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Where’s the Thief? The ‘Options Scandal’ is a Dud
Tobak’s take on Steve Jobs’ role in the stock options backdating scandal at Apple. The allegations of illicit sex, drugs, and rock and roll reminded me of the 60s Funny, I can’t remember. While the story was enthralling, I didn’t understand what any of it had to do with a federal investigation into stock option backdating. But how does that relate to hiring prostitutes and drugging customers without their knowledge?
Walker, Unpacking Backdating: Economic Analysis and Observations on the Stock Option. Scandal, 87 B.U. L. REv. (). However, none of these other.
Yeah, neither do we. In recent weeks, this supposed national corporate stock options scandal has started to remind us of nothing less than the Duke lacrosse scandal — perhaps because in both cases the swarm of accusatory press coverage swirling around the developing story seems to have rapidly outpaced any actual proof of criminal wrongdoing. The current hubbub can be traced to an academic paper that a Norwegian economist in Iowa published last year in a seemingly obscure journal called Management Science.
That is, the grant date might be set to be an earlier date with a particularly low price. Over the past several months, short of actually proving chicanery, the Journal has suggested the possibility of chicanery at a long list of companies. For readers who like their schadenfreude catalogued, the Journal has even published a handy Options Scorecard , listing some 50 or so companies and noting which ones are currently being investigated by the SEC, the justice department, and so on.
But having your books looked over by the SEC no more makes you guilty of corporate malfeasance than having your block patrolled by a beat cop makes you guilty of kicking the tar out of your neighbor. This is kind of like saying: buying alcohol at the store, while not illegal in itself, could result in drunk driving.
What would happen if a powerful paper in a close-knit community published the names of everyone in town who had recently bought alcohol as part of a larger story about a widening drunk driving scandal? Chances are, other people in the community would soon start wagging their tongues and pointing their fingers at the people on the list — which is exactly what has happened to the companies fingered by the Journal.
Ever since its initial report was published in March, various other news organizations around the country have piled on with perfunctory Enron-references, overblown talk of a widening scandal, and self-serving quotes from members of Congress who are just shocked and simply outraged at the smug, reckless, behavior of overly entitled college athletes. Jenkins, Jr. It eliminates a perverse incentive to game the stock price during the negotiation.
It leaves a valued executive no reason to grump about the issue date or feel there was any invidious message in its selection, yet the company retains full control over the size of the package.
Ex-Comverse CEO to Forfeit $46M in Backdating Scandal
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.
From the Financial Times on June “Options Scandal Hits Home Depot”. From Newsday on June “Investigating the backdating game; Widespread.
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.
If share values rise, so does the value of the options, even if the person hasn’t yet bought the stock. The release of negative news can mean extra money — frequently hundreds of thousands of dollars — for a CEO with stock options coming due. An example is the options backdating scandal of the mids, when researchers such as Erik Lie of the University of Iowa found that thousands of companies dated options as though they were given before they actually were, choosing a time when share prices were particularly low.
That boosted the value for the executives receiving them. Such a move is legal if done properly, including informing investors. Often it wasn’t. The new study shows a twist in options shenanigans: Many companies distribute optional press releases with a negative tone that drive down the share price around the option strike date.
Then the price returns to a more normal level, netting the CEOs of the companies a hefty return. Researchers looked at CEOs of large, publicly traded U. Each had at least two different option strike dates from and , which meant that if effects were random in nature, they should more or less cancel out.
When love becomes a nightmare: Online dating scams
But a recent paper , coauthored by Robert M. Daines of Stanford University, has unearthed a new and potentially more sinister version of the scheme — call it Dating Game 2. Under Dating Game 1. Revelations about backdating came to light in and sparked outrage on many fronts. Federal prosecutors filed criminal charges against more than a hundred executives, convicting 12 and sending five to prison.
RESEARCH IN MOTION LIMITED – OPTION GRANTING SCANDAL there were improper option dating practices for grants on options for.
Options backdating is the process of granting an employee stock option ESO that is dated before its actual issuance. In this way, 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 process makes the granted option ” in the money ” ITM and therefore of greater value to the holder. The practice of backdating options has been considered unethical and is now the subject of regulatory scrutiny, making it far less widespread in recent years.
The practice of options backdating first occurred when companies were only required to report the issuance of stock options to the SEC within two months of the initial grant date. Companies would simply wait during that period to identify a particular date in which the company’s stock price fell to a low and then moved higher within those two months. The company would then grant the option, but date it at or near this lowest point. This back-date would become the offcial granted option that would be reported to the SEC.
The act of options backdating became much more difficult after companies were required to report the granting of options to the SEC within two business days. This adjustment to the filing window came with the Sarbanes-Oxley legislation in After the two-day reporting rule went into effect, the SEC found numerous companies were still backdating options in violation of the legislation. Disordered, untimely paperwork was cited as the cause in some cases of unintentional backdating.
Backdating: Insight Into a Scandal
Basically, they made two types of lies to their users. In some cases, they told users that they were a 90 percent match, but in reality they were only 30 percent compatible or less. This means that some people were going on dates that never should have happened, and others missed opportunities as a result of being deceived.
Keywords misconduct, stock-option backdating, financial fraud, diffusion J. N. “Shock options: The stock options backdating scandal of.
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. However, the court pointed out that the condition precedent under the option agreement was that Sutardja had to be employed by Marvell Semiconductor at the scheduled vesting dates to obtain the right to exercise the option.
Once the option vested, Marvell was contractually bound to sell, and Sutardja had the irrevocable right to purchase shares at the option price. This committee was composed solely of independent directors, and neither of the plaintiffs was a member. In , the Executive Compensation Committee approved a grant to Sutardja of Marvell stock options covering 1. The option did not have a readily ascertainable fair market value when granted.
Executive Tripped by 409A and Backdating Scandal
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.
The options backdating problem stems from a number of practices adopted when granting employee stock options. Stock options are generally.
NEW YORK Reuters – The stock options timing scandal, which has already implicated at least companies, could include hundreds more, according to a new analysis that found lax enforcement of corporate governance reforms that should have prevented the practice. Beginning in August , the U. Securities and Exchange Commission required companies to disclose their stock-option awards in Form 4 filings within two days of options grants to comply with Sarbanes-Oxley.
Before that, companies did not have to report option grants for several weeks. The new regulations should have removed most opportunities for backdating. But Glass Lewis, in the report, said the SEC has not enforced the two-day filing rule, possibly leading to many more instances of backdating. More than companies have launched internal reviews or are under government investigation over possible manipulation of stock option grant timing. Companies have said that many of the late Form 4 filings were unintentional — a result of sloppy paperwork— and their options grants have been accounted for correctly.
O, told Reuters that Medis had been late in some of its Form 4 filings but did not engage in backdating of options. Glass Lewis also raised concerns about late Form 4s that could have resulted in higher profits for executives at Hansen Natural Corp. O , Digital River Inc. N, Websense Inc. O, Silicon Image Inc. O, and Keryx Biopharmaceuticals Inc.