Whatever happened to the backdating scandal?

Unfortunately, relatively little. The wrist-slap that ex-KB Home CEO Bruce Karatz received this week (eight months house detention in a Bel-Air mansion and five years probation) caps off the government's lackluster run at prosecuting the backdaters. The SEC and Justice Department looked at more 100 companies, and internal investigations by the companies themselves led to dozens of firings. But on the criminal front, only 12 executives received sentences, five of them prison terms. Though defense attorneys will have you believe otherwise, backdating has always been a serious breach of fiduciary trust. How else would you describe going back in time to price a stock option at a lower price than what had originally been set in order make more money when the shares go up? To many of us, that's a form of cheating, but backdating is only illegal if the practice is not disclosed. And even then, any number of violators - including Karatz - got off easy because the practice was not considered especially injurious to shareholders. But isn't a victimless crime a crime nonetheless? From the NYT:

"These prosecutions went out with a whimper rather than a bang," said Christopher J. Clark, a criminal defense lawyer at Dewey LeBoeuf who has done work on backdating cases. "With few convictions and no substantial sentences, juries and the courts simply did not agree with the government's position that stock option backdating represented a serious financial crime."

That was not the view of several judges. Judge Jed S. Rakoff of Federal District Court in Lower Manhattan gave the longest prison term to an executive charged with conduct related to backdating. In September 2009 he sentenced James J. Treacy, the former chief operating officer of Monster Worldwide, to two years in prison for improperly accounting for backdated stock options. "I don't have any doubt the jury's verdict was correct," Judge Rakoff said at sentencing. "It is appalling; it is disgusting that this practice went on."

Agreed. In a study published last year, Erik Lie, a finance professor at the University of Iowa, found that that 29 percent of American businesses, more than 2,000 companies, that made stock-option grants to executives from 1996 through 2005 had manipulated them. Let me repeat: More than 2,000 companies that made stock-option grants to executives from 1996 through 2005 had manipulated them. In other words, they cheated. Yet, it's a scandal that pooped out because backdating was quickly declared a standard business practice. You know, too complicated for most of us to understand. More of a tax strategy than a crime. Much ado about very little. And for the most part, prosecutors, judges and juries bought into it. There are lots of executives out there who should be counting their lucky stars.