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.
Where’s the Thief? The ‘Options Scandal’ is a Dud
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Walker, Unpacking Backdating: Economic Analysis and Observations on the Stock Option. Scandal, 87 B.U. L. REv. (). However, none of these other.
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?
How CEOs Reinvented the Dating Game Scandal in Stock Options
Chief executive officers are driven by success, and the more they can get for their companies, the better their personal fortunes. At least that’s the theory behind corporations loading up their CEOs with stock or, as the experts put it, “aligning CEO and shareholder interests. But a new study from researchers at the University of Georgia, the University of Notre Dame, and Lehigh University shows that sometimes the opposite is true. Stock options give someone the right to buy a certain number of shares at the price of the day the options are granted, respectively called the strike price and the strike date.
The practice of falsifying the date stock options were granted in order to make them more valuable to company executives was widespread in.
Fortune Magazine — It’s tempting to roll your eyes at the latest options backdating news – more evidence that in certain ways American executives are still the world’s most creative. But in fact it’s worth a closer look, because this type of conniving, which involves backdating exercise dates rather than grant dates, is different and in some ways worse. Bizarrely, while this book-cooking appears to be a tax scam, it may actually leave the U. Treasury better off than if the executives had been honest.
What it reveals most strongly is some executives’ utter contempt for their shareholders. Evidence of this new twist on backdating arose in a study by an economist at the Securities and Exchange Commission, first reported in the Wall Street Journal. Thus far the backdating scandal, which has already involved well over companies, has centered on firms manipulating the dates on which options were granted to executives.
Stock prices were lower on the bogus dates, so executives’ potential gain would be greater. But in the more recently discovered scam, executives allegedly fudged the date on which they chose to exercise options, citing some earlier date when the stock price was lower, thus reducing their own gain. Why would anyone want to do that? Most people wouldn’t, because most option holders sell their shares the same day they buy them.
But some executives plan on holding their shares for a while before cashing them in. Their “gain on exercise” – the difference between what they pay for the shares and the shares’ market price that day – is taxed as ordinary income, at a top rate of 35 percent.
Stock option backdating scandal could grow: report
The U. Court of Federal Claims concluded that a genuine issue of material fact exists, namely, whether the stock option was discounted at the time it was granted. The court found this is a necessary factual predicate to tax liability under Internal Revenue Code IRC Section A, and remanded the case to trial to determine whether the option was indeed discounted. Plaintiffs Dr. Sehat Sutardja and his wife, Weili Dai, argued that even if the option had been granted at a discount, Section A would not apply, as there was no actual compensation creating a taxable event until Sutardja exercised the vested portions and sold the shares.
In addition to his prison term, U. District Judge Nathaniel M. From the day he surrendered to authorities last March, Hodge, a resident of Laguna Beach, was among the highest-profile names in a scandal headlined with them. He rose to the head of Pimco, the bond management company based in Newport Beach, before retiring from the post of chief executive in Full Coverage: The latest updates on the college admissions scheme.
Federal prosecutors accused top CEOs, two Hollywood actresses and a legendary fashion designer of taking part in an audacious scheme to get their children into elite universities through fraud, bribes and lies. Prosecutors from the U. Gorton handed down in November what was previously the longest sentence in the case, a six-month term, to Toby Macfarlane. The Del Mar title insurance executive is incarcerated in Tucson scheduled to be released in June, according to Bureau of Prison records.
Hodge pleaded guilty in October to conspiring to commit fraud and money laundering. Along with three other parents, he reversed his not-guilty plea after prosecutors warned of a new indictment carrying a bribery charge. Eleven parents — a group that includes the actress Lori Loughlin and her husband, J. Mossimo Giannulli — balked at the threat, maintained their not-guilty pleas and were indicted on a bribery charge. Fifteen parents have pleaded not guilty; 21 have admitted their guilt or said they plan to do so.
Spotlight on Stock Options Backdating
Jacob “Kobi” Alexander has been on the run since , when the U. He is now living in Namibia and the U. Department of Justice said. The government had been trying to seize the holdings of two of Alexander’s investment accounts since he fled the country four years ago, but Alexander and his wife had been fighting the seizure. The practice of falsifying the date stock options were granted in order to make them more valuable to company executives was widespread in the technology industry over the past decade.
