Options Backdating
Stock Options Backdating Scheme
CLASSIFICATION: Financial Crime
LOCATION
United States
TIME PERIOD
1996-2006
VICTIMS
0 confirmed
In a case involving options backdating, several executives from a publicly traded corporation were implicated in altering the grant dates of stock options to earlier periods when the stock price was lower, thereby increasing their potential profits. This practice reportedly occurred between 1996 and 2002, with over 2,000 companies participating in similar activities, leading to significant scrutiny from the U.S. Securities and Exchange Commission (SEC). The investigation revealed that the executives failed to disclose these alterations to shareholders, which violated both corporate governance standards and tax regulations. As of October 2023, the case remains under review by federal authorities, with potential legal repercussions for those involved, including civil penalties and possible criminal charges. Key evidence includes internal emails and financial records indicating the manipulation of option grant dates to maximize executive compensation without proper reporting.
Options backdating is viewed by some as a method for executives to manipulate stock options for personal gain, often leading to accusations of corporate cheating. Many believe that this practice is widespread, with over 2,000 companies allegedly engaging in it between 1996 and 2002, particularly right before significant stock price increases. While not always illegal, backdating raises ethical concerns and scrutiny from regulatory bodies like the U.S. Securities and Exchange Commission, especially when it involves misrepresentation to shareholders or tax authorities.
The Intricate World of Options Backdating: A True Financial Crime Tale
The Art of Backdating
In the shadowy corridors of high finance, a practice known as "options backdating" emerged as a controversial technique. This financial maneuver involves altering the date a stock option was granted, usually to an earlier date where the underlying stock price was lower. This strategic manipulation increases the option's value when the "strike price" - the predetermined price at which the option holder can purchase the stock - is fixed to this earlier, lower stock price. While not inherently illegal, options backdating has been scrutinized as it often appears as a deceptive tactic to inflate executive compensation beyond what was authorized.
From 1996 to 2002, a study led by Erik Lie, a finance professor at the University of Iowa, revealed that over 2,000 companies engaged in some form of backdating to benefit senior executives. In many "uncanny" instances, companies would grant stock options right before a significant increase in stock prices, raising eyebrows and triggering investigations.
Legal and Ethical Quagmire
To remain on the right side of the law, backdating must be transparently disclosed to shareholders, accurately reflected in earnings, and properly accounted for in tax calculations. The U.S. Securities and Exchange Commission (SEC) views backdating with suspicion, primarily due to differing tax implications between "in the money" options and those "at the money" or "out of the money." Companies can exploit backdating to enhance executive incomes without reporting higher expenses to shareholders, potentially skewing financial results and failing to meet earnings expectations.
Despite these concerns, corporations defend backdating as their legal right, citing lengthy approval processes as justification. However, the line between legitimate business practice and financial chicanery can become blurred, particularly when shareholders remain unaware of the true nature of these backdated options.
A Historical Perspective
The roots of options backdating trace back to 1972, when accounting rule APB 25 allowed companies to omit executive incomes from expense reports if derived from "at the money" stock options. This loophole enabled companies to boost executive compensation without shareholder notification, provided the options only gained value with subsequent stock price increases.
In 1994, a tax code revision labeled executive incomes exceeding one million dollars as "unreasonable," prompting companies to issue stock options instead of cash to avoid higher taxes. This practice became widespread, with executives recognizing they could backdate options to make them tax-deductible and immediately valuable.
Brocade Communications, a data storage company, became a high-profile example of backdating gone wrong. The company had to restate earnings, acknowledging a $723 million increase in stock-based expenses between 1999 and 2004. This admission followed allegations of manipulating stock option grants for senior executives without proper disclosure to investors.
Terminology of Deception
The world of options backdating is rife with jargon:
- Bullet dodging: Delaying an options grant until after negative earnings news to capitalize on depressed share prices.
- Spring-loading: Timing an options grant just before favorable news that boosts stock prices.
