An investigation by U.S. regulators into backdating of executives' stock options could have a major impact on the directors and officers insurance markets in the United States and London, according to a report from Aon Limited.

The London-based insurance broker noted that the Securities and Exchange Commission and the Department of Justice are investigating at least 54 companies that allegedly allowed their executives to backdate their option grants to benefit from an advantageous movement in share price.

On July 20, the SEC and DOJ filed their first civil and criminal actions related to stock option backdating. Prior to the SEC and DOJ filing, there were several civil cases filed by shareholders.

The SEC case involves Gregory L. Reyes, 43, of Saratoga, Calif., former chief executive officer, president and chairman of Brocade Communications Systems Inc., and Stephanie Jensen, 48, of Los Altos, Calif., former vice president of human resources of the company. The two are alleged to have routinely backdated stock option grants between 2000 and 2004.

Their alleged actions include falsification of records that eventually resulted in the restatement of Brocade's earnings for 1999 through 2004.

The SEC also filed a civil suit against Antonio Canova, Brocade's former chief financial officer, for failing to take action after learning of the falsification.

Aon said that insurers offering D&O policies are gearing up for increased claims activity from both criminal and civil actions. Some carriers are even contemplating whether to include backdating as a policy exclusion going forward, the broker added.

While the ongoing litigation is currently based in the United States, it is likely that the United Kingdom and Europe, where backdating is not allowed, will feel the ripple effect, Aon warned.

Major institutional investors, who have already been lobbying U.S. regulators for stricter regulations and limitations on executive pay prior to the backdating scandal, will be considering whether to join in any class action lawsuits in the United States to protect their funds' investments, which would increase exposure, Aon said.

Adam Codrington, executive director within Aon's Professional Risks unit, said: "At the moment there have been no insurer payouts from a D&O perspective. However underwriters are paying a great deal of interest to this issue. As the scandal unfolds, we are likely to see much more focus on the cost of D&O insurance and a possible restriction of terms and conditions.

"At the very least, insurers will want to see very strict procedures and processes in place when it comes to the offering of stock options."

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Option Date Probe Could Impact D&O Market: Aon

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