Although backdating had not yet been recognized as a problem, the provisions of Sarbanes-Oxley requiring that insiders report the acquisition of securities, including options, within two days of receipt greatly hindered the ability of corporations to backdate options.Under previous regulations, corporations could wait 45 days or, in some cases, over a year to report options, thus providing ample time for backdating.At least that seems to be the conclusion reached by the Department of Justice and the Securities and Exchange Commission regarding their first case against executives charged with fraud related to backdating.Last week the Do J brought criminal charges against two Brocade Communications Systems executives, while the SEC filed a civil suit against the same two and the CFO.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.At first glance, call options represent the perfect way to tie an executive's level of compensation to the company's performance because as the company's share price increases, so does the payoff the executive will receive.
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.
By pushing the date into the past, to a time when the underlying stock traded at a lower price than it did the day the grant was issued, the option holder is, in effect, being given the promise of cash.
That promise is considered to be an in-the-money options grant.
Some executives have, well, at least when it comes to their stock options.
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.