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Stock option backdating: a question of bad timing

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The issue -- backdating/manipulation of stock option grant dates

Some executives who received stock options by their board awarded themselves the options on days when stock prices were low so they could in turn reap higher returns when selling those options. This is illegal and plaintiff lawyers are now on the hunt.

Who is impacted

Publicly traded companies that issued stock options to those executives where this activity has occurred may be impacted by this activity. All of them are now forced to review option grants for dates, authority, timing, backdating, backup and more. Industries significantly impacted are life sciences, technology and recent IPOs.

What's at stake

D&O insurers are asking insurers difficult questions during the renewal process. They are requesting full and complete assurances/disclosures of no known problems and an additional assurance by companies that they have fully investigated the issue. Those companies that find themselves in the position without valid answers are finding their renewals negatively impacted. Even with good answers, underwriters are weighing heavily on this issue. In short, coverage and pricing will be directly affected. Law firms are talking clients through the issues and advising them of the D&O implications.

For those companies facing this issue, a broker who is up to speed on the issues surrounding stock option expense timing can help public companies navigate through the reporting process of an anticipated claim where a problem is suspected. Positioning is key during the renewal process and expertise in this area will be of invaluable assistance to ensure underwriters understand a company's particular history.


Niedernhofer is a principal with Barney & Barney and is team leader of the Executive Risk Practice. For more information, call (858) 587-7144 or e-mail johnn@barneyandbarney.com.>

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