- Symmetric spring-loading: When board members approving the grant are aware of impending good news.
- Asymmetric spring-loading: When those approving are unaware of forthcoming positive developments.
The Corporate America Fallout
Initially, backdating enjoyed widespread acceptance as a standard business practice. However, as scandals erupted and investigations into fraudulent activities intensified, corporate policies shifted to avoid the practice. The Sarbanes–Oxley Act drastically curtailed fraudulent backdating by mandating companies to report options issuances within two days, making dishonest practices much riskier.
Despite stricter regulations, companies still conduct internal probes to assess past backdating activities, often amending earnings statements and tax forms to reflect the issuance of "in the money" options.
Public Perception and Legal Battles
Public opinion largely views all backdating as fraudulent, although not all instances are criminal. Judge William Alsup of the U.S. District Court for the Northern District of California emphasized that proving fraud requires more than just evidence of backdating – additional facts are necessary.
The perception of executive corruption is strong, yet options backdating can also result from standard accounting practices and remain legal if properly disclosed for tax purposes.
Scandals That Shook the Financial World
Academic researchers long suspected unusual patterns of stock price surges following option grants to executives. By late 2005, these suspicions gained wider attention, with financial analysts compiling lists of companies exhibiting suspicious stock price behaviors after option grants.
Typically, public companies grant stock options as part of a formal plan approved by shareholders. If options are backdated to reflect a lower exercise price than the fair market value, they mislead shareholders and avoid recording necessary compensation expenses.
Consequences vary: severe cases of intentional wrongdoing led to SEC enforcement actions and criminal charges, while less egregious cases, resulting from procedural delays, often faced no formal sanctions.
By 2007, most criminal actions concerning backdating were initiated, as the Sarbanes–Oxley Act's two-day reporting requirement effectively curbed new offenses. By November 2006, over 130 companies were implicated, leading to resignations or firings of over 50 top executives. Notable companies caught in the scandal included Broadcom Corp., UnitedHealth Group, and Comverse Technology.
Prominent figures such as Steve Jobs and Michael Dell were drawn into the controversy. Although the SEC decided not to charge Apple or Jobs, they filed charges against former Apple CFO Fred D. Anderson and former general counsel Nancy R. Heinen. Anderson settled for $150,000 and disgorged $3.49 million, while Heinen later settled for $2.2 million.
Tax Implications and Legal Challenges
According to Section 83 of the tax code, employees must recognize taxable income when stock options vest. Backdating options to show no value above the strike price can be seen as an attempt to evade income recognition.
Section 162(m) of the tax code, amended in 1993, deems compensation exceeding one million dollars unreasonable. To qualify for performance-based exceptions, options must not be "in the money" at grant. Backdating raises suspicions of non-performance-based compensation, risking the denial of tax deductions.
Sources
For more detailed information, please visit the Wikipedia article on options backdating.
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APB 25 Revision
New accounting rules allowed companies to avoid reporting executive incomes as expenses for stock options.
Tax Code Change
New tax provision declared executive incomes over one million dollars as 'unreasonable', prompting companies to issue 'at the money' stock options.
Backdating Scandal Emerges
The issue of stock options backdating gained public attention as analysts identified suspicious patterns in stock price performance following options grants.
130 Companies Identified
Over 130 companies were identified as having engaged in stock options backdating, leading to the resignation of more than 50 executives.
SEC Charges Apple Executives
The SEC announced charges against former Apple CFO Fred D. Anderson and general counsel Nancy R. Heinen for their roles in backdating options.
Heinen Settlement
The SEC settled with Nancy R. Heinen for $2.2 million related to her involvement in backdating options at Apple.
Sarbanes-Oxley Act Enacted
The Sarbanes-Oxley Act was enacted, requiring companies to report stock option grants within two days, significantly reducing opportunities for backdating.
Backdating Scandal Ends
The backdating scandal largely concluded with minimal prosecutions, as the statute of limitations for many cases had expired.
