Companies Say Backdating Used In Days After 9/11
Washington, D. McGuire, M. The settlement is the first with an individual under the “clawback” provision Section of the Sarbanes-Oxley Act to deprive corporate executives of their stock sale profits and bonuses earned while their companies were misleading investors. The Commission’s complaint alleges that during a year period, McGuire repeatedly caused the company to grant undisclosed, in-the-money stock options to himself and other UnitedHealth officers and employees without recording in the company’s books and disclosing to shareholders material amounts of compensation expenses as required by applicable accounting rules. McGuire’s misconduct. The Commission’s complaint alleges that from at least through , McGuire looked back over a window of time and picked grant dates for UnitedHealth options that coincided with dates of historically low quarterly closing prices for the company’s common stock, resulting in grants of in-the-money options. According to the complaint, McGuire signed and approved backdated documents falsely indicating that the options had actually been granted on these earlier dates when UnitedHealth’s stock price was at or near these low points.
On the Timing of CEO Stock Option Awards
This article also appeared in the Bloomberg Corporate Law Journal and can be accessed by clicking the pdf link above. Employee option grants have long been a staple of the recruitment and compensation of employees at venture-backed companies. However, changes in the regulatory and enforcement environment in recent years have made the option grant process more complicated and often more perilous than it has been in the past.
This article reviews the primary regulatory issues that companies should consider when granting options and suggests some best practices for doing so. The determination of the correct fair market value is crucial for both tax and accounting reasons.
compensation that is the basis for employee stock option grants. before stock option grant dates were normal, after the stock options were granted the.
Tobak’s take on Steve Jobs’ role in the stock options backdating scandal at Apple. The allegations of illicit sex, drugs, and rock and roll reminded me of the 60s Funny, I can’t remember. While the story was enthralling, I didn’t understand what any of it had to do with a federal investigation into stock option backdating. But how does that relate to hiring prostitutes and drugging customers without their knowledge?
Said another way, do the feds really need to dig that deep to find enough rope to hang executives with? After all, stock option backdating is all the rage these days. You’d think they’d be up to their eyeballs in rope. I count no fewer than 38 top executives at 19 high-tech companies that have bit the dust over this stuff. And we’re just getting started. That’s serious fallout considering that options backdating is legit as long as the company reports it and accounts for it accurately.
You see, if you backdate stock options to a date when the price of the stock was lower, then the options are “in-the-money” when granted.
Before Lehman Brothers imploded, before Bernard L. Karatz, the former chief executive of KB Home , to five years of probation. His case is likely to be the last criminal trial relating to backdating, a scandal that ensnared dozens of executives over allegations that the dates of stock-option awards had been manipulated to enrich recipients. When the first cases emerged in , they looked like low-hanging fruit for federal prosecutors.
The Securities and Exchange Commission and the Justice Department investigated more than companies. Internal investigations by companies led to scores of financial restatements and dozens of executive dismissals.
In he was granted stock options amounting to million Apple former executives for their alleged roles in backdating Apple options.
In finance , options backdating is the practice of altering the date a stock option was granted, to a usually earlier but sometimes later date at which the underlying stock price was lower. This is a way of repricing options to make them more valuable when the option ” strike price ” the fixed price at which the owner of the option can purchase stock is fixed to the stock price at the date the option was granted. Cases of backdating employee stock options have drawn public and media attention.
Stock options are often granted to the upper management of a corporation. While options backdating is not always illegal,  it has been called “cheating the corporation in order to give the CEO more money than was authorized. To be legal, backdating must be clearly communicated to the company shareholders, properly reflected in earnings, and properly reflected in tax calculations. The U.
Corporations, however, have defended the practice of stock option backdating with their legal right to issue options that are already in the money as they see fit, as well as the frequent occurrence in which a lengthy approval process is required. In essence, the revision enabled companies to increase executive compensation without informing their if the compensation was in the form of stock options contracts that would only become valuable if the underlying stock price were to increase at a later time.
The problem with this practice, according to the SEC, was that stock option backdating, while difficult to prove, could be considered a criminal act. One of the larger backdating scandals occurred at Brocade Communications , a data storage company. It allegedly failed to inform investors, or account for the options expense s properly. Since the advent of stock option backdating, corporate policies have moved first toward a posture of encouraging backdating as a standard business practice, but then toward a posture of avoidance as public scandals emerged and investigations into fraudulent or dishonest business practices increased despite a commonly held belief that backdating was an acceptable and legal practice.
Best Practices for Option Grants by Venture-Backed Companies
Many corporate managers, with the aid of the board of directors, discovered that they could provide themselves with guaranteed or excessive compensation by manipulating the terms of stock option grants that were included in their compensation packages. This paper seeks to examine the legal, tax, and accounting issues that have evolved because of these suspect illegal activities. The author then examines regulations, judicial theory, and court cases to determine the current legal status of backdating, spring loading, or bullet dodging of executive stock option grants.
The current legal environment has made it difficult for executives to continue the practice of manipulating stock option grants without falling under the ire of regulators and shareholders. However, a question remains whether executives that manipulated stock option grants in the past will be found criminally liable for their acts. The paper’s review of the discourse on the legality of corporate executives enhancing their compensation packages shows the complexity of detecting and regulating this type of suspect activity.
stock option grants by “backdating” them, engaging in theft to all cases, backdating is illegal and unethical. two business days after the grant. Revelations of.
This study documents that the abnormal stock returns are negative before unscheduled executive option awards and positive afterward. The return pattern has intensified over time, suggesting that executives have gradually become more effective at timing awards to their advantage, and possibly explaining why the results in this study differ from those in past studies.
