Pitfalls of Backdating
Fritz Kreisler was one of the most famous violinists of the early 20th century. Besides studying violin, Kreisler studied with composer Anton Bruckner at the Vienna Conservatory and with composers Jules Massenet and Leo Delibes in Paris.
Kreisler was a prolific composer. Although he is best known for his volumes of violin pieces, he arranged dozens of compositions for violin and piano and wrote cadenzas (virtuosic solo music played in the middle of a concerto without accompaniment) for major violin concerti. Kreisler also wrote string chamber music, songs, and three operettas.
He wrote many of his violin pieces in the styles of composers from earlier eras, such as Pugnani, Vivaldi, Boccherini, Beethoven, Stamitz, and Couperin, and Tartini. Concerned that his music would not be accepted unless they appeared to have stood the test of time, Kreisler initially passed these pieces off as newly-discovered pieces written by the composers of an earlier time in whose styles he had written.
When people discovered that Kreisler had written those pieces himself, at first it was quite the scandal, and Kreisler, who had been an esteemed artist, fell victim to criticism. Kreisler quickly stopped criticism of the music, itself, by pointing that his critics had praised the same pieces when they believed famous composers of an earlier era had written them.
It’s unfortunate that a composer of Kreisler’s ability felt he needed to ascribe his music to an earlier era for it to be accepted. Kreisler’s “backdating” his compositions to an earlier era to give them credibility was viewed as a hoax, and while scandalous, at the time, not illegal.
Most people think that backdating legal documents is illegal, and often it is. In Backdating-When is it Appropriate? I discussed when and how to legally backdate a document. However, both legal and illegal backdating has consequences. And, even when backdating is legal, many people, like Kreisler, experience negative consequences.
Backdating is putting an earlier date on a legal document than the date it is approved or signed. Barring a Constitutional provision or law prohibiting backdating, backdating which is disclosed and done in good faith without intent to defraud usually is legal.
There are several legal terms which signal that a document has been backdated. When a court filing or other legal document is backdated, it sometimes is called “nunc pro tunc” or “now for then.” A similar term, “ex post facto,” which roughly translates to “from a thing done later,” usually refers to laws which apply retroactively.
When a contract is to apply retroactively, it often will have an “as of” date or “effective date,” which differs from the date of the contract. Corporate resolutions retroactively approving a company action frequently are called “ratifications.” And, an insurance policy that covers claims made before the policy was issued are said to have a “retro date” or “prior acts coverage.”
These terms signal to the parties and the reader that the legal document or action is being backdated so it applies retroactively. Using terms like “nunc pro tunc” or “as of” or “ratification” in a document satisfy the requirement that backdating be disclosed.
Sometimes parties need to legally backdate a document. However, even legal backdating can have negative consequences.
Real Life Example–Tax Consequences
Many illegally backdated documents don’t disclose that they have been backdated. One of the most famous illegal backdating scandals involved backdating of stock options. Stock options allow someone to purchase a company’s stock at a pre-established price (the strike price).
Since the market price of stock fluctuates, stock options can be very valuable or have no value at all depending upon whether the strike price is above or below the market price. If the strike price is lower than the market price for the stock, a stock option is said to be “in the money.” If the strike price is higher than the market price, the stock option is “out of the money.”
Stock options may be awarded to corporate executives as part of their compensation. Usually, options granted to executives are out of the money, and it’s speculative whether the options ever will be worth anything. By backdating options and saying they were granted to executives on a date when the stock price was lower, executives assured that their options would be “in the money.”
Options backdating was illegal, so claims of conspiracy and fraud followed its discovery. In addition, options backdating shared one negative consequence with some legal backdating–tax liability. The executives hadn’t reported receipt of the options as taxable income, even though they had value when received, and faced serious tax consequences.
Real Life Example–Previous Compliance Decisions No Longer Make Sense
Article I, Section 9 of the US Constitution prohibits Congress from passing ex post facto laws. Article I, Section 10 imposes a similar prohibition upon the states.