In a case involving options backdating, several executives from a publicly traded corporation were implicated in altering the grant dates of stock options to earlier periods when the stock price was lower, thereby increasing their potential profits. This practice reportedly occurred between 1996 and 2002, with over 2,000 companies participating in similar activities, leading to significant scrutiny from the U.S. Securities and Exchange Commission (SEC). The investigation revealed that the executives failed to disclose these alterations to shareholders, which violated both corporate governance standards and tax regulations. As of October 2023, the case remains under review by federal authorities, with potential legal repercussions for those involved, including civil penalties and possible criminal charges. Key evidence includes internal emails and financial records indicating the manipulation of option grant dates to maximize executive compensation without proper reporting.
Options backdating is viewed by some as a method for executives to manipulate stock options for personal gain, often leading to accusations of corporate cheating. Many believe that this practice is widespread, with over 2,000 companies allegedly engaging in it between 1996 and 2002, particularly right before significant stock price increases. While not always illegal, backdating raises ethical concerns and scrutiny from regulatory bodies like the U.S. Securities and Exchange Commission, especially when it involves misrepresentation to shareholders or tax authorities.
The Intricate World of Options Backdating: A True Financial Crime Tale
The Art of Backdating
In the shadowy corridors of high finance, a practice known as "options backdating" emerged as a controversial technique. This financial maneuver involves altering the date a stock option was granted, usually to an earlier date where the underlying stock price was lower. This strategic manipulation increases the option's value when the "strike price" - the predetermined price at which the option holder can purchase the stock - is fixed to this earlier, lower stock price. While not inherently illegal, options backdating has been scrutinized as it often appears as a deceptive tactic to inflate executive compensation beyond what was authorized.
From 1996 to 2002, a study led by Erik Lie, a finance professor at the University of Iowa, revealed that over 2,000 companies engaged in some form of backdating to benefit senior executives. In many "uncanny" instances, companies would grant stock options right before a significant increase in stock prices, raising eyebrows and triggering investigations.
Legal and Ethical Quagmire
To remain on the right side of the law, backdating must be transparently disclosed to shareholders, accurately reflected in earnings, and properly accounted for in tax calculations. The U.S. Securities and Exchange Commission (SEC) views backdating with suspicion, primarily due to differing tax implications between "in the money" options and those "at the money" or "out of the money." Companies can exploit backdating to enhance executive incomes without reporting higher expenses to shareholders, potentially skewing financial results and failing to meet earnings expectations.
Despite these concerns, corporations defend backdating as their legal right, citing lengthy approval processes as justification. However, the line between legitimate business practice and financial chicanery can become blurred, particularly when shareholders remain unaware of the true nature of these backdated options.
A Historical Perspective
The roots of options backdating trace back to 1972, when accounting rule APB 25 allowed companies to omit executive incomes from expense reports if derived from "at the money" stock options. This loophole enabled companies to boost executive compensation without shareholder notification, provided the options only gained value with subsequent stock price increases.
In 1994, a tax code revision labeled executive incomes exceeding one million dollars as "unreasonable," prompting companies to issue stock options instead of cash to avoid higher taxes. This practice became widespread, with executives recognizing they could backdate options to make them tax-deductible and immediately valuable.
Brocade Communications, a data storage company, became a high-profile example of backdating gone wrong. The company had to restate earnings, acknowledging a $723 million increase in stock-based expenses between 1999 and 2004. This admission followed allegations of manipulating stock option grants for senior executives without proper disclosure to investors.
Terminology of Deception
The world of options backdating is rife with jargon:
- Bullet dodging: Delaying an options grant until after negative earnings news to capitalize on depressed share prices.
- Spring-loading: Timing an options grant just before favorable news that boosts stock prices.
- Symmetric spring-loading: When board members approving the grant are aware of impending good news.
- Asymmetric spring-loading: When those approving are unaware of forthcoming positive developments.
