Backdating stock options legal

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For example, suppose that it is August 16, 2006, and the closing share price of XYZ Corp. On June 1, 2006, XYZ Corp.'s stock price was at a six-month low of .

Technically, any options granted today should bear a strike price of .

This article will attempt to provide reasons why this issue is important, why civil and criminal authorities are investigating, and why it is critical that public companies who issued options over the past...

Options backdating occurs when companies grant options to their executives that correspond to a day where there was a significantly lower share price.

Law360, New York (June 15, 2006, AM EDT) -- It is virtually impossible to pick up a newspaper these days and not see an article about the ever-growing list of companies being caught up in investigations concerning allegations of backdated stock options.

Despite the attention paid to this issue, little has been written explaining why backdating options is problematic and potentially illegal.

However, this concept is not perfect and there are ways that executives can take advantage of the way that options are granted in order to earn money.

In some cases, backdating can be considered an act of fraud and an SEC investigation may result.

In order to lock in a profit on day one of an options grant, some executives simply backdate (set the date to an earlier time than the actual grant date) the exercise price of the options to a date when the stock was trading at a lower level. In this article, we'll explore what options backdating is and what it means for companies and their investors. Most businesses or executives avoid options backdating; executives who receive stock options as part of their compensation, are given an exercise price that is equivalent to the closing stock price on the date the options grant is issued.

This means they must wait for the stock to appreciate before making any money.

In a backdated situation, however, the options would be granted today (August 16), but their listed day of granting would be June 1 in order to give the options a lower strike price.

Options backdating defeats the purpose of linking an executive's compensation to the company's performance, because the bearer of the options will already have experienced a gain.

It is suspected that these situations are not a coincidence and that the board or executives were granted options based on a past date in order to make these options more profitable.

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