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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

January 15, 2009 Backdating Case Against Bed, Bath & Beyond Tossed

Source: Law.com

Three months after allowing a stock options backdating case to proceed against Comverse Technology Inc., a New York appellate court has tossed out a similar case against Bed, Bath & Beyond Inc.

December 23, 2008 UnitedHealth settles with SEC over backdated options

Source: Twin Cities.com

UnitedHealth Group has settled a civil lawsuit with the Securities and Exchange Commission that alleged the company's back dating of stock options violated SEC rules.

December 23, 2008 Brunswick suspends PR exec over insider trading case

Source: Reuters

International PR firm Brunswick Group suspended Nina Devlin, the executive whose husband was charged with insider trading based on confidential information authorities said he obtained from her.

December 18, 2008 Backdating: The Gift That Keeps on Giving

Source: LegalTech - Law.com

Larry Sonsini and his firm, Wilson Sonsini Goodrich & Rosati, paid $9.5 million to client Brocade to forget about that little backdating thing. Is it possible now that they'll have to pay more?

December 16, 2008 KB Home Ex-Official Pleads Guilty to Obstruction

Source: The Wall Street Journal

KB Home's former head of human resources agreed to plead guilty to conspiring to obstruct justice in connection with a backdating scandal that came to light at the home builder in 2006.

December 13, 2008 Blockbuster UNH-McGuire settlement gets smaller

Source: Star-Tribune - MN

Here's something else taking a big hit from the tanking stock market: shareholder lawsuit settlements. The $420 million settlement brokered a year ago between UnitedHealth Group Inc. and its former CEO, William McGuire, is now...

December 3, 2008 Quest Software Settles Options Probe with SEC

Source: Orange County Business Journal - CA

Aliso Viejo-based Quest Software Inc. is just around the corner from ending its long stock options ordeal. The maker of business software said Tuesday it’s set to settle a two-year long probe into stock options backdating with...

November 26, 2008 Judge OKs Monster settlement

Source: Worster Telegram.com - MA

Monster Worldwide Inc., operator of the world’s largest online job-search Web site, won a judge’s approval of a $47.5 million settlement of an investor lawsuit over options backdating. Monster and two top executives were sued...

November 13, 2008 Blue Coat Systems and Former CFO Settle Charges of Stock Option Backdating

Source: Securities and Exchange Commission

Washington, D.C., — The Securities and Exchange Commission has charged Sunnyvale, Calif., network security company Blue Coat Systems, Inc. and its former chief financial officer Robert P. Verheecke, alleging that they backdated...[more]

November 11, 2008 Lawyer pleads guilty in Broadcom options case

Source: Associated Press

An attorney who worked for indicted Broadcom Corp. co-founder Henry T. Nicholas III has pleaded guilty to evading a banking law and will cooperate with the federal government in a sweeping stock options backdating probe involving...

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