What is the purpose of backdating stock options
There have already been nearly 150 shareholder derivative lawsuits filed, as well as over 100 public inquiries launched by both the SEC (Securities and Exchange Commission) and DOJ (Department of Justice).
Nearly 40 directors and officers have resigned as a result of these investigations.
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The number of cases involving options backdating continues to rise in the United States.
"However, stock options have a unique period right before the grant date where CEOs are encouraged to lower their firm's share price—this is the action that will create the most value for them personally.
When we examine which CEOs are most likely to try to use this mechanism to lower their stock price, we see that CEOs that are underpaid compared to their peers and those with significant discretion are more likely to release negative news during the period before the grant date, which lowers the stock price." The study points to a key example from 20—years after the options backdating scandal and a decade after the passage of the Sarbanes-Oxley Act of 2002, which was enacted in response to a series of high-profile financial scandals including Enron and World Com in an effort to improve corporate governance and accountability.
Having been the first to plead guilty to charges of fraud and conspiracy in relation to backdating, Mr.
Kreinberg was also forced to pay .4 million in order to settle civil fraud charges.
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By drafting or modifying the grant document to reflect a past date associated with a favourable exercise price, one may create the illusion that the decision to grant options was, in fact, made on the indicated date.
While, according to the grant document, it appears that options are offered "at the money", meaning at a price equal to the share price at the time of the grant, the options are, in reality, offered "in the money".
The move depresses the stock price and lowers the guaranteed "strike price," which allows the CEO to exercise their stock option to buy a specified number of shares below market value.
Should the stock price go up, the executive can then sell the shares at market price and keep the difference as profit. publicly traded companies from 2009 to 2013, examining the cumulative abnormal returns before option grant dates.