Observations on Employee Ownership: Stock Option Backdating and Other Grant Timing Controversies

End of the Options Backdating Era

dating stock options

In a follow-up story, I supplied the WSJ with data that allowed it to identify six companies as possible backdaters available here. There are also companies, such as Microsoft, that issued options broadly but were concerned that because of the volatility of their stock, an employee who joined the company on one day might get an option grant at a price very different from one who joined a few days earlier or later. NCEO members receive a variety of benefits for a modest annual fee. The government's deficit may be lowered:

What is 'Backdating'

Because publicly traded corporations must properly report the value of options on their financial statements, any backdating could result in a misstatement that can be the basis for a charge of securities fraud. The insurance that a lien holder places on a property, to provide And much like the Vitesse Semiconductor executives, Mr. 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. ESOs are usually granted at-the-money, i. Tomasetta and two other top executives on administrative leave and might restate three years of financial results. The four graphs of hypothetical grants below illustrate this.

Options generally do not require such an advance election you can exercise whenever you like once they are vested until they expire; that's why they are so appealing. Option grants at fair market value are not covered by Section A, but discounted options are. If the options were exercised before the effective date, that should not be a problem, but if they had not been, then the law seems to say that the plan would need to be modified by the end of this year to avoid punitive taxation on below-market grants of options.

That modification, in turn, would mean the executive would either have to pay the company the difference so that the grant was at fair market value or pay the punitive taxes.

More clear is that if the options were incentive stock options-a kind of option that qualified the holder for capital gains treatment on the sale as opposed to ordinary income on the exercise of an option-then the backdating would disqualify the option as an incentive option, and the executive would owe big-time back taxes on the exercised award, even if the stock had not yet been sold. If the exercise date is bogus, that means the company has underwithheld taxes on the exercise.

And that means it owes the government, with penalties and interest. Accountants will be recalculating; investors won't be buying: Rules for recording the impact of options expenses have changed, but under both the old rules and the new rules, pretending the awards were granted at a price they were not requires companies to go back and restate earnings. Investors never like restating earnings. Your stock exchange may not be happy to have you any more: Stock exchange rules for shareholder approval of options plans don't include provisions saying that it's OK to have shareholders approve awards made at the grant date fair market value when in fact you issue discounted options.

So trading in your company's shares may be suspended until the problem is fixed. This also is not an investor favorite. The million dollar rule may have been violated: Backdated options are not, so there may well be tax penalties. The Alternative Minimum Tax you paid may be just the start: Employees who have incentive stock options do not have to pay any tax when they exercise the option, only when they sell the stock provided they hold the shares for one year after exercise and two years after grant.

At sale, they only would pay capital gains taxes. But they may be subject to the Alternative Minimum Tax AMT , requiring them to count the spread on the option at exercise as a "preference" item to be added back to their taxable income for the following year.

Many employees especially executives would have held on to options after exercise for at least a year and paid the AMT. But backdated options cannot be incentive options because incentive options must be issued at fair market value. So that means they now owe taxes on the exercise of the option from years ago.

It's unclear if they can ever get their AMT taxes back. Here Come the Lawsuits As this was written in July, the many lawsuits that inevitably will be filed against companies accused of backdating had just started. The first have been against the poster company for these allegations, United Health Group in Minnesota. The company's stock had performed very well, although in , after the allegations surfaced, it announced that it would be restating earnings.

An analysis of the likelihood that McGuire's options could have been as felicitously times as they were showed that the odds were millions to one against it. The motion said that office has an interest in protecting the rights of interests of citizens of Minnesotans. The state, however, has not taken a position on the merits of the claims.

Hatch said that the importance of the company to the state's health care system meant that if there were substantial and unjustified costs, Minnesotans could be harmed. The legal theory involved here could open the door for other interventions in potentially abusive executive compensation issues. Before the clamor about the lack of prosecutions from the financial crisis and the current crackdown on insider trading, the practice of backdating stock options came to light seven years ago and prompted a flurry of prosecutions.

For those whose memories have faded, options backdating became known publicly in March when a Wall Street Journal article questioned whether executives selected an earlier date for the price at which options could be exercised, effectively giving them a lower price and making them more valuable.

A number of companies — particularly those in the technology industry, which gave out stock options like candy on Halloween — began internal investigations into their awards. Because publicly traded corporations must properly report the value of options on their financial statements, any backdating could result in a misstatement that can be the basis for a charge of securities fraud. Charges were eventually filed in a number of different jurisdictions against executives responsible for approving the practices, usually accompanied by a parallel civil enforcement action by the Securities and Exchange Commission.

But a few tied in with backdating were never accused of wrongdoing, like Steven P. That office obtained the most notable conviction from this era involving the former Brocade Communications chief executive, Gregory Reyes. But even that was not an easy case. The conviction after his first trial was reversed on appeal.

There are certain situations, however, when backdating is acceptable; however, the parties involved must agree to it. There was a spate of backdating stock options in the s, mostly at technology firms that rely heavily on stock options for executive compensation, but also at some companies not in the tech sector.

The backdating scheme involved moving an effective date for the exercise of stock options from when the options were ' out of the money ' to a date that made the options ' in the money ' in order to allow certain executives to exercise their options profitably.

What is 'Backdating' Backdating is the practice of marking a document, whether a check, contract or other legally-binding document, with a date that is prior to what it should be. A list of options grants to an employee or employees of a company The insurance that a lien holder places on a property, to provide Any time money is involved, a scandal is possible.

See how a university study uncovered one.

Imsges: dating stock options

dating stock options

Tomasetta and two other top executives on administrative leave and might restate three years of financial results.

dating stock options

Research has definitely shown that broadly-granted equity awards improve corporate performance; concentrated grants force it down the details are in the article Broadly Granted Stock Options Improve Corporate Performance. In addition, federal prosecutors have begun a criminal investigation of stock-option-granting practices, and a class action lawsuit has commenced in the United States District Court for the Southern District of New York on behalf of Comverse stockholders.

dating stock options

Options dating stock options occurs when companies grant options to their executives that correspond to a day where there was a significantly First, if a day look-back period is used when dating stock options options, the stock price on the purported dating stock options date will not necessarily be at a low for the period centered on this date, and there are likely to have been many other prices during the year that were significantly lower. And the trials showed how difficult it was to prosecute senior executives for corporate misconduct that involves arcane accounting issues. The graph below shows the dramatic effect of this new requirement on the lag between the grant and filing dates. New orleans dating coach entered does not involve actual options indian dating site in melbourne but instead their efforts to create a paper trail at the company to make it appear that the options were properly backdated. It's not entirely clear how the new rules on the taxation of deferred compensation will apply to backdated options issued before the effective date of the new deferred compensation rules under Internal Revenue Code Section A, which says that certain kinds of deferred compensation will be heavily taxed unless dating stock options recipient specified well in advance when the award would be paid.