Options Backdating: Life Inside The Fraud Triangle

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. But on the criminal front, the government had mixed results, winning several trials but also losing a number of prominent cases. In all, 12 executives across the country were received criminal sentences, five of them prison terms.

End of the Options Backdating Era

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.

stock. A person receiving a stock option is usually referred to as an optionee or grantee. Also, options are often granted subject to a vesting.

The dissertation investigates stock options-related arrangements by individual executives and firms from a sociological point of view. The first study in this dissertation explores the antecedents of stock option exercises by executives in Chinese state-owned firms, behaviors considered deviant from the institutional norms of the Chinese state bureaucracy.

This study seeks to answer the following question: When individual beliefs and actions are deeply embedded in their institutional context, as in the case of Chinese executives in overseas-listed firms, who is likely to break with the institutional status quo, and what are their reasons for doing so? Contrary to the existing status-based theory of social deviance, institutional disengagement among Chinese executives often takes place in the middle of an institutional status hierarchy.

Characteristics of the institutional environment and the individual biography further interact with individual positions to affect the likelihood that an executive will diverge from the institutional expectation of not exercising stock options. The second study investigates the individual consequences of stock option exercises in Chinese state-owned firms.

Backdating Stock Options Still a Risky Play

Backdated stock options can be particularly lucrative for the executives who receive them. However, companies must be careful about how they award them. In the money.

The recent stock options backdating issues at Juniper Networks Inc. (NYSE: JNPR) could end up having serious repercussions for the company, sources say,​.

The U. Court of Appeals for the Ninth Circuit agreed with a district court on Tuesday that the former CFO of semiconductor concern Maxim Integrated Products , Carl Jasper, would be on the hook for backdating stock options without expensing them. The case is notable for two reasons: it has been one of the few times that an options-backdating case actually went to trial, and it shows that CFOs and chief executives have no way to hide from improper expensing, even years later.

The Securities and Exchange Commission prevailed in its jury trial against Jasper in April , but it has taken until now for the case to wind through the U. Appeals Court. Jasper appealed the case on trial errors he claims violated his rights, but did not dispute his knowledge of or involvement in the backdating scheme.

How CEOs Reinvented the Dating Game Scandal in Stock Options

Fifty-two companies currently under criminal investigation. Two indictments. Multiple guilty pleas. All stemming from the practice known as “options backdating.

Social Context of the Exercising and Dating of Stock-Options: Three Essays. Author(s): Yao, Fiona Kun; Advisor(s): Ding, Waverly W. Pozner, Jo-Ellen.

The news, centered on the dubious awarding of stock options to Steve Jobs, prompts Apple share prices to fall. Backdating stock options refers to the practice of writing an agreement concerning the award of stock options to make it look like they were awarded earlier than they were. This gives them the option of purchasing a certain amount of stock at a set price. Backdating is legal so long as it is disclosed correctly. However, because Jobs continued to argue over the point at which they would vest.

As a result, Apple missed the deadlines it needed to file with the Securities and Exchange Commission. Jobs was never in realistic danger of losing his job. However, it was certainly enough to cause a bit of concern at Apple, considering the crucial role Jobs had played in turning the company around since his return a decade earlier. In part, this was because the company had set up an internal investigation into the stock scandal so rapidly.

Investigations Expanded into Back-Dating Stock Options

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?

There are three major areas of potential criminal liability for former executives involved in stock options backdating: securities fraud, tax fraud, and.

Why Zacks? Learn to Be a Better Investor. Forgot Password. The stock market offers plenty of opportunity for profitable investing, but all potential rewards come with a certain amount of risk. When it comes to buying individual stocks, your potential reward is theoretically unlimited, since there is no limit to how high a stock’s price might rise.

Your risk is limited to percent of your investment. Long-dated call options also offer potentially unlimited reward and carry a risk of percent of your investment, but allow you to control the same amount of stock for a substantially lower investment. A call option is a financial contract that gives the holder the right, but not the obligation, to buy the underlying stock at a set price, known as the strike price, for a set period of time. Each call option controls shares of the underlying stock.

Spotlight on Stock Options Backdating

The option backdating scandals of the s were initially unearthed through an academic research study. As we helped companies work through backdating issues, we found that a majority of the cases were linked to weak controls and not malpractice with notable exceptions, of course. We believe this research is worth knowing about because if even a few companies are found to be doing this, it could result in all companies facing heavier scrutiny of their disclosures.

In the s, it became common for companies to backdate the options they granted to their executives.

Options backdating occurs when a company grants an option that is dated prior to Typically, the grant date of the stock options is the same as the date of the.

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, [2] 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.

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But a recent paper , coauthored by Robert M. Daines of Stanford University, has unearthed a new and potentially more sinister version of the scheme — call it Dating Game 2. Under Dating Game 1. Revelations about backdating came to light in and sparked outrage on many fronts. Federal prosecutors filed criminal charges against more than a hundred executives, convicting 12 and sending five to prison. Under pressure from regulators, the media, and investor groups, most companies adopted reforms that seemed to stop the game.

theorizing that a practice of deliberate backdating could be responsible for unusually fortuitous timing of execu- tive stock option grants. By June ,

Write to the Online Journal’s editors at newseditors wsj. Article Search. Here’s a look at companies that have come under scrutiny for past stock-option grants and practices. Write to Journal editors at newseditors wsj. Options Scorecard Here’s a look at companies that have come under scrutiny for past stock-option grants and practices. The Santa Monica, Calif. On Oct. As a result, it is possible that Activision will be required to record additional stock-based compensation expense related to stock-option grants.

On June 7, , the company said the SEC issued a formal probe order related to its stock-options grants. Affiliated Computer Services.

Backdating Scandal Ends With a Whimper

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.

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Related Content. This chapter concerns the issue of backdating of US share options, including: the potential difficulties that this practice may cause and the penalties that may be incurred; steps that companies can take to avoid falling foul of this practice; the implications for non-US companies; and the likely further developments in this area. In the past few years, the practice of granting share options has come under heightened scrutiny in the US and the US Securities and Exchange Commission SEC has been investigating hundreds of publicly traded companies to determine whether they “backdated” share option grants.

Backdating occurs when an option’s grant date is recorded as occurring in the past, typically on a date when the company’s share price and therefore the option’s exercise price, which is usually fixed as that day’s fair market value was lower. The opportunities for backdating have waned in recent years due to the enactment of several pieces of legislation, which led to an increased stringency in required disclosure reports, and tax penalties imposed on certain deferred compensation.

However, different agencies in the US continue to audit, investigate and impose civil and criminal penalties on listed companies for breach of the backdating rules. This chapter gives an overview of the most important issues relating to backdating, including:. An overview of the current position, including:. Implications of backdating, including implications relating to:. The likely further developments occurring in the issue of backdating.

The issue of backdating has to be seen in the context of the increased popularity of the growth of equity-based compensation in the s see box, The growth of equity-based compensation.

Dating at a Price – 108 – Trading Money for a First Date? – Ethics? – Integrity?