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But if you're lucky enough to have a coupon that lets you buy a Ferrari for a mere ,000, your piece of paper would have a far more handsome market value of ,000. If an executive is able to change the grant date of an option retroactively--for instance, to when the stock was trading at a lower price--the options become more lucrative. Stock options by themselves are not problematic or controversial. One method academics have used to measure the pervasiveness of backdating is to review stock option grants to executives to see if an unusual number are clustered around dates when the stock is trading at a low value.
They're a way to recruit and retain good employees, and they tend to align employees' interests with those of shareholders. What's at issue here is whether some top executives--typically CEOs--committed fraud when obtaining them. Then, when the stock increases, the executives benefit. Erik Lie, a finance professor at the University of Iowa's College of Business, has evaluated thousands of option grants and found that it was statistically improbable for them not to have been backdated at many companies.
To try to answer some questions about what's going on, CNET has compiled the following list of frequently asked questions. Backdating, which refers to the practice of altering the dates of grants, is a way for employees of a company to make additional money from stock options.
While it's not necessarily illegal, in many cases it could be. The Securities and Exchange Commission said last week that at least 80 companies are the subject of a probe.
The complaints, which accuse company executives of manipulating stock options to maximize returns, name past and present officers, such as Jobs, Chief Financial Officer Peter Oppenheimer and even Apple board member and .
A handful of cases involving similar allegations and parties are pending in California federal court against chipmaker Rambus.
Q: How did the Sarbanes-Oxley (SOX) law change things? In addition, executives themselves benefit by exercising the stock option and waiting a year to sell the stock.
After Sarbanes-Oxley took effect in August 2002, companies were supposed to report stock option grants within two days. Nejat Seyhun, finance professors at the University of Michigan's business schoool, analyzes grants made before and after the law's effective date. That qualifies as a capital gain and is currently subject to only a federal income tax of only 15 percent.
Last week, federal investigators announced criminal charges against former executives of Brocade Communications Systems, and they're hinting that more cases may be on the way.
Also, some companies have independently confirmed that they've been contacted by federal investigators.
Those include Altera, Applied Micro Circuits, Asyst Technologies, CNET Networks (publisher of CNET News.com), Equinix, Foundry Networks, Intuit, Marvell Technology Group, RSA Security and Veri Sign.
Rather, he's accused of backdating stock options to lure an unnamed employee to take a "high-level sales position." An FBI affidavit says Reyes told Jensen to backdate an offer letter by more than two months to benefit from a more favorable share price in late 2001.
Reyes' attorney has defended his client as wrongly accused, saying "financial gain is always the motive in securities fraud cases, and here there was none. The stock options are awarded just before news, usually positive, is announced.