End of the Options Backdating Era


Before the clamor about the lack of prosecutions from the financial crisis and the current crackdown on insider trading, the practice of backdating stock options came to light seven years ago and prompted a flurry of prosecutions. For those whose memories have faded, options backdating became known publicly in March when a Wall Street Journal article questioned whether executives selected an earlier date for the price at which options could be exercised, effectively giving them a lower price and making them more valuable. A number of companies — particularly those in the technology industry, which gave out stock options like candy on Halloween — began internal investigations into their awards. Because publicly traded corporations must properly report the value of options on their financial statements, any backdating could result in a misstatement that can be the basis for a charge of securities fraud. Charges were eventually filed in a number of different jurisdictions against executives responsible for approving the practices, usually accompanied by a parallel civil enforcement action by the Securities and Exchange Commission. But a few tied in with backdating were never accused of wrongdoing, like Steven P. Jobs at Apple.

Back-dating Stock Options: An Overview

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Option backdating is the practice of using hindsight to change the grant dates of current options to dates in the past. Because of accounting conventions and tax.

Backdated stock options can be particularly lucrative for the executives who receive them. However, companies must be careful about how they award them. In the money. Companies engaged in backdating wait for stock prices to rise and then grant executives at-the-money options that are dated earlier, when prices were lower. Executives can enjoy instant profits, and they and the company can avoid some of the negative consequences typically associated with in-the-money options.

Not necessarily illegal. However, companies must report their option grants within two days of their issue and list all stock options as expenses. To avoid backdating problems, be sure that your option-granting practices are consistent and well documented.

Investigations Expanded into Back-Dating Stock Options

Write to the Online Journal’s editors at newseditors wsj. Article Search. Here’s a look at companies that have come under scrutiny for past stock-option grants and practices. Write to Journal editors at newseditors wsj. Options Scorecard Here’s a look at companies that have come under scrutiny for past stock-option grants and practices. The Santa Monica, Calif.

Stock option backdating is difficult to spot, since it is not immediately apparent in a company’s financial statements. Instead, one must examine.

Options backdating is the process of granting an employee stock option ESO that is dated before its actual issuance. In this way, the exercise strike price of the granted option can be set at a lower price than that of the company’s stock price at the granting date. This process makes the granted option ” in the money ” ITM and therefore of greater value to the holder.

The practice of backdating options has been considered unethical and is now the subject of regulatory scrutiny, making it far less widespread in recent years. The practice of options backdating first occurred when companies were only required to report the issuance of stock options to the SEC within two months of the initial grant date. Companies would simply wait during that period to identify a particular date in which the company’s stock price fell to a low and then moved higher within those two months.

The company would then grant the option, but date it at or near this lowest point.

How CEOs Reinvented the Dating Game Scandal in Stock Options

Stock options give their holder the right to purchase the common stock of a corporation at a specific price. This right is available over a date range, such as for the next five years. Once a stock option is used to buy shares, these shares are typically sold right away, in order to pay any related income taxes. Consequently, a person who has been awarded stock options will only use them if the current market price is higher than the exercise price built into the options.

The exercise price is usually the market price of the shares on the date when the options were awarded. An issue with stock options that management can illegally take advantage of is to backdate the options.

option backdating. Moreover, the tendency to backdate is stronger when stock options are more important in CEO compensation and when directors receive.

What is backdating? Backdating is the practice of marking a document with a date that precedes the actual date. What is the benefit of backdating ESO grants? ESOs are usually granted at-the-money, i. Because the option value is higher if the exercise price is lower, executives prefer to be granted options when the stock price is at its lowest. Backdating allows executives to choose a past date when the market price was particularly low, thereby inflating the value of the options.

An example illustrates the potential benefit of backdating to the recipient. In comparison, had the options been granted at the year-end price when the decision to grant to options actually might have been made, the year-end intrinsic value would have been zero. Is backdating of ESO grants illegal? Backdating of ESO grants is not necessarily illegal if the following conditions hold:.

Backdating Stock Options Still a Risky Play

Last month, the U. Hussain is seeking an appeal. Backdating is dating any document earlier than the one on which the document was originally drawn up.

Options backdating occurs when a company issues stock options on one date, but reports in its financials an earlier issue date to create a “strike” or exercise price.

The option backdating scandals of the s were initially unearthed through an academic research study. As we helped companies work through backdating issues, we found that a majority of the cases were linked to weak controls and not malpractice with notable exceptions, of course. We believe this research is worth knowing about because if even a few companies are found to be doing this, it could result in all companies facing heavier scrutiny of their disclosures.

In the s, it became common for companies to backdate the options they granted to their executives. That way, executives could receive a grant below the current market price while investors may have believed that the grant was at the money. Options backdating also enabled companies to issue enormous compensation packages to executives without notifying shareholders, and allowed executives to claim certain IRS tax advantages ordinarily reserved for options granted at the money.

They look backward two months and assign October 1, as the grant date since the stock price was the lowest at this date. However, this scheme caught the eye of regulators. The SEC began a thorough investigation in , ending in a long string of criminal charges and executive resignations.

Options backdating

More than one hundred companies have been implicated in the recent federal inquiry into stock options backdating. There are three major areas of potential criminal liability for former executives involved in stock options backdating: securities fraud, tax fraud, and mail or wire fraud. Backdating is not illegal per se.

