ambiguous Definition of Measurement Date and No Definition of Grant Date

(b) The Compounding Ambiguities of SFAS 123: Revised Definition of Measurement Date and Initial Definition of Grant Date

34A.5 Evaluation of Accounting Training for As-of Grants

34A.6 Financial Literacy

34A.7 Conclusion

APPENDIX: EVOLUTION OF THE ACCOUNTING GUIDANCE FOR EMPLOYEE STOCK OPTIONS FROM THE MID-1990S TO 2006

NOTES

34A.1 INTRODUCTION

The Sarbanes-Oxley Act of 2002 holds senior business executives criminally liable for accounting errors and misstatements. To show criminal liability, the government must prove that the executives knew (or should have known) that they or their colleagues were breaking the rules, which is what we understand the courts to mean when they interpret the statute's word reckless.

This chapter presents the outline of a defense suitable for a known or should-have-known charge against senior corporate ...