The Corporate America Fallout
Initially, backdating enjoyed widespread acceptance as a standard business practice. However, as scandals erupted and investigations into fraudulent activities intensified, corporate policies shifted to avoid the practice. The Sarbanes–Oxley Act drastically curtailed fraudulent backdating by mandating companies to report options issuances within two days, making dishonest practices much riskier.
Despite stricter regulations, companies still conduct internal probes to assess past backdating activities, often amending earnings statements and tax forms to reflect the issuance of "in the money" options.
Public Perception and Legal Battles
Public opinion largely views all backdating as fraudulent, although not all instances are criminal. Judge William Alsup of the U.S. District Court for the Northern District of California emphasized that proving fraud requires more than just evidence of backdating – additional facts are necessary.
The perception of executive corruption is strong, yet options backdating can also result from standard accounting practices and remain legal if properly disclosed for tax purposes.
Scandals That Shook the Financial World
Academic researchers long suspected unusual patterns of stock price surges following option grants to executives. By late 2005, these suspicions gained wider attention, with financial analysts compiling lists of companies exhibiting suspicious stock price behaviors after option grants.
Typically, public companies grant stock options as part of a formal plan approved by shareholders. If options are backdated to reflect a lower exercise price than the fair market value, they mislead shareholders and avoid recording necessary compensation expenses.
Consequences vary: severe cases of intentional wrongdoing led to SEC enforcement actions and criminal charges, while less egregious cases, resulting from procedural delays, often faced no formal sanctions.
By 2007, most criminal actions concerning backdating were initiated, as the Sarbanes–Oxley Act's two-day reporting requirement effectively curbed new offenses. By November 2006, over 130 companies were implicated, leading to resignations or firings of over 50 top executives. Notable companies caught in the scandal included Broadcom Corp., UnitedHealth Group, and Comverse Technology.
Prominent figures such as Steve Jobs and Michael Dell were drawn into the controversy. Although the SEC decided not to charge Apple or Jobs, they filed charges against former Apple CFO Fred D. Anderson and former general counsel Nancy R. Heinen. Anderson settled for $150,000 and disgorged $3.49 million, while Heinen later settled for $2.2 million.
Tax Implications and Legal Challenges
According to Section 83 of the tax code, employees must recognize taxable income when stock options vest. Backdating options to show no value above the strike price can be seen as an attempt to evade income recognition.
Section 162(m) of the tax code, amended in 1993, deems compensation exceeding one million dollars unreasonable. To qualify for performance-based exceptions, options must not be "in the money" at grant. Backdating raises suspicions of non-performance-based compensation, risking the denial of tax deductions.
Sources
For more detailed information, please visit the Wikipedia article on options backdating.
No Recent News
No recent news articles found for this case. Check back later for updates.
No Evidence Submitted
No evidence found for this case. Be the first to submit evidence in the comments below.
Join the discussion
Loading comments...
APB 25 Revision
New accounting rules allowed companies to avoid reporting executive incomes as expenses for stock options.
Tax Code Change
New tax provision declared executive incomes over one million dollars as 'unreasonable', prompting companies to issue 'at the money' stock options.
Backdating Scandal Emerges
The issue of stock options backdating gained public attention as analysts identified suspicious patterns in stock price performance following options grants.
130 Companies Identified
Over 130 companies were identified as having engaged in stock options backdating, leading to the resignation of more than 50 executives.
SEC Charges Apple Executives
The SEC announced charges against former Apple CFO Fred D. Anderson and general counsel Nancy R. Heinen for their roles in backdating options.
Heinen Settlement
The SEC settled with Nancy R. Heinen for $2.2 million related to her involvement in backdating options at Apple.
Sarbanes-Oxley Act Enacted
The Sarbanes-Oxley Act was enacted, requiring companies to report stock option grants within two days, significantly reducing opportunities for backdating.
Backdating Scandal Ends
The backdating scandal largely concluded with minimal prosecutions, as the statute of limitations for many cases had expired.