The options 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?

You see, if you backdate stock options to a date when the price of the stock was lower, then the options are "in-the-money" when granted.

That means the company incurs an expense equal to the difference in the share price between the two dates.

The Wall Street Journal (see discussion of article below) pointed out a CEO option grant dated October 1998.

The number of shares subject to option was 250,000 and the exercise price was (the trough in the stock price graph below.) Given a year-end price of , the intrinsic value of the options at the end of the year was (-) x 250,000 = ,750,000.

However, when granting options, the details of the grant must be disclosed, meaning that a company must clearly inform the investment community of the date that the option was granted and the exercise price. In addition, the company must also properly account for the expense of the options grant in their financials.

(For more insight, see ) Although it may appear shady, public companies can typically issue and price stock option grants as they see fit, but this will all depend on the terms and conditions of their stock option granting program.

Most shareholder approved option plans prohibit in-the-money option grants (and thus, backdating to create in-the-money grants) by requiring that option exercise prices must be no less than the fair market value of the stock on the date when the grant decision is made. For example, because backdating is used to choose a grant date with a lower price than on the actual decision date, the options are effectively in-the-money on the decision date, and the reported earnings should be reduced for the fiscal year of the grant.

(Under APB 25, the accounting rule that was in effect until 2005, firms did not have to expense options at all unless they were in-the-money.

Awarding employees with stock options those are dated prior to the actual grant date.

The date chosen could be one when the company’s stock was at a low, so the options can be in-the-money at the time of granting itself.

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The practice is illegal if it is not followed by proper disclosure and related expenses are not recorded in financial statements.

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