Brocade Communications Systems has become the first company to be formally investigated by the SEC regarding the recent options backdating issue.
According to the SEC’s complaint document, which names three former executives of the company as plaintiffs, from 2000 through 2004 the company inflated net income by understating their options-related expense through fraudulent schemes to backdate options.
Under US GAAP, options granted with an exercise price higher than the current market price did not need to be expensed, but options granted with an exercise price lower than the market price (known as “in the money”, or as I like to call it – instant profits) must be expensd.
So, Brocade is alleged to have granted in the money options to their execs and backdated them to when they were “out of the money”, in order to avoid the expense while allowing the executives to reap instant profits.
I’m going to have a post in the near-future where I outline current Canadian GAAP related to stock-based compensation, so stay tuned for that gem!