Options backdating cases


16-Feb-2017 11:48

(Under APB 25, the accounting rule that was in effect until 2005, firms did not have to expense options at all unless they were in-the-money.However, under the new FAS 123R, the expense is based on the fair market value on the grant date, such that even at-the-money options have to be expensed.) Because backdating is typically not reflected properly in earnings, some companies that have recently admitted to backdating of options have restated earnings for past years. The exercise price affects the basis that is used for estimating both the company's compensation expense for tax purposes and any capital gain for the option recipient.

options backdating cases-56

alternative dating agency

Furthermore, the pre-and post-grant price pattern has intensified over time (see graph below).

(In fact, it can be argued that if these conditions hold, there is little reason to backdating options, because the firm can simply grant in-the-money options instead.)David Yermack of NYU was the first researcher to document some peculiar stock price patterns around ESO grants.

In particular, he found that stock prices tend to increase shortly after the grants.

Thus, an artificially low exercise price might alter the tax payments for both the company and the option recipient.

Further, at-the-money options are considered performance-based compensation, and can therefore be deducted for tax purposes even if executives are paid in excess of

Further, at-the-money options are considered performance-based compensation, and can therefore be deducted for tax purposes even if executives are paid in excess of $1 million (see Section 162(m) of the Internal Revenue Code).

The number of shares subject to option was 250,000 and the exercise price was $30 (the trough in the stock price graph below.) Given a year-end price of $85, the intrinsic value of the options at the end of the year was ($85-$30) x 250,000 = $13,750,000.

||

Further, at-the-money options are considered performance-based compensation, and can therefore be deducted for tax purposes even if executives are paid in excess of $1 million (see Section 162(m) of the Internal Revenue Code).The number of shares subject to option was 250,000 and the exercise price was $30 (the trough in the stock price graph below.) Given a year-end price of $85, the intrinsic value of the options at the end of the year was ($85-$30) x 250,000 = $13,750,000.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.An example illustrates the potential benefit of backdating to the recipient.

million (see Section 162(m) of the Internal Revenue Code).The number of shares subject to option was 250,000 and the exercise price was (the trough in the stock price graph below.) Given a year-end price of , the intrinsic value of the options at the end of the year was (-) x 250,000 = ,750,000.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.An example illustrates the potential benefit of backdating to the recipient.



Jul 19, 2010. Former Monster Worldwide Officer Consents to Injunctions and Pays More Than $209,000 in Options Backdating Case SEC v. Anthony Bonica, Litigation Release No. 21542, June 1, 2010; Jury Finds Silicon Valley CFO Liable In Fraudulent Stock Option Backdating Scheme SEC v. Carl W. Jasper.… continue reading »


Read more

Oct 6, 2011. In one of the Steve Jobs obituaries there is this reference to the backdated options scandal at Apple. In 2001 he was granted stock options amounting to 7.5 million Apple shares, allegedly without the required authorisation from the company's board of.… continue reading »


Read more

Aug 19, 2013. The string of options-backdating cases showed how difficult it was to prosecute senior executives for corporate misconduct that involves arcane accounting issues.… continue reading »


Read more

The SEC brought no backdating cases prior to 2006. The practice of options backdating, apparently widespread from 1996 through 2002, is widely believed to have been short-circuited by the enactment of Sarbanes-Oxley in 2002. Although backdating had not yet been recognized as a problem, the provisions of.… continue reading »


Read more

May 5, 2006. Unfortunately, these conditions are rarely met, making backdating of grants illegal in most cases. In fact, it can be argued that if these conditions hold, there is little reason to backdating options, because the firm can simply grant in-the-money options instead. How do we know that backdating takes place in.… continue reading »


Read more