Backdating Options Widespread

The NYT has joined the chorus of option critics, jumping intp the fray with this story today: Study Finds Backdating of Options Widespread.

Here’s a quick excerpt:

"More than 2,000 companies appear to have used backdated stock options to sweeten their top executives’ pay packages, according to a new study that suggests the practice is far more widespread than previously disclosed.

The new statistical analysis, which comes amid a broadening federal inquiry of the practice of timing options to the stock market, estimates that 29.2 percent of companies have used backdated options and 13.6 percent of options granted to top executives from 1996 to 2005 were backdated or otherwise manipulated…

Last week, the United States attorney in San Francisco announced a task force to investigate the backdating of options, which appears to have been particularly popular in Silicon Valley during the 1990’s dot-com boom. The study found that the abuse was more prevalent in high-technology firms, where an estimated 32 percent of unscheduled grants were backdated; at other firms, an estimated 20 percent were backdated."

What makes this so significant is that the underlying study underestimated the number of firmns engaging in backdating:

"Professor Lie said the findings were so surprising that he asked several colleagues to check his numbers. Together, they concluded that the numbers probably erred on the low side."

Of the companies examined, 29.2 percent, or 2,270, had at some point during the period manipulated stock option grants, the study estimated.

“Over all, our results suggest that backdated or otherwise manipulated grants are spread across a remarkable number of firms, although these firms did not manipulate all their grants,” the authors said.

The study concluded that before Aug. 29, 2002, 23 percent of unscheduled grants — as distinguished from grants that companies routinely schedule annually — were backdated. Unscheduled grants are easier to backdate.

That date is significant: Its when the S.E.C. tightened reporting requirements — execs must now report stock option grants they receive within two business days.

Not surprisingly, since that time, backdating has declined to 10 percent of unscheduled grants.


Study Finds Backdating of Options Widespread
NYTimes, July 17, 2006

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What's been said:

Discussions found on the web:
  1. Richard commented on Jul 17

    i don’t see how backdating options isn’t a criminal offense punishable by fines or jail time. you are literally stealing money from shareholders.

  2. Stan commented on Jul 17

    Greed and power corrupts. There is a universal greed that is rotting the system to the core and few if any executives who are willing to stand up and speak out regarding the massive corruption. Who is responsible to the shareholder? How are his/her best interests served? There needs to be an oath, promise, and legal obligation to put shareholder interest first, where it belongs.

  3. trader75 commented on Jul 17

    Simple lesson: transparency works. Sunlight is the best disinfectant.

    The more that public corporations are forced to do things out in the open, the less temptation there is for a bad CEO to steal or a good CEO to screw up and do a bad thing.

    Same thing applies to politicians. If politicians were required to maintain an exhaustive public record of every penny in donations ever received, and if that public record was directly linked to every issue or bill ever voted on, with the ability to cross reference votes and contributing special interest groups by category, what would happen?

  4. Mukund Mohan commented on Jul 17

    The unfortunate part will be that most of these executives and board of directors will go away scott free. Previous cases (Peregrine) were settled with no fines paid and no admission of guilt.


  5. Ned commented on Jul 17

    trader75 that sounds like an awesome website to me.
    call it

  6. crack commented on Jul 17

    I’ve been a low level employee at a couple of large corps that allowed even employees as lowly as me to purchase shares at a discount to the lowest price of shares in the quarter the purchase was to take place in. That seems a reasonable practice to me and it was disclosed; how would something like this be accounted for in a study like this? They don’t mention if any of these companies did disclose such practices.


  7. ~ Nona commented on Jul 17

    Love that disinfectant recommendation, Trader75!

  8. trader75 commented on Jul 17

    Thanks Nona–just to be, uh, transparent, the sunlight part is a quote from Supreme Court J Louis Brandeis.

  9. yuugi commented on Mar 14

    I just wonder are there any benefits of options backdating; from the firm’s perspective.

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