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.
The backdating concern occurs when the company does not disclose the facts behind the dating of the option.
A recent high-profile spring-loading case involving Tyson Foods Inc.
The cascading litany of alleged charges is not likely to stop with the Brocade case.
Indeed, with more than 80 companies being reviewed by the SEC for potential illegal backdating practices, and one academic study claiming that more than 2,000 companies have engaged in the practice, civil and criminal charges will probably mushroom in the next few months. The purpose of backdating is straightforward: it gives options holders an immediate paper gain, and a real gain once the option is exercised.
There is no statute that explicitly outlaws backdating stock-option grants, but it seems virtually impossible to backdate options and achieve the ultimate goal of putting grants “in the money” without first deliberately falsifying documents and then covering up the sham.
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.
Do you ever wish that you could turn back the hands of time?
Some executives have, well, at least when it comes to their stock options.The court did not go nearly as far for Reye's co-defendant, Stephanie Jensen, Brocade's Vice-President of the Human Resources Department.She was found to have worked to conceal the backdating and was sentenced to four months.Reyes was fined million and sentenced to 21 months in federal prison after being found guilty in 2007 of picking favorable dates in the past for the awarding of stock options without revealing that information to shareholders. Circuit Court of Appeals tossed Reyes conviction Tuesday, finding that prosecutors lied to the jury in final arguments, telling them that no one in the Brocade's finance department knew about the backdating.He was the first of more than a dozen executives who faced criminal prosecution in the wide-ranging scandal. In fact, some of those employees explicitly told the FBI they knew about the shenanigans.That promise is considered to be an in-the-money options grant.