In 1798, the US Supreme Court held in Calder v. Bull that the ex post facto prohibition applies only to “crimes, pains, and penalties.” Therefore, Congress and the states may pass laws involving civil matters which are retroactive.
The best known legal ex post facto laws may be the federal tax laws. New tax laws often are effective retroactive to January 1 of the year in which they were adopted. That makes it easier to administer the new laws since they apply to the entire tax year. However, some tax planning and compliance decisions made before the law laws were adopted turned out to be ill-advised given the new tax laws.
This consequence isn’t limited to ex post facto laws. Even legal backdating of a contractual arrangement or ratification of a corporate action can affect the consequences of decisions made before the backdating occurred.
Real Life Example–Assuming Existing Liability
Insurance policies usually are effective on the date they are issued. However, sometimes, the insured negotiates a “retroactive date” or “prior acts coverage.” This is most common with “claims made” policies, which cover the insured only for claims made during the policy period.
Before agreeing to retroactive coverage, the insurance company usually requires the insured to demonstrate that it had insurance during the prior acts period. The insurance company also may ask the insured to certify that it isn’t aware of any claims that might be assured for prior acts.
Once the insurance company issues a policy with retroactive coverage, it assumes responsibility to cover existing liability that the insured may have. Although the insurance company assumes this liability voluntarily, parties who backdate contracts may inadvertently assume prior liability.
Real Life Example–Breaching a Contract Before It is Signed
Many real estate purchase contracts include confidentiality clauses. To help the buyer with its due diligence, the seller usually gives the buyer the seller’s financial records and business documents. Sellers don’t want this information made public and require the buyer to keep it confidential and to require its advisors to agree to confidentiality.
Likewise, the parties to a contract may not want the contract’s existence or terms made public. Frequently, the agree to keep this information confidential until after the closing.
Sometimes, in a desire to move the transaction forward the seller provides the buyer with information before the contract is signed. The buyer may share this information with third parties to evaluate the purchase. Plus, the parties may be excited about the upcoming transaction and want to share that information with others.
If a contract signed later is backdated, the parties might find themselves in breach as soon as the contract is signed. The buyer may find itself in breach of the confidentiality language because it shared information with third parties after the backdated contract date without complying with the contract confidentiality provisions. Or the parties who shared information about the transaction might find themselves in breach because they shared information about the transaction after the backdated contract date.
Preventing Negative Consequences When Backdating
It’s not clear whether Kreisler considered the possible negative consequences of his attributing his music to composers of an earlier era. However, before agreeing to backdate a legal document, parties who backdate documents should consider the consequences by doing the following:
Prevent Appearance of Impropriety Even though backdating may be legal, it may cause people to conclude that a fraudulent conspiracy is afoot. Secrecy contributes to this appearance of impropriety. Parties planning to backdate a document should be transparent about the backdating and the reasons for it.
Evaluate Impact on Previous Business Decisions A business decision (such as sharing information as discussed above) which made sense when it was made can become ill-advised if a document is backdated to a date before the decision was made. Before agreeing to backdate a document, the parties should review existing business decisions to determine if the backdated document nullifies them or changes their consequences.
Evaluate Tax Consequences Parties should evaluate the future tax consequences of any business decision. But before backdating a document, they need to consider whether the backdating might create unanticipated tax consequences for earlier decisions.
Don’t Involuntarily Assume Existing Liability Many business decisions involve allocation of liability. Parties might intentionally assume responsibility for a previous debt or action. Before agreeing to backdate a document, parties should evaluate whether they might be unintentionally be assuming liability for an existing situation.
Be Sure You Aren’t in Breach Parties should evaluate their previous actions and the current situation to be sure that backdating won’t result in breach of a contract the moment it is signed.
After Kreisler’s hoax was discovered, he fell into disrepute. He repaired his reputation by noting that if his music hadn’t been good people wouldn’t have accepted it, no matter when they believed it was written. Today’s businesses should do better by avoiding illegal backdating and being proactive to prevent negative consequences of legal backdating.
© 2019 by Elizabeth A. Whitman
Any references clients and their legal situations have been modified to protect client confidentiality
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