Erik lie backdating
The other major way that backdating can be misleading to investors relates to the method by which the company accounts for the options.
Until very recently, a company that granted stock options to executives at fair market value did not have to recognize the cost of the options as a compensation expense.
In essence, the revision enabled companies to increase executive compensation without informing their shareholders if the compensation was in the form of stock options contracts that would only become valuable if the underlying stock price were to increase at a later time.
In 1994, a new tax code (162 M) provision declared all executive income levels over one million dollars to be “unreasonable” in order to increase taxes on all applicable salaries by removing them from their previous tax-deductible status.
This is not always the case, according to a ruling by federal judge William Alsup of the U. District Court for the Northern District of California.
According to Alsup’s reasoning and subsequent ruling, it is improper to infer fraudulent activity based solely on the occurrence of options backdating – further facts must be present and proven before the act can be considered to be fraudulent.
It was forced to restate earnings by recognizing a stock-based expense increase of 3 million between 19, after allegedly manipulating its stock options grants for the benefit of its senior executives.
It allegedly failed to inform investors, or account for the options expense(s) properly.
In the modern business world, the Sarbanes-Oxley Act has all but eliminated fraudulent options backdating by requiring companies to report all options issuances within 2 days of the date of issue.
Toward the other extreme, where the backdating was a result of overly informal internal procedures or even just delays in finalizing the paperwork documenting options grants, not intentional wrongdoing, there is likely to be no formal sanction—although the company may have to restate its financial statements to bring its accounting into compliance with applicable accounting rules.
With respect to the more serious cases of backdating, it is likely that most of the criminal actions that the government intended to bring were brought in 2007.
While this conclusion is logical in cases of options backdating in which executives knowingly participated in the criminal actions, options backdating can be a result of normal accounting or corporate policies that are not criminal in nature, and is a legal practice as long as the backdated contract is appropriately reported for tax purposes.
Academic researchers had long been aware of the pattern, exhibited by some companies, of share prices rising dramatically in the days following grants of stock options to senior management.However, in late 2005 and early 2006, the issue of stock options backdating gained a wider audience.