In the mids, an investigation by the Securities and Exchange The essence of the options backdating scandal can be summarized. in the upcoming proxy season commencing in the spring of . During the summer and fall of , the option backdating scandal. Keywords: executive compensation; stock option grants; backdating; repricing; In particular, for CEOs, fewer than 10 episodes ..  Bernile, G. and G. Jarrell (), qThe Impact of the Options Backdating Scandal on Shareholdersq, .
The SEC and other federal authorities are currently investigating more than 50 companies suspected of illegal, undisclosed options backdating practices, and the first criminal charges relating to these practices are expected shortly.
The practice of backdating options is not illegal as long as it is disclosed to shareholders. This fact is often used as a reason to downplay the seriousness of the issue. But abuse of stock options has been allowed to perpetuate for years.
In all my reading of the backdating scandal coverage, I have yet to see a thorough analysis of the real victims of this scandal: Simply put, backdating a stock option grant amounts to ripping off shareholders by shortchanging the company treasury. Shares are issued to option holders at artificially low prices and the company gets an artificially low amount of capital in return for its shares. The exercise price of an option is crucial because it is the price the executive or employee option holder must pay to the company when exercising options in return for newly issued shares.
But the great majority of public companies issue options with an exercise price equal to the market price at the date of grant.Steve Jobs TV interview about movies in iTunes and backdating scandal 2006
This practice requires at least a nominal investment on the part of the option holder if he or she wishes to exercise. Instead of using excess cash to buy back stock at a short-term discount, a long list of blue chip companies used the post-Sept. The number who received grants was 2. Their grants were concentrated around Sept. They were dated Sept. Besides, he added, no one could have known whether the stock would rebound immediately or continue to slide.
Brown said he believes that he called both members of the stock option committee on Sept.
Options backdating - Wikipedia
But first, on the same page of the July 15 Wall Street Journal is another article quoting an early whistle-blower in the backdating scandal.
He suspects that it will turn out much worse than what has been exposed in the media thus far emphasis added: In his new research paper, which analyzes options prices and share movements, Dr.
Afterward, the number of suspicious grants dropped in half. BRCMa communications chip company, stands out as one of the best examples of how an excessive option plan can dilute shareholder interests.
The tech bubble of the late s was a time when top-notch engineers and programmers routinely demanded generous stock option packages as inducement to sign on with public companies.
These companies met their demands, and were allowed to do so by shareholders who were far too distracted in their quest to find tech companies with the best growth prospects.
Options backdating - The Globe and Mail
By the market bottom inscores of tech companies were left with unhappy employees holding worthless options with triple-digit exercise prices. While it was caught up in the options frenzy ofBroadcom made some grants with suspiciously perfect timing for option holders, not stockholders. The Wall Street Journal describes how the company now faces a significant charge and earnings restatement relating to the unfolding backdating scandal.
Companies are supposed to account for options grants on the date they are granted.
But this does not address the key issue of shareholder dilution. Why pay a high multiple for EPS with zero real growth? Several tech companies felt compelled to re-price options with bubble-level strike prices after the burst. One of the larger backdating scandals occurred at Brocade Communicationsa data storage company.
It allegedly failed to inform investors, or account for the options expense s properly. In the modern business world, the Sarbanes-Oxley Act has all but eliminated fraudulent options backdating by requiring companies to report all options issuances within 2 days of the date of issue.
District Court for the Northern District of California. However, in late and earlythe issue of stock options backdating gained a wider audience.
Numerous financial analysts replicated and expanded upon the prior academic research, developing lists of companies whose stock price performance immediately after options grants to senior management the purported dates of which can be ascertained by inspecting a company's Form 4 filings, generally available online at the SEC's website was suspicious. For instance, public companies generally grant stock options in accordance with a formal stock option plan approved by shareholders at an annual meeting.
Many companies' stock option plans provide that stock options must be granted at an exercise price no lower than fair market value on the date of the option grant. Thus, backdating can be misleading to shareholders in the sense that it results in option grants that are more favorable than the shareholders approved in adopting the stock option plan. The other major way that backdating can be misleading to investors relates to the method by which the company accounts for the options. Until very recently, a company that granted stock options to executives at fair market value did not have to recognize the cost of the options as a compensation expense.
However, if the company granted options with an exercise price below fair market value, there would be a compensation expense that had to be recognized under applicable accounting rules. If a company backdated its stock options, but failed to recognize a compensation expense, then the company's accounting may not be correct, and its quarterly and annual financial reports to investors may be misleading.
Although many companies have been identified as having problems with backdating, the severity of the problem, and the consequences, fall along a broad spectrum. At one extreme, where it is clear that top management was guilty of conscious wrongdoing in backdating, attempted to conceal the backdating by falsifying documents, and where the backdating resulted in a substantial overstatement of the company's profitability, SEC enforcement actions and even criminal charges have resulted.
Toward the other extreme, where the backdating was a result of overly informal internal procedures or even just delays in finalizing the paperwork documenting options grants, not intentional wrongdoing, there is likely to be no formal sanction—although the company may have to restate its financial statements to bring its accounting into compliance with applicable accounting rules. With respect to the more serious cases of backdating, it is likely that most of the criminal actions that the government intended to bring were brought in There is a five-year statute of limitations for securities fraud, and under the Sarbanes-Oxley Act ofoption grants to senior management must be reported within two days of the grant date.