In the last few weeks, we have started to see some of the fallout from the backdating scandal. I thought I'd take a couple of minutes to jot down some observations about the collateral consequences of the backdating issue to issuers. Some of these are the obvious results, such as SEC investigations. Other results are more attenuated, but nevertheless significant.
1. SEC investigations: The number of investigations continues to grow, prompting companies to hire expensive Wall Street law firms to handle both the SEC's investigation, and any related internal investigation.
2. Shareholder suits: Shareholders will file class actions alleging fraud in connection with any misstatements of the financial statements that result from the backdating issue. Companies that must restate financials to treat the difference between the strike price and the FMV at the date of grant as a compensation expense can expect to see class action lawsuits, and defending against these suits will also be expensive.
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