Stock option backdating cases
Options backdating defeats the purpose of linking an executive's compensation to the company's performance, because the bearer of the options will already have experienced a gain.In the past, granted options were only required to be disclosed to the Securities and Exchange Commission (SEC) within two months of the options being granted, which gives companies a window for backdating.
That means the company incurs an expense equal to the difference in the share price between the two dates.In other words, there seem to be an awful lot of people around Steve Jobs who have allegedly had problems linked to the backdating of stock options. Jobs is the prodigal son credited with saving Apple, which he co-founded in 1976 with Steve Wozniak, by turning a then-struggling Silicon Valley icon into a consumer-electronics powerhouse after his triumphant return in 1996.The turnaround was masterful; in fact, it's now the subject of business-school case studies.Fifty-two companies currently under criminal investigation. Moreover, the company avoids having to expense the options as current compensation, thus increasing earnings in the near term. As a consequence, the option is immediately profitable, or “in the money,” to the option holder.An option's strike price is usually chosen by taking the stock's closing price on the day that the option was granted, calculating an average of the day's high and low prices or by taking the closing price from the previous day's trading.
For example, suppose that it is August 16, 2006, and the closing share price of XYZ Corp. On June 1, 2006, XYZ Corp.'s stock price was at a six-month low of $25.
The backdating problem was first highlighted by Professor Erik Lie of the University of Iowa, who published his initial study in 2004.
Professor Lie concluded that the robust profitability of so many options was statistically impossible absent some artificial influence such as backdating.
But how does that relate to hiring prostitutes and drugging customers without their knowledge?
Said another way, do the feds really need to dig that deep to find enough rope to hang executives with?
Ann Mather, who worked as chief financial officer of Pixar Animation Studios before then-chief executive Jobs dealt Pixar to Walt Disney Co.