Backdating securities

ACS consented to a permanent injunction prohibiting violations of Securities Act Section 17(a) and Securities Exchange Act sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B), which together address unlawful business practices and reporting errors, the SEC said Thursday.In settling, ACS neither confirmed nor denied the allegations made by the SEC. However, in Brocade's specific case, backdated options caused major accounting errors that harmed public shareholders.In 2000, Brocade reported earnings of $67.9 million.After Reyes departed, the company reported a $951-million loss.These accounting errors led to overstated earnings of more than $1 billion.

Backdating options is not illegal if shareholders and the government know about it.To add to public suspicion, Brocade's downfall coincided with the year when Reyes made a staggering $556 million, most of which came from selling his options.There has been disagreement over whether Reyes personally profited from backdated options.Government investigations revealed that the date on some of Reyes' options is identical to the incorrectly dated options that other executives received.

The SEC claimed in its civil complaint, "Reyes himself received backdated options." Richard Marmaro, partner at Los Angeles-based law firm Skadden, Arps, Slate Meagher & Flom, maintained his client's innocence in a written statement: "Financial gain is always the motive in securities fraud cases, and here there was none.

• The TSX Venture Exchange (TSX-V) imposes similar rules, though it allows an issuer to set the exercise price at a discount (ranging from 15% to 25%) from the market price, which is specified by the TSX-V.

Backdating securities comments

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