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Backdating option grants

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Stock option backdating has erupted into a major corporate scandal, involving potentially hundreds of publicly-held companies, and may even ensnare Apple's icon, Steve Jobs.

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You'd think they'd be up to their eyeballs in rope.grants to one that is earlier than the actual grant date in order to place a lower exercise price on the options and thus enhance the potential profits from the exercise of those stock options.The practice sometimes also occurs in the insurance industry, whereby policy issuers make the effective date of a policy (or claim) earlier than the application date in order to obtain a lower premium for the customer (or obtain better claim results). When he was hired, the Company XYZ board of directors offered John an attractive salary as well as an annual grant of 1,000 Company XYZ stock options.Granting stock options to employees is a generally accepted and perfectly legal form of compensating employees. Critics of backdating argue that the practice is difficult to detect and thus encourages boards and executives to use it to synthesize more creative compensation packages.In our example, backdating the options is the same as giving John Doe a check for $35,000 -- without recording that $35,000 on the within two business days.Those options give John the right but not the on the date of the grant.

The board formally grants the stock options to John every year at its January board meeting.

In researching this post, I came across a number of recent reports on Henry Nicholas III, the once high-flying CEO and cofounder of Broadcom. While the story was enthralling, I didn't understand what any of it had to do with a federal investigation into stock option backdating.

The allegations of illicit sex, drugs, and rock and roll reminded me of the 60s ... Sure, Broadcom had to take a $2.2 billion charge to fix the accounting mess left by the company's former executives.

Despite the attention paid to this issue, little has been written explaining why backdating options is problematic and potentially illegal.

This article will attempt to provide reasons why this issue is important, why civil and criminal authorities are investigating, and why it is critical that public companies who issued options over the past...

The SEC’s Enforcement Division and the offices of the United States Attorney are investigating the option granting practices of dozens of companies and actions taken by their executives.