SEC Says Canadian Company and Finance Officers Misled Outside Auditors in Options Backdating Scheme

An SEC enforcement action charges a Canadian company and four of its senior officers with misleading the company’s independent auditors about a stock option backdating scheme. The SEC said that undisclosed, in-the-money options were illegally granted to company executives and employees by backdating millions of stock options over an eight-year period. The complaint alleges that the defendants made false and misleading disclosures about how the company priced and accounted for options, and that the illicit backdating provided the executives and other employees with millions of dollars in undisclosed compensation. The officers charged included the CFO and the Vice President of Finance, both of whom had previously worked as auditors for a Big Four accounting firm. (SEC v. Research in Motion Limited, et al., DC DofC, AAER No. 2937).

The SEC alleged that the executives backdated documents reflecting grants, such as option agreements and offer letters, which concealed the fact that the options were granted in-the-money. The two finance officers took steps to hide the backdating from the company’s independent auditor, outside counsel, and U.S. and Canadian regulators. The CFO also misled investors at the annual shareholder meeting by denying that the company was backdating. The SEC alleged that the two finance officers violated the antifraud provisions of the Exchange Act, as well as provisions prohibiting misrepresentations to auditors.

When the company became an SEC reporting company, the outside auditor provided the finance officers with a description of the U.S. GAAP requirements for stock option accounting, which description became part of the annual reports on Form 40-F that the company filed with the Commission. Further, the finance officers received numerous additional documents from the outside auditor and outside counsel explaining that the company was required to record compensation expenses for in­-the-money options.

The SEC said that the CFO misrepresented in management representation letters to the independent auditor that he had no knowledge of any fraud or illegal acts and that the company’s internal controls were adequate to permit the preparation of accurate financial statements. He also told the auditor that the financial statements were fairly presented in conformity with U.S. GAAP.

In addition, the SEC alleged that the two finance officers were aware that inaccurate stock option grant dates from the books and records, including backdated option agreements and information generated from the electronic database the company used for tracking options, were provided to the auditor. And, the senior officers understood that the auditor relied on those documents in conducting its audits and reviews. They also did not provide to the auditor e-mails revealing backdating.