If the court finds that Brocade knowingly took a deduction it was not entitled to have, the company or executives involved could be guilty of tax fraud, as well.In the end, if the Do J proves that the Brocade executives deliberately orchestrated a scheme to mislead investors and regulators by falsifying documents and forging financial statements, it could amount to criminal securities fraud, contends Kenneth Lee, a securities litigator in the New York office of Thacher Proffitt and Wood.At least that seems to be the conclusion reached by the Department of Justice and the Securities and Exchange Commission regarding their first case against executives charged with fraud related to backdating.Last week the Do J brought criminal charges against two Brocade Communications Systems executives, while the SEC filed a civil suit against the same two and the CFO.Congress and the White House have not yet released a plan but are working this month to prepare legislation.Mnuchin heads to Capitol Hill on Tuesday to discuss tax policy with GOP congressional leaders, the latest in a series of meetings.As expected, the charges focused on backdating stock options by doctoring employment documents, neglecting to record the stock-option expense on the company’s books, and misleading investors.
That means that if an option is in the money as a result of backdating, the company forfeits its tax deduction for the covered employees, explains Lehman Brothers tax expert Robert Willens."I don't know if we'll be able to achieve that given the budget issues.But we're going to get this down to a very competitive level," Mnuchin said.By pushing the date into the past, to a time when the underlying stock traded at a lower price than it did the day the grant was issued, the option holder is, in effect, being given the promise of cash.
That promise is considered to be an in-the-money options grant.
In-the-money options are different from performance-based compensation in the eyes of the Internal Revenue Service and the Financial Accounting Standards Board.