Back-dating Stock Options: An Overview

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.

How CEOs Reinvented the Dating Game Scandal in Stock Options

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.

PDF | The paper discusses the economic impact of legal, corporate governance, tax, disclosure, and incentive issues arising from revelation of dating | Find.

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. Backdating only becomes illegal when executives fail to disclose the practice in financial reports, and fail to properly account for backdated options according to Generally Accepted Accounting Principles GAAP and the relevant tax laws.

Whether executives will be criminally liable depends on whether they were consciously trying to cover up the practice of backdating. The primary source of criminal liability for backdating are the federal securities acts, which regulate the sale of securities by publicly traded companies. See Securities Act of , 15 U.

Any person who willfully violates ‘ any provision’ of the Securities Act or the Exchange Act and ‘ any rule or regulation thereunder’ commits a criminal offense, and could be subject to substantial fines as well as imprisonment.

Backdating of US share options | Practical Law

The dissertation investigates stock options-related arrangements by individual executives and firms from a sociological point of view. The first study in this dissertation explores the antecedents of stock option exercises by executives in Chinese state-owned firms, behaviors considered deviant from the institutional norms of the Chinese state bureaucracy. This study seeks to answer the following question: When individual beliefs and actions are deeply embedded in their institutional context, as in the case of Chinese executives in overseas-listed firms, who is likely to break with the institutional status quo, and what are their reasons for doing so?

Contrary to the existing status-based theory of social deviance, institutional disengagement among Chinese executives often takes place in the middle of an institutional status hierarchy. Characteristics of the institutional environment and the individual biography further interact with individual positions to affect the likelihood that an executive will diverge from the institutional expectation of not exercising stock options.

There are three major areas of potential criminal liability for former executives involved in stock options backdating: securities fraud, tax fraud, and.

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. The date at which the option price is set is shifted backward to that date on which the market price of the stock was the lowest. By doing so, those awarded stock options can now buy the shares at a lower exercise price, so that they reap larger profits when they sell the shares.

Instead, one must examine the date of the board of directors minutes to see when the options were authorized, and then trace this date back to when the options documentation was completed. A disparity between the dates indicates that backdating has occurred. Books Listed by Title. Articles Topics Index Site Archive. About Contact Environmental Commitment.

Sean Rad Releases Statement on Stock Options

A growing list of publicly-held companies are being asked by the government to re-examine their stock options programs. One area of concern is the practice of back-dating, in which companies allow employees to buy stock at a lower, retro-active price and thereby maximize returns. I’m Scott Simon. Coming up: Mexican teachers prepare a lesson for their country’s presidential candidates.

Options Backdating ? The Timing of News Releases around Option Grants. by Josh Schaeffer, PhD and Fan Wang. The option backdating.

Note: This page has been archived and is no longer being updated. It may include obsolete or out-of-date information. Home Previous Page. Spotlight on Stock Options Backdating Note: This page has been archived and is no longer being updated. Trident Microsystems, Inc. Lin, and Peter Y. Jen, Litigation Release No. Anthony Bonica, Litigation Release No. Carl W.

Options Backdating

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.

Abstract: We study motives for executive stock option backdating, the practice of changing the grant dates of current options to dates in the past using hindsight.

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.

Options Backdating: Life Inside The Fraud Triangle

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.

The string of options-backdating cases showed how difficult it was to the practice of backdating stock options came to light seven years ago.

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. Companywide stock-option grants, for one, are typically initiated well in advance and involve generating a list of who can receive them.

The Criminal Implications Of Backdating Stock Options

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.

Stock options are usually granted at that day’s market price, so backdating them to a day when the company’s stock was low means that anyone exercising the.

In finance , options backdating is the practice of altering the date a stock option was granted, to a usually earlier but sometimes later date at which the underlying stock price was lower. This is a way of repricing options to make them more valuable when the option ” strike price ” the fixed price at which the owner of the option can purchase stock is fixed to the stock price at the date the option was granted.

Cases of backdating employee stock options have drawn public and media attention. Stock options are often granted to the upper management of a corporation. While options backdating is not always illegal, [2] it has been called “cheating the corporation in order to give the CEO more money than was authorized. To be legal, backdating must be clearly communicated to the company shareholders, properly reflected in earnings, and properly reflected in tax calculations.

The U. Corporations, however, have defended the practice of stock option backdating with their legal right to issue options that are already in the money as they see fit, as well as the frequent occurrence in which a lengthy approval process is required. In essence, the revision enabled companies to increase executive compensation without informing their if the compensation was in the form of stock options contracts that would only become valuable if the underlying stock price were to increase at a later time.

Spotlight on Stock Options Backdating

The Sarbanes-Oxley Act made it illegal to backdate stock options and now requires companies to report stock options within two days of their being granted. As demonstrated in this case, the commission is committed to holding corporate officers accountable for illegally backdating stock options and will seek the return of undeserved compensation. The commission said that Dr McGuire consented to various requirements as a result of the ruling, including a bar on his serving as an officer or director of a public company for 10 years.

We investigate the backdating of stock option exercises. Before SOX, we find evidence that some exercises were backdated to days with low stock prices.

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