For example, a person commits financial fraud by backdating stock options to land on the date when the stock was at its lowest value, allowing.

But a recent paper , coauthored by Robert M. Daines of Stanford University, has unearthed a new and potentially more sinister version of the scheme — call it Dating Game 2. Under Dating Game 1. Revelations about backdating came to light in and sparked outrage on many fronts. Federal prosecutors filed criminal charges against more than a hundred executives, convicting 12 and sending five to prison.

Under pressure from regulators, the media, and investor groups, most companies adopted reforms that seemed to stop the game. One key reform: Companies began scheduling their upcoming option grants well in advance and on immovable dates. On top of that, regulators ordered all companies to disclose all of their option grants within two days of when they occurred.

In Dating Game 2. McQueen and Robert J. Schonlau at Brigham Young University.

The Criminal Implications Of Backdating Stock Options

Related Content. This chapter concerns the issue of backdating of US share options, including: the potential difficulties that this practice may cause and the penalties that may be incurred; steps that companies can take to avoid falling foul of this practice; the implications for non-US companies; and the likely further developments in this area.

In the past few years, the practice of granting share options has come under heightened scrutiny in the US and the US Securities and Exchange Commission SEC has been investigating hundreds of publicly traded companies to determine whether they “backdated” share option grants. Backdating occurs when an option’s grant date is recorded as occurring in the past, typically on a date when the company’s share price and therefore the option’s exercise price, which is usually fixed as that day’s fair market value was lower.

The opportunities for backdating have waned in recent years due to the enactment of several pieces of legislation, which led to an increased stringency in required disclosure reports, and tax penalties imposed on certain deferred compensation. However, different agencies in the US continue to audit, investigate and impose civil and criminal penalties on listed companies for breach of the backdating rules.

tiny for options backdating potentially face a panoply of accounting, legal and tax Stock option backdating refers to se- lecting the effective date of stock option.

Why Zacks? Learn to Be a Better Investor. Forgot Password. The stock market offers plenty of opportunity for profitable investing, but all potential rewards come with a certain amount of risk. When it comes to buying individual stocks, your potential reward is theoretically unlimited, since there is no limit to how high a stock’s price might rise.

Your risk is limited to percent of your investment. Long-dated call options also offer potentially unlimited reward and carry a risk of percent of your investment, but allow you to control the same amount of stock for a substantially lower investment. A call option is a financial contract that gives the holder the right, but not the obligation, to buy the underlying stock at a set price, known as the strike price, for a set period of time.

Each call option controls shares of the underlying stock. Once the call option reaches the end of its contract period, referred to as the expiration date, it becomes worthless and ceases to exist.

Spotlight on Stock Options Backdating

Fifty-two companies currently under criminal investigation. Two indictments. Multiple guilty pleas.

Options backdating occurs when a company grants an option that is dated prior to Typically, the grant date of the stock options is the same as the date of the.

The U. Court of Appeals for the Ninth Circuit agreed with a district court on Tuesday that the former CFO of semiconductor concern Maxim Integrated Products , Carl Jasper, would be on the hook for backdating stock options without expensing them. The case is notable for two reasons: it has been one of the few times that an options-backdating case actually went to trial, and it shows that CFOs and chief executives have no way to hide from improper expensing, even years later.

The Securities and Exchange Commission prevailed in its jury trial against Jasper in April , but it has taken until now for the case to wind through the U. Appeals Court. Jasper appealed the case on trial errors he claims violated his rights, but did not dispute his knowledge of or involvement in the backdating scheme. The practice of backdating stock options as a way of retaining valued employees is legal, as long as the true expense of the backdated options is recorded as a company expense for employee compensation.

Liability was found in the Maxim case partly because backdating and a failure to expense the practice were proven, Fickes notes. But it was also found because the CFO and CEO were aware of the backdating, understood the accounting consequences, and still allowed the company to issue its financial statements, he said. Silicon Valley, in particular, had been a hotbed for the practice of backdating options to retain key employees.

But companies are currently less likely to run into the same problem that Maxim did, according to Koji Fukumura, a partner in the litigation department at Cooley.

Backdating of US share options | Practical Law

The news, centered on the dubious awarding of stock options to Steve Jobs, prompts Apple share prices to fall. Backdating stock options refers to the practice of writing an agreement concerning the award of stock options to make it look like they were awarded earlier than they were. This gives them the option of purchasing a certain amount of stock at a set price. Backdating is legal so long as it is disclosed correctly.

However, because Jobs continued to argue over the point at which they would vest. As a result, Apple missed the deadlines it needed to file with the Securities and Exchange Commission.

Backdating occurs when an option’s grant date is recorded as occurring in the past, Section A states that discounted stock options (including backdated.

Tobak’s take on Steve Jobs’ role in the stock options backdating scandal at Apple. The allegations of illicit sex, drugs, and rock and roll reminded me of the 60s Funny, I can’t remember. While the story was enthralling, I didn’t understand what any of it had to do with a federal investigation into stock option backdating.

But how does that relate to hiring prostitutes and drugging customers without their knowledge? Said another way, do the feds really need to dig that deep to find enough rope to hang executives with? After all, stock option backdating is all the rage these days. You’d think they’d be up to their eyeballs in rope. I count no fewer than 38 top executives at 19 high-tech companies that have bit the dust over this stuff.

And we’re just getting started.


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