This week four of RIM's [RIMM] top executives settled options backdating cases with the SEC and the OSC, Canada's securities regulation agency. The Ontario-based cronies have agreed to pay almost $100 million CN in penalties, costs and compensation in Canada, and $2.2 million USD in penalties and reimbursements in the U.S. But their actual out-of-pocket cost will end up being closer to 1/10 of that. Should these guys be in jail?
Only three of the four men charged in the U.S. were charged in Canada, and two of those three—co-CEO Jim Balsillie and COO Dennis Kavelman—will be barred from serving on the board of a public issuer for one year and five years respectively. They'll also undergo executive reeducation courses in Canada. The other co-CEO, Mike Lazardis, will remain as CEO and company director.
Those slaps on the wrist won't do much to deter Balsillie and Lazardis, both of whom Forbes estimates are worth over $3 billion USD each. They also won't be deterred by the supposed penalties and reimbursements. Of the $92 million CN the three men are supposed to pay collectively, all but a paltry $9 million of it can be forgiven if the men forfeit some of their properly-dated options grants.
The goal of "backdating" schemes like this one are usually to alter the date of an options grant to a time when the underlying asset (the company stock) is priced lower—usually to a date that precedes a price jump, so the option becomes "spring loaded." That way, once the executive exercises the option, it's worth more relative to its original price. That's not necessarily illegal, unless the executives don't inform the stockholders of the date change.
The four RIM execs did more than just mislead their investors. In fact, they've been backdating options grants for over a decade, according to the SEC, with the total number of grants altered ringing up in the thousands. Each time the company published a document delineating the options grants, the four men issued personal verification of their accuracy, even though the published numbers had been secretly changed. The SEC has even made public one email in which the men discuss the illegality of the practice. "FYI, it is a major breach of protocol to be discussing (and documenting via email) using option pricing other than that allowable by the Ontario Securities Commission and the SEC in the U.S.," wrote the COO, Kavelman to a manager in an email message.
Those false options prices were publicized in circulars, annual reports, financial statements and prospectuses, and the thousands of grants they altered account for millions of company shares worth hundreds of millions of dollars. RIM closed at $42.10 today on the NASDAQ.
In Canada, punishments for securities fraud are much lighter than here in the U.S. Stateside laws can hold companies and their executives liable for both criminal and civil parallel charges. Earlier this month, a federal judge ruled that Broadcom Corp. [BRCM] would allow investors to file a class action suit for a $2.2 billion backdating scandal originating in 2006. Broadcom's CEO, Gregory Reyes, was sentenced to 21 months in jail and will have to pay a $15 million fine.
In the U.S., 17 companies are presently under investigation for improperly documented options backdating. Charges vary, depending on the extent to which executives consciously misled investors. By falsifying the dates on options packages, employees run the risk of affecting a company's recorded compensation expenses. That, in turn, means a company's accounting is incorrect when it is published in quarterly and annual reports.
But shipping executives to jail—especially more than one— can have catastrophic consequences for a company that is blindsided by a backdating scandal. The purpose of backdating regulations is ostensibly to protect shareholders' right to accurate information about a given company. But uprooting a company's management four at a time could do even greater damage to shareholders' interests by devaluing their assets, should the company's performance suffer.
It is unknown whether the RCMP will pursue further charges against the executives.