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  • Options backdating - Wikipedia.
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  • Backdating of Executive Stock Options?

The board formally grants the stock options to Jane every year at its January board meeting. Typically, the grant date of the stock options is the same as the date of the board meeting. This is important because the grant date is what determines the exercise price on the options.

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Let's say Jane now decides to exercise her stock options. Granting stock options to employees is a generally accepted and perfectly legal form of compensating employees, and typically companies grant stock options with an exercise price that is equal to the market price of the shares on the date of the grant. But backdating options allows companies to set an exercise price that's lower than the current value of the company's stock. This makes the options in-the-money for the grantee Jane Smith, in our example , basically giving her options that are instantly profitable.

While it is true that many forms of backdating are not fraudulent or criminal in nature, there is a largely prevalent public opinion that all forms of backdating are the equivalent of fraud.

District Court for the Northern District of California. Another public perception is that options backdating stems from executive corruption. Academic researchers had long been aware of the pattern, exhibited by some companies, of share prices rising dramatically in the days following grants of stock options to senior management.

However, in late and early , the issue of stock options backdating gained a wider audience. Numerous financial analysts replicated and expanded upon the prior academic research, developing lists of companies whose stock price performance immediately after options grants to senior management the purported dates of which can be ascertained by inspecting a company's Form 4 filings, generally available online at the SEC's website was suspicious. For instance, public companies generally grant stock options in accordance with a formal stock option plan approved by shareholders at an annual meeting.

Many companies' stock option plans provide that stock options must be granted at an exercise price no lower than fair market value on the date of the option grant. Thus, backdating can be misleading to shareholders in the sense that it results in option grants that are more favorable than the shareholders approved in adopting the stock option plan. The other major way that backdating can be misleading to investors relates to the method by which the company accounts for the options.

Until very recently, a company that granted stock options to executives at fair market value did not have to recognize the cost of the options as a compensation expense. However, if the company granted options with an exercise price below fair market value, there would be a compensation expense that had to be recognized under applicable accounting rules. If a company backdated its stock options, but failed to recognize a compensation expense, then the company's accounting may not be correct, and its quarterly and annual financial reports to investors may be misleading.

Although many companies have been identified as having problems with backdating, the severity of the problem, and the consequences, fall along a broad spectrum. At one extreme, where it is clear that top management was guilty of conscious wrongdoing in backdating, attempted to conceal the backdating by falsifying documents, and where the backdating resulted in a substantial overstatement of the company's profitability, SEC enforcement actions and even criminal charges have resulted.

Options backdating

Toward the other extreme, where the backdating was a result of overly informal internal procedures or even just delays in finalizing the paperwork documenting options grants, not intentional wrongdoing, there is likely to be no formal sanction—although the company may have to restate its financial statements to bring its accounting into compliance with applicable accounting rules. With respect to the more serious cases of backdating, it is likely that most of the criminal actions that the government intended to bring were brought in There is a five-year statute of limitations for securities fraud, and under the Sarbanes-Oxley Act of , option grants to senior management must be reported within two days of the grant date.

This all but eliminated the opportunity for senior management to engage any meaningful options backdating. Therefore, any criminal prosecution is likely to be based on option grants made before Sarbanes-Oxley took effect, and the deadline facing the government for bringing those prosecutions has already passed. This made me think about the possibility that some of the grants had been backdated. I further found that the overall stock market performed worse than what is normal immediately before the grants and better than what is normal immediately after the grants.

Unless corporate insiders can predict short-term movements in the stock market, my results provided further evidence in support of the backdating explanation. In a second study forthcoming in the Journal of Financial Economics available at http: The graph below shows the dramatic effect of this new requirement on the lag between the grant and filing dates. To the extent that companies comply with this new regulation, backdating should be greatly curbed. Thus, if backdating explains the stock price pattern around option grants, the price pattern should diminish following the new regulation.

Indeed, we found that the stock price pattern is much weaker since the new reporting regulation took effect. Any remaining pattern is concentrated on the couple of days between the reported grant date and the filing date when backdating still might work , and for longer periods for the minority of grants that violate the two-day reporting requirements. We interpret these findings as strong evidence that backdating explains most of the price pattern around ESO grants. There is also some relatively early anecdotal evidence of backdating. A particularly interesting example is that of Micrel Inc.

For several years, Micrel allowed its employees to choose the lowest price for the stock within 30 days of receiving the options. Remy Welling, a senior auditor at the IRS, was asked to sign the deal in late Instead, she decided to risk criminal prosecution by blowing the whistle. A NY Times article describes this case in greater detail the article is available here , and so does a article in Tax Notes Magazine available here. In a CNBC interview, Remy Welling said that "this particular -- well, it's called a day look-back plan, is even widespread in Silicon Valley and maybe throughout the country.

What about spring loading and bullet dodging? The terms "spring loading" and "bullet dodging" refer to the practices of timing option grants to take place before expected good news or after expected bad news, respectively. This is what Professor Yermack hypothesized in his article discussed above, though he never used these terms.

What it is:

The collective evidence suggests that these practices play a minor role in explaining the aggregate stock returns around grants. For example, if spring-loading and bullet dodging played a major role, we should observe pronounced price decreases before grants and increases after grants irrespective of whether they are filed on time, but we don't. Thus, it appears that either a spring loading and bullet dodging are not widespread or b these practices typically fail to lock in substantial gains for the option recipients.


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A couple of related notes: Positive news announcements after grants is consistent with both spring-loading and backdating. Thus, such news announcements do not necessarily imply spring-loading.

RIM trips on offering options to employees - The Globe and Mail

However, this term has been used imprecisely in the media. For example, Microsoft's practice before of using the lowest market price during the 30 days after July 1 which was when the grant was issued as the exercise price has been referred to as forward dating. However, this is just a variation of backdating, because the exercise price cannot be set until the 30 days have passed, at which point one can look back to see what the lowest price was. What happens to companies that are caught backdating? An internal investigation uncovered 49 cases in which the reported date of a Mercury stock-option grant differed from the date on which the option appears to have been actually granted.

Because the company was unable to restate the earning to account for the option backdating in a timely manner and delayed other filings of earnings with the SEC, its shares were delisted in the beginning of