Fifty-two companies currently under criminal investigation. Moreover, the company avoids having to expense the options as current compensation, thus increasing earnings in the near term.
The backdating problem was first highlighted by Professor Erik Lie of the University of Iowa, who published his initial study in 2004.
Professor Lie concluded that the robust profitability of so many options was statistically impossible absent some artificial influence such as backdating.
All stemming from the practice known as “options backdating.” Options backdating occurs when a company issues stock options on one date, but reports in its financials an earlier issue date to create a “strike” or exercise price equal to the earlier date’s lower price.
Another consequence is that the company underrepresents the real nature of an executive’s compensation, perpetuating the myth that options are performance-based incentive compensation.
But even if no criminal charges are filed, the SEC still can bring a civil fraud action in federal court.
This sort of case can be brought against the corporation and its officers and directors and can result in the disgorgement of profits, stiff monetary penalties, and prohibitions against officers and directors serving any public company in those capacities in the future.
The Internal Revenue Service has also joined a number of investigations due to the tax implications of options backdating, both with respect to the individuals who received the backdated options as well as the corporations that failed to account properly for the options when they were granted.
Of course, disparity between a reported grant date and the actual grant date is not always intentional.
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