Spotlight on Stock Options Backdating

Triquint stock option backdating

If a backdated option is granted at a discount to fair market value, the option will be treated under the tax rules as a non-qualified option. Thus, backdating can be misleading to shareholders in the sense that it results in option grants that are more favorable than the shareholders approved in adopting the stock option plan.

There is also some relatively early anecdotal evidence of backdating. Backdating is properly reflected in earnings. Backdating can be hard to identify. But, there are also some companies out there that have bent the rules by both hiding the backdating from investors, and also failing to book the grant s as an expense against earnings. No documents have been forged.

Some executives have, well, at least when it comes to their stock options. It also approved requirements that mandate that companies outline the specifics of their compensation plans to their shareholders. Backdating is clearly communicated to the company's shareholders. This compensation expense is then amortized over the vesting period.

Annual and quarterly reports filed by the company did not include the compensation costs that stemmed from the options backdating incidents. Notable companies embroiled in the scandal include Broadcom Corp. To be clear, the majority of public companies handle their employee stock options programs in the traditional manner. It allegedly failed to inform investors, or account for the options expense s properly.

Annual and quarterly reports

The Dangers Of Options Backdating

He attributed most of this pattern to grant timing, whereby executives would be granted options before predicted price increases. We have also learnt about other transactions that have been backdated. Cost to Shareholders The biggest problem for most public companies will be the bad press they receive after an accusation of backdating is levied, and the resulting drop in investor confidence. Initially, lax enforcement of the reporting rule was also blamed for allowing many companies to sidestep the rule adjustment that stemmed from Sarbanes-Oxley. It has also been the subject of a civil and a criminal complaint.

But ultimately, it can prove to be quite costly to shareholders. Tomasetta and two other top executives on administrative leave and might restate three years of financial results. Positive news announcements after grants is consistent with both spring-loading and backdating.

Notable companies embroiled inTo be clear

In this litigious society, shareholders will almost certainly file a class-action lawsuit against the company for filing false earnings reports. 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. 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.

In particular, he found that stock prices tend to increase shortly after the grants. This included options backdating presented in offer letters to new hires. Companies would simply wait for a period in which the company's stock price fell to a low and then moved higher within a two-month period. This adjustment to the filing window came with the Sarbanes-Oxley legislation. The compensation is determined at the time of grant by the difference between fair market value and the strike price.

Unless corporate insiders can predict short-term movements in the stock market, my results provided further evidence in support of the backdating explanation. This all but eliminated the opportunity for senior management to engage any meaningful options backdating. 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. The backdating concern occurs when the company does not disclose the facts behind the dating of the option. Second, companies sometimes have a mix of option plans, some of which might dictate the grants to be scheduled in advance, in which case the overall evidence of backdating will be murky.