Back to backdating ways

Are you one of those who have lost money due to the backdating of stock options by directors and officers – and wondering what it all means ?  Don’t worry, going by the news stream, you are going to be in solid company.

Apple Computer has concluded an internal investigation into backdated stock options and found that while CEO Steve Jobs was aware of the practice, he did not personally benefit from it.  [ Doesn’t quite cover your ass, Steve ! ]

Admitting for the first time that former officials intentionally priced stock options retroactively and falsified documents, KLA-Tencor today restated its past results to include $370 million in charges related to those backdated options.

These corporate directors and officers engage in a scheme that enable them to award stock option grants to themselves on specific dates corresponding to low stock price trade dates in the past. This ensures that these officers and directors would maximize the cash value of their option grants.

A stock option has traditionally been defined as an incentive given to officers and directors to purchase the company’s stock at a lower price based on the actual trade price of the stock at the time the option is granted. Since the compensation committee within a company’s board of directors determines the fair market value of such options, they were backdated so as to ensure better profits for those who received them.

Dr.Erik Lie of the University of Iowa did a study on the behavior of stock prices before and after option grants, looking at 5,977 option grants between 1992 and 2002. In his paper, he discovered that unless executives were truly clairvoyant in their market timing, they had to be backdating the grants. Essentially, companies were pricing options on days in which the firm’s stock was trading at a low for the week, month, or quarter; thereby almost guaranteeing a large profit for the executives. Who wouldn’t want to name their own price on a bonus or a stock? Unfortunately, the market isn’t run by priceline.com, and the practice of backdating options lowered income levels, thus evading certain taxes and bilking company shareholders out of a considerable chunk of profit.

A detailed article and profile of Dr.Lie as appeared in WSJ is available here, that which appeared in AP is here and a copy of Dr.Lie’s testimony to the US Senate Banking Committee is available here.

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