The Dangers Of Options Backdating

Back dating options illegal

Disordered, untimely paperwork was cited as the cause in some cases of unintentional backdating. For instance, public companies generally grant stock options in accordance with a formal stock option plan approved by shareholders at an annual meeting. In addition, the company must also properly account for the expense of the options grant in their financials. In some cases, the amounts may be trivial.

In this litigious society, shareholders will almost certainly file a class-action lawsuit against the company for filing false earnings reports. The four graphs of hypothetical grants below illustrate this. Lin was accused of backdating stock option documents in order to give the appearance that options were granted on earlier dates than issued.

In any event, resources will be put in place to improve the disclosure requirements for option grants and enforce existing regulations. Initially, lax enforcement of the reporting rule was also blamed for allowing many companies to sidestep the rule adjustment that stemmed from Sarbanes-Oxley. This all but eliminated the opportunity for senior management to engage any meaningful options backdating. 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. The general reason companies backdate options is to create a lower exercise price, which in turn increases the probability that exercising the options will make more money for the optionee.

In this litigious

Notable companies embroiled in the scandal include Broadcom Corp. In such a case, tax deductions would be denied. While not quantifiable in terms of dollars and cents, in some cases, the damage to the company's reputation could be irreparable. Third, firms might have concealed any traces of backdating by not choosing the absolute lowest price for the look-back period or by only backdating some of the grants.

Lin was accused of

But ultimately, it can prove to be quite costly to shareholders. Positive news announcements after grants is consistent with both spring-loading and backdating.

Positive news announcements after grants is

In others, the costs may be in the tens or even hundreds of millions of dollars. Heinen for their alleged roles in backdating Apple options.

Furthermore, the pre-and post-grant price pattern has intensified over time see graph below. The tax issue is narrower, but still looms. In short, it is this failure to disclose - rather than the backdating process itself - that is the crux of the options backdating scandal. That means that if an option is in the money as a result of backdating, the company forfeits its tax deduction for the covered employees, explains Lehman Brothers tax expert Robert Willens. However, among the minority of grants that are filed late i.

The four graphs of

The board formally grants the stock options to John every year at its January board meeting. To be clear, the majority of public companies handle their employee stock options programs in the traditional manner. Companies would simply wait for a period in which the company's stock price fell to a low and then moved higher within a two-month period. In this article, we'll explore what options backdating is and what it means for companies and their investors. 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.

It also provides investors with timely access to grant pricing information. This adjustment to the filing window came with the Sarbanes-Oxley legislation. This included options backdating presented in offer letters to new hires. Typically, the grant date of the stock options is the same as the date of the board meeting.

The Dangers Of Options Backdating

But ultimately it