Moreover, I document that the predicted returns are abnormally low before the awards and abnormally high afterward. Unless executives possess an extraordinary ability to forecast the future marketwide movements that drive these predicted returns, the results suggest that at least some of the awards are timed retroactively.
Authors: Erik Lie Erik Lie. Search Search. Volume 66, Issue 8 August Volume 66, Issue 7 July
Backdating Scandal Ends With a Whimper
At GitLab we strongly believe in employee ownership in our Company. We are in business to create value for our shareholders and we want our employees to benefit from that shared success. In this document only accessible to GitLab team-members and candidates , you can find some more details on the number of shares outstanding and the most recent valuations. NSOs are granted to contractors and non-US employees. The reason we give stock options instead of straight stock is that you do not need to spend any money to purchase the stock at the date of grant and can decide to purchase the stock later as your options vest.
In addition, we do not provide straight stock grants since this may subject you to immediate tax liabilities.
It is the relation between post-grant stock price rises and reporting lags that distinguishes dating The economic impact of backdating of executive stock options.
With the U. The practice involves stock options. A company promises a worker the right to buy a share of of stock at a specific price, called the strike price. The strike price is typically tied to the value of the stock on a certain date—the hiring date for an employee, for example. That option is currently worth nothing. If that difference seems slight, imagine it multiplied by thousands—or even millions—of options. No—in fact, companies often do it as a way to lure top talent.
At the most basic level, Dina says, improperly backdating stock options is a way for companies to overstate their assets and understate their expenses. According to Patrick Taylor, CEO of options-monitoring software maker Oversight Systems, there have been at least public companies that have come under scrutiny in the last year. Because of changes in the law. First, the U. Subsequently, compensating employees with options was a way to save on taxes for both the company its employees, as the proceeds from exercising stock options are eligible only for the percent capital gain tax rate.
Thus, companies had healthy incentives to load compensation packages with stock options. Second, the Sarbanes-Oxley Act of required companies to report stock option grants within two days.
Legal and accounting issues of manipulating the timing of stock option grants
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Impact of Backdating of Executive Stock Options, MICH. that the persistence of backdating after SOX (in blatant violation of its reporting requirements).
Options backdating is the process of granting an employee stock option ESO that is dated before its actual issuance. In this way, the exercise strike price of the granted option can be set at a lower price than that of the company’s stock price at the granting date. This process makes the granted option ” in the money ” ITM and therefore of greater value to the holder. The practice of backdating options has been considered unethical and is now the subject of regulatory scrutiny, making it far less widespread in recent years.
The practice of options backdating first occurred when companies were only required to report the issuance of stock options to the SEC within two months of the initial grant date. Companies would simply wait during that period to identify a particular date in which the company’s stock price fell to a low and then moved higher within those two months. The company would then grant the option, but date it at or near this lowest point. This back-date would become the offcial granted option that would be reported to the SEC.
The act of options backdating became much more difficult after companies were required to report the granting of options to the SEC within two business days. This adjustment to the filing window came with the Sarbanes-Oxley legislation in
Corporate Law Alert: Backdating Stock Options
Options backdating? Who would be so arrogant to be still backdating their options? We decided to find out.
The backdating of stock options has imposed costs on shareholders After August 29, , the Sarbanes-Oxley Act required that companies.
What is backdating? Backdating is the practice of marking a document with a date that precedes the actual date. What is the benefit of backdating ESO grants? ESOs are usually granted at-the-money, i. Because the option value is higher if the exercise price is lower, executives prefer to be granted options when the stock price is at its lowest.
Backdating allows executives to choose a past date when the market price was particularly low, thereby inflating the value of the options. An example illustrates the potential benefit of backdating to the recipient. In comparison, had the options been granted at the year-end price when the decision to grant to options actually might have been made, the year-end intrinsic value would have been zero. Is backdating of ESO grants illegal?
Backdating of ESO grants is not necessarily illegal if the following conditions hold:.
Scholars, regulators, and practitioners have long struggled with challenges emanating from the separation of ownership and control of modern corporations. Agency theory typically prescribes the use of stock options, or other outcome-based contractual arrangements, to overcome the critical issue of information asymmetry. We theorize that this arrangement, which leaves information asymmetry in place, provides CEOs an informational advantage that can be used, via impression management techniques, to circumvent some of the intended benefits of option grants.
A guide to administrative and compliance issues for stock option plans in US public Post-dated transactions are a result of many causes, including delay in the.
This brings the number the number of companies sued in securities fraud class action lawsuits based on options timing allegations to eight. Background on the other seven companies previously named can be found on prior D …. With the addition of the Brooks Automation lawsuit, the number of companies named in securities fraud class …. The recent media coverage surrounding stock option practices primarily has been focused on options backdating , and to a lesser extent on options springloading.
A new wave of media attention has drawn scrutiny of another options compensation practice — the allegedly improper use of stock options grants in connection with hiring and recruiting of …. Options backdating involves retroactively dating the grant and exercise price of an options issue to a …. On May 30, , American Tower Corporation became the fourth company to be named in a securities class action lawsuit connected with the options backdating probe.
In the latest development in the evolving options backdating story , the May 19, issue of the Wall Street Journal contains a report via wsj. Every day seems to bring fresh media outrage on the topic of executive compensation. See a useful discussion of this article on the CorporateCounsel. Among the more interesting media analyses on the topic of executive compensation is the series ….