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Backdating Stock Options Hot Topic Discussion, Article, News

The CEO Cash Time Machine - - Back Dating Options – a Form of Time Travel?

Stock options are generally granted to executives as an incentive – often at the fair market value of the stock price on the date of grant. Or, at a discount so that the executive “earns” the incentive as share prices increase (for shareowners). Options are supposed to effectively link executive compensation to shareholder returns – they allow executives to earn compensation equal to the difference between the stock price at the date of the grant (the “strike price”) and the stock price on the date the option is exercised.  Boards approve stock option plans.

This arrangement is an incentive for the executive to work to grow (increase) the company’s stock price – the market cap, the total valuation.  If there is no increase in stock price -- there is no gain for the executive. At the time of the grant, the option usually has no real money value.

Some executives and boards have permitted stock option backdating – a practice which establishes the stock option grant reflecting a date in the past when the stock price was lower than the real date of the grant or when more favorable conditions existed for the cashing in of options held. This deliberate falsification allows the executive recipient to take advantage of a more opportune date with a low stock price, which will eventually equal greater income when the option is exercised. 

Stock option grants that have intentionally been altered or misrepresented may be an act of fraud and criminally punishable. Aside from the tax and accounting consequences to the company, the potential penalties for those individuals involved in this scandal can range from criminal charges - - to shareholder lawsuits -- to SEC sanctions and -- to termination of employment.  The executive in question, the company’s CFO other executive suite members and/or governing board members could all face some or all of these consequences.

Also, it should be expected that shareholders will attempt to recover all compensation earned by executives through backdated options, likely including all compensation earned on the option grant.

This practice—perhaps more widely practiced than first thought was first uncovered by several academics and then reported in The Wall Street Journal several years ago.  The initial and follow up stories and subsequent investigations by the SEC have led to limited punitive and criminal actions – so far.   It is estimated that more than 100 companies are under investigation by SEC and that as many as 600 companies with aggressive accounting practices may have been involved in backdating.  This really is waiting for more shoes to drop. With more companies going under the microscope regarding this practice ---  the editors of AC have branded it a hot corporate topic for 2008!



Latest on Options Backdating

December 13, 2012 Why Should We Care About Corporate Interlocks?

Source: Forbes

Tomorrow, GMI Ratings launches Global LeaderBoard (GLB), an online research and data-visualization tool designed to deepen the analysis of corporate governance practices that can materially affect issuer risk. GLB maps complex...

October 29, 2012 The Perils of Feeding a Bloated Industry

Source: Gretchen Morgenson, NY Times

THEY say the wheels of justice grind slowly, but should it really have taken more than five years for the Justice Department to discover that Countrywide Financial, the mortgage mania’s top creator of risky loans, dumped a load...

October 16, 2012 Low lake levels lead to lesson on erosion and ways to combat it

Herald & Review - Stine';s job with the Environmental Protection Agency is to study ground water and enforce regulations, and one of the biggest contaminators of ground water is runoff that brings farm chemicals and trash...

September 25, 2012 Former Broadcom executive emerges intact from options scandal

Source: LA Times

Almost from its inception, the federal government's options backdating case against executives of Broadcom Corp. reeked of cheap melodrama more than it gleamed with truth-seeking about corporate accounting and corporate pay.

August 23, 2012 Stock Options: A Strategic Weapon For Growth

Source: Forges

On a regular basis, I am asked by startup business founders how to develop a thoughtful employee stock option plan. Most entrepreneurs are looking for information to guide their thinking and action on this very critical business...

July 18, 2012 Backdating Claims Still Stick to Tech Executives

Source: Courthouse News Service

A jury should determine whether Silicon Valley executives practiced insider trading and backdating to manipulate option grants, a federal judge ruled

May 23, 2012 Socially Responsible Utilities Continue to Outperform: Evidenced by Target Rock Utility Sustainability and ESG Indexes

Source: PR Web

Target Rock Advisors, LLC (TRA) today released the first quarterly update of its ten energy utility industry Sustainability and ESG (Environmental, Social and Governance) Indexes, originally launched on February 14, 2012. The...

May 22, 2012 Climate change hits globe's water cycle

Source: UPI

The Earth's dry lands are getting drier and wet ones wetter as climate change shifts and accelerates the globe's water cycle, U.S. researchers say. Changing patterns of salinity in the global ocean during the past 50 years...

May 18, 2012 Backdating Stock Options Still a Risky Play

Source: CFO

The U.S. 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...

March 21, 2012 U.S. Supreme Court denies appeal by Brocade ex-CEO

Source: SF Chronicle

The U.S. Supreme Court denied an appeal Monday by Gregory Reyes, former chief executive of Brocade Communications, who was sentenced to 18 months in federal prison in the nation's first prosecution for concealing the backdating...

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