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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

October 12, 2009 SEC probes KB Home’s accounts


Los Angeles-based builder KB Home disclosed Friday that the US Securities & Exchange Commission was probing its accounts over possible accounting and disclosure violations.

October 9, 2009 Damning Memos in Maxim Backdating Case Are Fakes, Defense Suggests


When SEC lawyers sued former Maxim Integrated Products CFO Carl Jasper for backdating stock options, they pointed to some damning evidence. It was handwritten notes from Maxim CEO Jack Gifford instructing Jasper to expense the...

October 2, 2009 TriQuint settles backdating lawsuit

Source: Portland Business Journal

TriQuint Semiconductor Inc. has posted a proposed settlement on its Web site for a two-year-old lawsuit accusing company executives of backdating stock options

October 1, 2009 Ruling in case against Broadcom's ex-finance chief favors prosecution

Source: Los Angeles Times

A court says William J. Ruehle's statements to company lawyers about an alleged option-backdating scheme are not protected by attorney-client privilege and can be admitted as evidence at his trial.

September 21, 2009 ITV rocked by bumper pay demands

Source: Interactive Investor

A number of major ITV (ITV) shareholders have reportedly been left fuming after the frontrunner for the chief executive role rejected a £20 million remuneration package for being too low.

September 17, 2009 Ex-McAfee Lawyer Roberts Alleges Defamation After Options Probe

Source: Bloomberg

Sept. 17 (Bloomberg) -- McAfee Inc.’s former General Counsel Kent Roberts, who was acquitted of fraud last year, sued the software company claiming it made him the scapegoat in a federal probe of stock-options manipulation. ...

September 10, 2009 SEC, Hain Celestial Settle Stock Options Case

Source: Natural Products Insider

BROOKLYN, N.Y.—The Securities and Exchange Commission (SEC) and Hain Celestial Group, Melville, N.Y., reached a settlement regarding charges the Melville, N.Y.-based natural foods company backdated and re-priced stock option...

September 4, 2009 Tea maker pays no green to settle SEC probe

Source: Crain's New York Business

Hain-Celestial Group Inc., maker of Celestial Seasonings tea and other food and health products, agreed to settle charges that it fraudulently back-dated stock options granted to its executives.

September 3, 2009 Monster’s James Treacy Gets Two-Year Sentence in Options Case


Former Monster Worldwide Inc. Chief Operating Officer James Treacy must serve two years in jail for improperly accounting for backdated stock options, a judge said, rejecting a U.S. request for a term of as much as 12 1/2 years.

September 2, 2009 SEC investigating possible insider trading at Apple

Source: The Inquirer

APPARENTLY NOT SATISFIED with having avoided prosecution last year for back-dating share option grants, Jobs' Mob has recently become the subject of an SEC investigation into possible insider trading in Apple shares

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