NationMaster - Encyclopedia: Backdating

Options backdating is the potentially illegal (depending on the country) practice of the grant of restricted employee stock options at an exercise price equal to the value on the date that the grant is apparently made. However, the date chosen for the grant date is cherry picked to select an earlier date, one when the price of the underlying stock was lower. This results in a value of the option most favorable to the employee receiving it. This practice reduces the risk of share price going down for the year. Image File history File links Current_event_marker. ... An Employee stock option is a call option on a companys own stock issued as a form of non-cash compensation. ... // In the literal case of harvesting cherries, or any other fruit, the picker would be expected to only select the ripest and healthiest fruits. ...

Backdating of stock options is not necessarily illegal. If the grantor of the stock options properly discloses the backdating at the actual time of grant, no fraud has taken place. It would only mean that it would not qualify for the favorable tax statutes carved out to encourage employee stock options like SARs or Stock Appreciation Right or incentive stock options. Also since the Enron scandal, Congress enacted Section 409A of the Internal Revenue Code to deal with such non-qualified deferred compensation. Stock Appreciation Right (SAR) is a kind of compensation to employee with ESO (Employee Stock Option). ... Stock Appreciation Right (SAR) is a kind of compensation to employee with ESO (Employee Stock Option). ... Incentive stock options (ISOs), are a type of employee stock option that can be granted only to employees and confer a U.S. tax benefit. ... Enron Corporation Enron Corporation is an energy trading and communications company based in Houston, Texas that employed around 21,000 people in mid-2001 (before bankruptcy). ... The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, gift taxes, estate taxes...

Most of the legal issues arising from backdating are a result of the grantor falsifying documents submitted to investors and regulators in an effort to conceal the backdating. This practice is a hot-button issue with investors all over the world and is currently being investigated/debated by the United States Securities and Exchange Commission. The United States Securities and Exchange Commission (commonly known as the SEC) is a United States government agency having primary responsibility for enforcing the Federal securities laws and regulating the securities industry. ...

Research History

David Yermack, a New York University finance professor, in 1995 studied data that companies were obligated to publish, under a 1992 SEC decree, the exact dates of options grants in proxy statements. Previously, dates were disclosed within often ignored filings. He found a pattern that the stock prices often declined in value just prior to the options grant and rose afterwards. He theorized these were timed to precede good news and follow bad news. In 1997, his findings were published in the Journal of Finance. New York University (NYU) is a major research university in New York City. ... 1995 (MCMXCV) was a common year starting on Sunday of the Gregorian calendar. ... 1992 (MCMXCII) was a leap year starting on Wednesday. ... SEC is a TLA which can refer to: In general context, an abbreviation for second. ...

Finance professors David Aboody of UCLA and Ron Kasznik of Stanford followed with a study of companies that grant options at the same time every year and found a similar patter, indicating timing of news. Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. ... A professor giving a lecture The meaning of the word professor (Latin: one who claims publicly to be an expert) varies. ... Binomial name Ucla xenogrammus Holleman, 1993 The largemouth triplefin, Ucla xenogrammus, is a fish of the family Tripterygiidae and only member of the genus Ucla, found in the Pacific Ocean from Viet Nam, the Philippines, Palau and the Caroline Islands to Papua New Guinea, Australia (including Christmas Island), and the... Stanford may refer: Stanford University Places: Stanford, Kentucky Stanford, California, home of Stanford University Stanford Shopping Center Stanford, New York, town in Dutchess County. ...

Finance professor Erik Lie of the University of Iowa in 2004 noted that many options grants were timed to exploit marketwide price depressions that nobody, including insiders, could predict leading to the conclusion that at least some of the grants must have been retroactive. Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. ... A professor giving a lecture The meaning of the word professor (Latin: one who claims publicly to be an expert) varies. ... Erik Lie is a finance professor atthe University of Iowa who published a report about options backdating that led to many investigations by the SEC into the potentially illegal practice. ... The University of Iowa, or Iowa for short, is a major national research university located on a 1,900-acre campus in Iowa City, Iowa, USA, on the Iowa River in East Central Iowa. ...

Terminology

symmetric spring-loading where members of the board who approve the grant are aware of the forthcoming good news

asymmetric spring-loading where members of the board who approve the grant are unaware of the forthcoming good news

Impact of options backdating in the United States

As of 17 November 2006, backdating has been identified at more than 130 companies, and led to the firing or resignation of more than 50 top executives and directors of those companies. Notable companies embroiled in the scandal include Broadcom Corp., UnitedHealth Group and Comverse Technology. 17 November is also the name of a Marxist group in Greece, coinciding with the anniversary of the Athens Polytechnic uprising. ... For the Manfred Mann album, see 2006 (album). ... Broadcom Corporation is a leading American supplier of integrated circuits (ICs) for broadband communications. ... UnitedHealth Group Incorporated (UnitedHealth Group) is a managed health care company. ... Comverse Technology, Inc. ...

