Backdating Scandal Ends With a Whimper

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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.

Options backdating

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.

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.

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. Regulatory issues aside, when we helped dozens of companies through a backdating analysis, we found numerous cases in which grant dates were chosen randomly.

This lack of process led to employees being worse off than had the best practice been followed. The resolution was to require new grants to be disclosed within two business days, making the long lookback required to backdate an impossibility. Today, most companies schedule their option grants well in advance and on a predetermined date. Daines and his colleagues report evidence of significant abnormal price movements around scheduled CEO option grant dates after

Options Backdating: Life Inside The Fraud Triangle

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.

If this backdating occurred without public disclosure, the recipient of the stock options received increased compensation in violation of Securities.

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.

UC Berkeley

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 recent stock options backdating issues at Juniper Networks Inc. (NYSE: JNPR) could end up having serious repercussions for the company, sources say,​.

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.

The Criminal Implications Of Backdating Stock Options

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. Backdating can be legal and illegal. If he perceives a pressure and an opportunity and can rationalize his behavior, he is likely to commit fraud.

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.

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:. No documents have been forged. Backdating is clearly communicated to the company’s shareholders.

Backdated Stock Options: Fraudulent or Legitimate?

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.

But first, this week, Apple Computer, Inc. Apple joins a growing list of publicly held companies that have been obliged to re-examine their stock options programs.

This paper provides an overview of (1) the basics of employee stock option backdating; (2) why firms and individuals may engage in backdating.

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. That’s serious fallout considering that options backdating is legit as long as the company reports it and accounts for it accurately.

Stock Options Scam


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