Options Backdating
What Is Options Backdating?
Options backdating is the most common way of granting a employee stock option (ESO) that is dated before its actual issuance. Along these lines, 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 interaction makes the granted option "in the money" (ITM) and thusly of greater value to the holder.
The practice of backdating options has been viewed as deceptive and is currently the subject of regulatory examination, making it undeniably less far reaching in recent years.
Understanding Options Backdating
The practice of options backdating first happened when companies were simply required to report the issuance of stock options to the SEC in no less than two months of the initial grant date. Companies would just stand by during that period to recognize a particular date where the company's stock price tumbled to a low and afterward moved higher inside those two months. The company would then grant the option, yet date it at or close to this lowest point. This back-date would turn into the offcial granted option that would be reported to the SEC.
The act of options backdating turned out to be significantly more troublesome after companies were required to report the granting of options to the SEC inside two business days. This adjustment to the filing window accompanied the Sarbanes-Oxley legislation in 2002.
Enforcement of Options Backdating Restrictions
After the two-day reporting rule came full circle, the SEC found various companies were all the while backdating options in violation of the legislation. Disordered, troublesome administrative work was refered to as the reason at times of unintentional backdating. Initially, remiss enforcement of the reporting rule was additionally faulted for allowing many companies to avoid the rule adjustment that originated from Sarbanes-Oxley.
The SEC would proceed to investigate and sue companies and related parties that were found to predate options, at times, as part of fraudulent and tricky schemes. For instance, the SEC recorded a civil claim in 2010 against Trident Microsystems and two former senior executives from the company for stock option backdating violations. The legal objection asserted that from 1993 to 2006, the former CEO and the former chief accounting officer directed the company to participate in schemes to give undisclosed compensation to executives and certain employees.
CEO Frank C. Lin was blamed for backdating stock option reports to give the appearance that options were granted on before dates than issued. This plan was purportedly used to the benefit of officers and employees of the company as well as its directors. This included options backdating introduced in offer letters to fresh recruits. Annual and quarterly reports documented by the company did exclude the compensation costs that originated from the options backdating incidents. Spear and its former executives agreed to settle the case without conceding or denying the charges in the SEC's protest.
Features
- Options backdating has become considerably more troublesome starting from the presentation of Sarbanes-Oxley as companies are currently required to report option grants to the SEC inside two business days.
- Options backdating is a practice by which a firm giving stock options to employees utilizes a previous date than the actual issue date to fix a lower exercise price, making the options more significant.
- Backdating options has been viewed as an unscrupulous or illegal practice, and is currently subject to legal and regulatory enforcement since the Sarbanes-Oxley Act of 2002.