Some of the more prominent corporate figures involved in the controversy currently are Steve Jobs and Michael Dell. Both Apple and Dell are currently under SEC investigation. Steven Paul Jobs (born February 24, 1955) is the co-founder and CEO of Apple and was the CEO of Pixar until its acquisition by Disney. ... Template:Infobox Celebrityu Michael Saul Dell (born February 23, 1965 in Houston, Texas) is the founder of Dell, Inc. ... Apple Inc. ... Dell Inc. ...

United States income tax issues

According to the February 9, 2007 WSJ (Page A3) article IRS Urges Companies to Pay Taxes Owed By Workers Unaware of Backdated Options the government will go after taxpayers on such options but will pursue the company for rank and file employees.

Deferral of recognition into employee's gross income

According to Section 83 of the Code, employees who receive property from the employer must recognize taxable income in the year in which that property vests (is free from restrictions and other risks of forfeiture). Stock options granted which exercise price below the then current fair market value has intrinsic value equal to the difference betwen the market price and the strike price. Such backdating may be construed as illegally avoiding income recognition because falsely under-reporting the market price of such stocks makes them appear to have no value in excess of the strike price at the time the option is granted. The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, gift taxes, estate taxes... This article contrasts tax evasion, tax avoidance, tax resistance and tax mitigation. ...

Denial of deduction under Section 162(m) of the Tax Code

The 1993 Clinton tax increase amended the Code to include Section 162(m) which presumptively makes compensation in excess of one million dollars unreasonable for public companies. As the Tax Code only allows a corporate deduction for reasonable compensation to employees, Section 162(m) needed an exception for performance based compensation. According to the September 5, 2006 Joint Committee on Taxation background briefing if the CEO or other top executive gets stock option grants with exercise price equal to market price, then the options granted would be presumed to be reasonable because they would be performance based. However, if the exercise price is below the market price so that they are in the money, then the compensation will not be performance based because the option would have intrinsic value immediately. (See page 5 of the background briefing). In finance, moneyness is a measure of the degree to which a derivative security is likely to have positive monetary value at its expiration. ...

As an economic and practical matter, backdating and cherry-picking dates with the lowest market price of the underlying stock may be evidence that the options granted were not reasonable compensation because it would not be performance based and therefore corporate deductions taken would be denied.

References

Categories: href="/encyclopedia/Category:Current-events" onmouseover="pv(event, 92)" onmouseout="unpv(92)" style="">Current events | Finance For the Manfred Mann album, see 2006 (album). ... November 5 is the 309th day of the year (310th in leap years) in the Gregorian Calendar, with 56 days remaining. ... For the Manfred Mann album, see 2006 (album). ... June 15 is the 166th day of the year in the Gregorian calendar (167th in leap years), with 199 days remaining. ... For the Manfred Mann album, see 2006 (album). ... July 24 is the 205th day (206th in leap years) of the year in the Gregorian Calendar, with 160 days remaining. ... For the Manfred Mann album, see 2006 (album). ... June 21 is the 172nd day of the year (173rd in leap years) in the Gregorian calendar, with 193 days remaining. ... For the Manfred Mann album, see 2006 (album). ... July 24 is the 205th day (206th in leap years) of the year in the Gregorian Calendar, with 160 days remaining. ... 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the Anno Domini (common) era. ... January 23 is the 23rd day of the year in the Gregorian calendar. ... For the Manfred Mann album, see 2006 (album). ... June 20 is the 171st day of the year (172nd in leap years) in the Gregorian Calendar, with 194 days remaining. ... For the Manfred Mann album, see 2006 (album). ... July 24 is the 205th day (206th in leap years) of the year in the Gregorian Calendar, with 160 days remaining. ... For the Manfred Mann album, see 2006 (album). ... June 1 is the 152nd day of the year in the Gregorian calendar (153rd in leap years), with 213 days remaining. ... For the Manfred Mann album, see 2006 (album). ... July 24 is the 205th day (206th in leap years) of the year in the Gregorian Calendar, with 160 days remaining. ... For the Manfred Mann album, see 2006 (album). ... July 24 is the 205th day (206th in leap years) of the year in the Gregorian Calendar, with 160 days remaining. ... A digital object identifier (or DOI) is a standard for persistently identifying a piece of intellectual property on a digital network and associating it with related data, the metadata, in a structured extensible way. ... For the Manfred Mann album, see 2006 (album). ... November 5 is the 309th day of the year (310th in leap years) in the Gregorian Calendar, with 56 days remaining. ... For the Manfred Mann album, see 2006 (album). ... December 27 is the 361st day of the year in the Gregorian Calendar (362nd in leap years). ... Subcategories There are 3 subcategories to this category. ...

Contents

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