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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

June 26, 2009 On Executive Pay, Simpler Is Better

Source: Harvard Business Review

Back in 1990, Michael Jensen wrote a landmark HBR article arguing that "It's Not How Much You Pay CEOs, But How." He wanted boards to adjust pay according to company performance as shown by stock price. V.G. Narayanan's recent...

June 19, 2009 Comverse settles stock option backdating charges

Source: Forbes

Voicemail software maker Comverse Technology Inc. on Thursday said it has settled charges of improper backdating of stock options and other accounting practices with federal regulators.

June 12, 2009 Apple execs settle backdating scandal; Apple makes $6.2 Milliom

Source: CRN Canada

Nearly two years after Apple became embroiled in a stock options backdating scandal that reached all the way up to CEO Steve Jobs, the Cupertino, Calif.-based company has finally settled all of its shareholder lawsuits. On...

June 11, 2009 Marvell settles backdating suit for $72 million

Source: IT World

Marvell Technology on Tuesday agreed in principle to settle a stock-options backdating suit with shareholders for US$72 million. The class-action lawsuit was filed by shareholders in August 2007 against Marvell and some former...

June 3, 2009 I.T. company sued over stock option allegations

Source: Las Vegas Sun

Information technology company Computer Sciences Corp. faces another lawsuit over the alleged backdating of stock options for executives, employees and directors. A suit seeking class-action status was filed May 29 by shareholder...

May 21, 2009 Affy Nears Settlement with Shareholders in Stock Option Backdating Suit

Source: Genome web

Affymetrix is preparing to settle with shareholders who accuse current and former officials of backdating stock-option grants. The firm entered into a stipulation of settlement on April 29 that set the terms to end the nearly...

May 19, 2009 Monster To Pay $2.5M To Settle SEC Backdating Case

Source: Wall Street Journal

Monster Worldwide Inc. (MWW) has agreed to pay $2.5 million to settle allegations by the U.S. Securities and Exchange Commission that the company engaged in a multiyear scheme to secretly backdate stock options paid to executives...

May 15, 2009 Former KB Home executive to pay $550,000 to settle SEC allegations

Source: Los Angeles Times

KB Home's former head of human resources agreed Thursday to pay $550,000 to settle Securities and Exchange Commission allegations stemming from an options backdating scheme at the Westwood home builder.

May 13, 2009 Recruitment boss guilty of fraud

Source: BBC News

The ex-boss of recruitment firm Monster Worldwide faces up to 25 years in jail after being found guilty of fraud in a stock option backdating scheme.

May 12, 2009 No-cash settlement OK'd for Marvell in backdating case, but attorney fees on hold

Source: The National Law Journal

federal judge in California has approved a stock options backdating settlement with Marvell Technology Group Ltd. that involves no cash payments to the company.

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