The WSJ has an article today on backdating:

Brocade Communication Systems Inc. agreed to pay a $7 million penalty to settle … the backdating scandal, according to people familiar with the matter…. Brocade first struck a deal to pay $7 million in March 2006, but the settlement was held up as the number of companies under investigation for backdating options expanded to more than 100….

Republicans, in general, oppose [fines for backdating] as a double hit to shareholders, who already have been penalized once for being defrauded. Democrats argue that penalties serve as deterrents.

There was not necessarily fraud on the shareholder because it’s in a shareholder’s interest to use backdated options to pay executives. They don’t have to use as many of them because they are intrinsically worth more (H. Jenkins), but are also not taxed as highly as more regular dated ones where the date wasn’t coincidentally the lowest price of the quarter.

Putting that aside, fines in general should not be paid by the damaged party, but should be paid as a deterrent–and as compensation! How about the following proposal: the company pays the fine to the shareholders of record on the day before the news that false accounts were filed. That way the ongoing shareholders aren’t hurt and the shareholders that sold after the bad news came out and the stock tanked will be compensated by the new ones who bought after the news. Just like how shareholders are treated when a company goes ex dividend.

Here’s another controversial idea to increase deterrence: don’t prosecute companies for common practices until you’ve given them sufficient warning to change their ways. Otherwise the prosecutors are doing what Dr. Strangelove accused the Russians of doing:

[T]he… whole point of the doomsday machine… is lost… if you keep it a secret! Why didn’t you tell the world, eh?

The Constitution guarantees no ex poste facto laws in Article I, Section 9, but we are still working on no ex poste facto judicially implemented regulation.

Who watches the watchmen? Do we need four independent judiciaries with each one’s scope determined by the others like the four redundant computers on the space shuttle? No need to curb the SEC and prosecutors of public companies–the companies are helping themselves. By going private.