Photobucket - Video and Image Hosting As the Wall Street Journal noted in its February 16, 2007 article entitled “Probes of Backdating Move to Faster Track” (here, subscription required), the various options backdating investigations may be moving more rapidly now. Within the last weeks, there have been guilty pleas entered in connection with the Take-Two (here) and Monster Worldwide (here) investigations, and the Journal article also suggested that criminal charges may be forthcoming in the Broadcom investigation.

The reason that the pace of activity seems to be picking up may be due to a looming deadline. According to a February 20, 2007 San Jose Mercury article entitled “Clock Ticking on Prosecuting Backdating Options” (here), investigators are “bumping up against a legal deadline” – the five year statute of limitations for securities fraud. According to the article, the window may be closing because stock options misdating largely ended in 2002 because of Sarbanes-Oxley options reporting requirements. The article suggests that the looming deadline may force prosecutors to allege lesser related charges, such as conspiracy or lying to prosecutors, because they are not yet ready to press criminal securities charges. Prosecutors may also seek waivers from potential defendants, but defendants may have little incentive to agree to a waiver. Prosecutors may also seek to allege that until recent disclosures and restatements, the options timing practices were concealed, and therefore the running of the statute should be tolled – but obviously prosecutors would rather avoid taking the chance that a court might not agree that the statute was tolled.

In determining whether or not to bring charges, prosecutors are, according to the Journal article linked above, looking for “plus factors” that can increase prosecutors’ “promise of success” – these factors include “written indications of deliberate backdating; falsified documents; efforts to hide manipulation from auditors or investigators; or indications that top executives gave themselves backdated options.” (These factors are similar to those I cited in my earlier post, Is Backdating Criminal?, here.)

Prosecutors undoubtedly will be, among other things, reviewing company email traffic pertaining to options grants, as the Wall Street Journal’s February 20, 2007 article entitled “Emails Reveal Backdating Scheme” (here, subscription required) suggests. Certainly, email references (such as those the Journal reports to have appeared in emails at Mercury Interactive) to “magic backdating ink” are not helpful for individuals hoping to avoid investigators’ attention.

The Ultimate Solution to Investment Fraud: According to news reports (here), a Chinese businessman has been sentenced to death for a fraudulent $385 million investment scheme. Wang Zhendong promised investors returns of 60 percent on investments in an ant-breeding scheme. (Ants apparently are used in traditional Chinese medicinal remedies; refer here for background) The scheme drew over 10,000 investors between 2002 and 2005. The investment arrangement was really a pyramid scheme, and most investors lost their entire investment. The Intermediate People’s Court in Yingkou sentenced Wang to death.