Stock option backdating example
Plaintiffs' law firms have already filed a number of securities class actions and derivative lawsuits on the backdating issue."It’s pretty sad to see that so many executives, after convincing their shareholders to approve stock incentive plans, thought they could get away with rewriting the terms," said Peter Pease, a partner at Berman De Valerio.
"That’s just plain theft, and it makes the incentive plans meaningless."The Journal, for example, analyzed the stock options grants of Jeffrey Rich, CEO of Affiliated Computer Services.
Backdating may also violate accounting rules because the stock options, which are equal to extra pay, affect the company's bottom line.
By failing to include these options in their books, companies may be overstating their profits – and may, ultimately, have to restate their financials.
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.
But it could lead to a false disclosure, which may, in turn, violate federal securities laws.
The auditors who failed to notice or to stop these potential violations may be equally culpable.
A number of chief executives already have been forced out or have resigned over the backdating issue.
Take this example, from The Wall Street Journal, which began investigating the practice last fall: "Suppose an executive gets 100,000 options on a day when the stock is at .
Exercising them after it has reached would bring a profit of times 100,000, or million.
That exercise price, or strike price, usually takes one of three forms: the closing price on the day of the grant; an average of the highs and lows of the day; or the closing price from the previous day.