Backdating Options - The Daily Reckoning
The issue of backdating options and stock options is discussed, and the Broadcom Corp. scandal is exemplified. Options backdating occurs when a company grants an option that is dated prior to Typically, the grant date of the stock options is the same as the date of the. Stock options give their holder the right to purchase the common stock of a corporation at a specific price. This right is available over a date range, such as for.
At one extreme, where it is clear that top management was guilty of conscious wrongdoing in backdating, attempted to conceal the backdating by falsifying documents, and where the backdating resulted in a substantial overstatement of the company's profitability, SEC enforcement actions and even criminal charges have resulted.
Toward the other extreme, where the backdating was a result of overly informal internal procedures or even just delays in finalizing the paperwork documenting options grants, not intentional wrongdoing, there is likely to be no formal sanction—although the company may have to restate its financial statements to bring its accounting into compliance with applicable accounting rules. With respect to the more serious cases of backdating, it is likely that most of the criminal actions that the government intended to bring were brought in There is a five-year statute of limitations for securities fraud, and under the Sarbanes-Oxley Act ofoption grants to senior management must be reported within two days of the grant date.
This all but eliminated the opportunity for senior management to engage any meaningful options backdating.
Therefore, any criminal prosecution is likely to be based on option grants made before Sarbanes-Oxley took effect, and the deadline facing the government for bringing those prosecutions has already passed. As of 17 Novemberbackdating has been identified at more than 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. Some of the more prominent corporate figures involved in the controversy currently are Steve Jobs and Michael Dell. Anderson and former Apple general counsel Nancy R. Heinen for their alleged roles in backdating Apple options. Deferral of recognition into employee's gross income[ edit ] According to Section 83 of the Codeemployees who receive property from the employer must recognize taxable income in the year in which that property vests i.
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.
Denial of deduction under Section m of the tax code[ edit ] The Clinton tax increase amended the Code to include Section m which presumptively makes compensation in excess of one million dollars unreasonable for public companies. According to the September 5, 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 the options are in the money, then the compensation will not be performance based, as the options would have intrinsic value immediately.
See page 5 of the background briefing. 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 the grant of the options would not be performance based.
Companies are supposed to account for options grants on the date they are granted. But this does not address the key issue of shareholder dilution. Why pay a high multiple for EPS with zero real growth? Several tech companies felt compelled to re-price options with bubble-level strike prices after the burst. These re-pricing initiatives are always done in the name of improving employee morale, but few mention the cost to shareholders.
- Options Backdating
- Options backdating
Another way to look at this table is to calculate the percentage of future free cash flow pledged to option holders. This percentage is calculated by dividing the Now, lest you think that sounds like a fair deal for shareholders after all, While this is just a theoretical estimate, it is conservative, because I am not including the tech bubble years, when the gap between strike and market prices was far wider. Also, management teams usually wait for a significant run in the stock before issuing a secondary, rather than doing so at average prices over a long period.
There is nothing illegal or necessarily immoral about paying deserving executives and employees very well. Other than a few activist hedge fund managers, the investment community is not doing much to stop abusive, dilutive options and compensation practices.
Options Backdating Definition & Example | InvestingAnswers
Broadcom shareholders cannot really do much about it. They should expect the trade-off of a permanent discount on their stock resulting from this share structure. Nevertheless, Broadcom appeals to growth investors given the valuation the market has given the stock of this communication chip company.
But everyone from executives to sell-side analysts recommend you back out this new expense when calculating earnings potential. Well, I hope I have just demonstrated the importance of expensing option grants. Broadcom is likely to tone down option issuance even further since the company started expensing options at the beginning of required by GAAP. The 5 cents per share in diluted, pro forma EPS will increase significantly, with smaller option grants in Inflation can be measured by dividing the amount of money and credit created in a given year by the total existing supply of money and credit.
Holding the supply of goods and services constant, the added supply of money and credit will exert pressure on asset prices, goods, and services in fairly unpredictable fashion. Contrary to popular belief, recessions initially exert pressure on published CPI numbers if the supply of goods and services contracts more quickly than the supply of money and credit.
It is only until default rates pick up and credit becomes rationed that pressure on CPI is eased. Whether these measures ultimately work depends entirely upon the U. Chairman Ben Bernanke is likely to be menaced by persistently high core CPI numbers while housing and consumer spending is clearly slowing. Perhaps this exposure will occur at a pace similar to the exposure of stock option dilution. If so, you will want to have a position in gold bullion, not Broadcom stock. Our writers explore how current discussions on civil liberties, world history, economic trends, and other issues affect your investment opportunities…especially in the face of unstable markets and insane circumstances.
Bubbles in Natural Gas or Energy Drinks? It has become so ingrained in the fabric of American society that there will be serious economic consequences to a downturn in housing prices.