Friday, December 07, 2007

2007-12-07 Options Backdating Update - Former United Health CEO Returns 418 Million

The New York Time and the Wall Street Journal report today that William W. McGuire has settled with the SEC and agreed to return an estimated 400 million dollars in connection with the options backdating civil action pending against him. According to one account, the total returned by McGuire will exceed 600 million dollars. Options backdating involves altering the date of an option grant, typically to increase it's value at the date of granting. The option grant's strike price is typically (and some argue should only) be the date on which the grant is made. This grant date also typically coincides with the commencement of a new position, or a bonus.

The grant date maneuverability necessarily involves some time based computer data manipulation, as I highly doubt that any of these time-shifted options grants were accomplished by the efforts Aunt Tillie typing on her Selectric, bottle of White-Out by her side, in the typing pool.

The malleability of computer data (and the difficulties involved in challenging and detecting same) are well set forth in In re Texlon Corporation Securities Litigation 2004 WL 3192729 (WD Ohio 2004). The Texlon court roundly excoriated the defendant's auditor PriceWaterhouseCoopers for violating its duty of preservation. The court noted that auditing documents were altered "well after the close of the [relevant auditing period] and that [PWC should have been on notice to preserve these documents..." The Texlon court further noted that expert testimony discovered that the metadata of certain documents had been altered or deleted, specifically that data had been time-and-date shifted.

What is perhaps most important is that the Texlon court also implicitly recognizes the issue of time based data manipulation, as it also took notice of expert testimony that "it is possible to alter any document in the database, and if the date on the computer used to alter the document is reset, the incorrect date will be incorporated in the metadata fields as the date of modification." Texlon, 2004 WL 319729 at *19. It should be noted that the matter ended prior to the judge's action on the reports and recommendations of the magistrate.

Perhaps in the future the time and date malleability of computer generated information will become the focus of more intense scrutiny by counsel as well as the Courts.

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