Around the time that Alexander fled the country, dozens of technology companies — including Apple, Broadcom and VeriSign — were forced to restate their financial results to take account of the backdating costs.
More purchase options. 2. Pressing And anyone who gave scandal less than 5 Stars has absolutely no taste and I wouldn’t trust their judgment It’s the best.
This was one of many options backdating scandals to occur within the last decade. To prevent similar fraudulent activity in the future, Apple should take measures to increase consequences for bad behavior or incentivize whistle-blowers. Options backdating consists of granting an option that is dated prior to the date the option is actually granted. It allows the grantee to receive options that are already in the money, which allows him or her to glean a much higher profit.
Apple admitted to granting backdated options on 15 dates between and 2. It is rare for someone to commit unethical behavior without the expectation of gaining some sort of benefit. In a deposition for the case SEC v. Heinen, Jobs also claimed that recognition by his peers was what drove him to ask for the options. Jobs and the other executives felt that they deserved a reward for their contributions to the company.
They may have been justified in their expectation of large compensation: these top Apple executives could have easily joined a competing company and received large sign-on bonuses and salaries. The board of directors benefited from the backdated options by being able to reward Jobs and other top executives who were valuable to the company. The board did not want to lose any of the executives and therefore wanted to give them an incentive to stay with Apple.
The backdated option grants in question occurred towards the end of the tech bubble when many executives were switching companies.
Option Backdating: The Next Big Corporate Scandal?
A new threat to the perceived propriety of American business has emerged in the wake of past financial scandals. Paul Worth, partner and head of fraud and asset recovery at Eversheds, explains why a number of major US companies are now under investigation by American authorities over their approach to granting stock options. The options backdating problem stems from a number of practices adopted when granting employee stock options.
Stock options are generally granted to executives as an incentive. They tie executive pay to shareholder returns by allowing executives to earn compensation equal to the difference between the stock price at the date of the grant, the strike price, and the stock price at the date the option is exercised. The executive therefore has an incentive to increase the company’s stock price so that the option can be exercised for a profit.
The options backdating problem stems from a number of practices adopted when granting employee stock options. Stock options are generally.
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. The reason? A shiny new product Jobs would show off for the first time less than two weeks later, in January Some have speculated that Apple could unveil its phone at the Macworld Expo, an event held every January that Apple has often used to showcase new products. Macworld will run from January 8 through January 12 in San Francisco.
Fugitive Technology Executive Sentenced to 30 Months for Stock-Options Backdating Scandal
Chuck Grassley, chairman of the Committee on Finance, and Sen. The news reportsmake it sound like the CEO had the board of directors over a barrel and helped himself to whateverhe could get, even with the taint of stock options backdating allegations against him. Congress has a duty to the taxpayers to find out what happened at UnitedHealth, and figure out what to do to stop this flood of backdating scandals. Just as in the Enroncase, we need to understand how and why abuses may have occurred, in order to craft responsiblelegislation and slow this trend.
In September, the committee convened a hearing to hear from the Justice Department, theSecurities and Exchange Commission, and the Internal Revenue Service about how they areresponding to stock options backdating and what Congress can do to aid their efforts. The hearingalso featured testimony from experts on whether the federal tax treatment of executive compensationis working as intended to discourage excessive executive compensation.
profile, scandal involving option backdating. Option backdating involves retroactively assigning award dates for employee stock options to put the options “in the.
In the mids, an investigation by the Securities and Exchange Commission resulted in the resignations of more than 50 senior executives and CEO s at firms across the spectrum from restaurant chains and recruiters to home builders and health care. What was it all about? Options backdating. Read on to find out how the scandal emerged, what brought it to and end and what you can learn from it now. The roots of the scandal date back to , when an accounting rule was put in place permitting companies to avoid recording executive compensation as an expense on their income statements so long as the income was in the form of stock options that were granted at a rate equal to the market price on the day of the grant, often referred to as an at-the-money grant.
This enabled companies to issue enormous compensation packages to senior executives without notifying shareholders. Although this practice gave the senior executives significant stock holdings, since the grant was issued at-the-money, the share price had to appreciate before the executives would actually earn a profit. A amendment to the tax code created an incentive for executives and their employers to work together to break the law. Performance-based compensation, on the other hand, was deductible.
Since at-the-money options require a firm’s share price to appreciate in order for the executives to profit, they meet the criteria for performance based-compensation and therefore qualify as a tax deduction.