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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

August 27, 2009 Judge finalizes United, shareholder settlement on stock backdating


Former and current executives have agreed to pay millions of dollars back to United stockholders.

August 24, 2009 McAfee seeks gag on exec ousted over options


Former McAfee President Kevin Weiss, exonerated of wrongdoing in a stock option-backdating scandal, plans to ask a judge on Monday to unseal the arbitration award that cleared him of wrongdoing and ordered McAfee to pay damages...

August 19, 2009 Judges Overturn Backdating Conviction

Source: New York Times

Citing misconduct by prosecutors, a federal appeals court on Tuesday overturned the conviction of the former chief executive of Brocade Communications Systems on charges related to the illegal backdating of stock options

August 18, 2009 Another Options Backdating Scandal Brewing

Source: 24/7WallStreet

The Wall Street Journal has taken an exclusive look at academic reseach documents that show many companies have backdated options. The last scandal about the practice should have taught public company boards and executives...

August 14, 2009 CalPERS getting share of lawsuit settlement

Source: Sacramento Bee

CalPERS will share in a $925 million settlement of a shareholder lawsuit against a Minnesota health insurer and its former chief executive over stock manipulation.

August 12, 2009 Judge OKs UnitedHealth $925.5 mln backdating pact

Source: Reuters

UnitedHealth Group Inc (UNH.N) and former chief executive William McGuire will pay $925 million to resolve an investor class-action lawsuit accusing the health insurer of improperly backdating stock options.

August 8, 2009 Former Take-Two execs settle SEC complaint

Source: Forbes

The Securities and Exchange Commission has settled civil complaints against former executives of video game publisher Take-Two Interactive Software Inc. over stock options backdating.

July 28, 2009 Backdating Returns to the Spotlight

Source: CYO Magazine

The IRS released new tax guidance this month related to so-called backdated stock options. But discounted options are still not considered "qualified performance based compensation."

July 2, 2009 UnitedHealth gets approval for settlement of options case

Source: Reuters

A U.S. federal judge has granted UnitedHealth Group Inc (UNH.N) final approval for the settlement of a 2007 shareholder lawsuit related to past stock options practices, court documents show.

June 30, 2009 Another Update to the Options Backdating Scorecard

Source: RiskMetrics

Just three weeks ago, we updated the options backdating numbers. With the settlement last week of litigation involving alleged options backdating at The Children’s Place Retail Stores, Inc., (NASDAQ: PLCE) for $12 million, it's...

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