Options backdating which companies are at risk

The backdating concern occurs when the company does not disclose the facts behind the dating of the option. To be clear, the majority of public companies handle their employee stock options programs in the traditional manner.

That is, they grant their executives stock options with an exercise price (or price at which the employee can purchase the common stock at a later date) equivalent to the market price at the time of the option grant.

This means that corporations will have less time to backdate their grants or pull any other behind-the-scenes trickery.

It also provides investors with timely access to (grant) pricing information.

However, when granting options, the details of the grant must be disclosed, meaning that a company must clearly inform the investment community of the date that the option was granted and the exercise price. In addition, the company must also properly account for the expense of the options grant in their financials.

If the company sets the prices of the options grant well below the market price, they will instantaneously generate an expense, which counts against income.

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.A Real-Life Example A perfect example of what can happen to companies that don't play by the rules can be found in a review of Brocade Communications.The well-known data storage company allegedly manipulated its stock options grants to ensure profits for its senior executives and then failed to inform investors, or to account for the options expense(s) properly.They also fully disclose this compensation to investors, and deduct the cost of issuing the options from their earnings as they are required to do under the Sarbanes-Oxley Act of 2002.But, there are also some companies out there that have bent the rules by both hiding the backdating from investors, and also failing to book the grant(s) as an expense against earnings.

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