Consequences of backdating stock options the middle school dating game

31 Aug

My views are my own and do not necessarily reflect the views of the Commission or any other member of the staff. In addition to our investigations, there is substantial criminal interest in options matters from United States Attorneys' Offices nationwide.In recent months, the SEC has brought two enforcement actions — one relating to Brocade and another involving Comverse.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.This paper contrasts the post-tax returns of backdated at-the-money options to currently-dated in-the-money options (with the same strike price as the backdated options) and demonstrates that a Canadian executive can earn a significantly larger after-tax return from backdated options compared to a US executive. We tie this to the favorable Canadian tax treatment of executive options relative to their treatment in the United States.

During that time, we’ve been brought in to help fix a number of situations in which the company had issued stock options at a value that later was determined to be too low.The audit firm (or the SEC) decides that the common stock was undervalued at some point in the past and, as a result, stock options were issued with a strike price that was too low.To correct this, the company is required to restate its financial results by taking a non-cash charge against earnings to account for the “extra compensation” that was, in effect, “paid” to employees. Because the IRS has stated that a cheap stock charge is one of three “red flag” issues for which it looks when examining a company’s stock option pricing.Based on our experience, here are some of the worst effects of such undervaluation. We see these most frequently at two stages in a company’s life: during the first financial audit; and during the IPO preparation process.A cheap stock charge is an additional expense that an audit firm (or the SEC) forces a company to include on its income statement.