Stock backdating illegal

Executives can profit quickly at shareholders’ expense in such instances.Instead of using excess cash to buy back stock at a short-term discount, a long list of blue chip companies used the post-Sept. A recent Wall Street Journal article entitled “Executive Pay: The 9/11 Factor,” describes the sequence of events (my emphases):“A Wall Street Journal analysis shows how some companies rushed, amid the post-9/11 stock market decline, to give executives especially valuable options.But the great majority of public companies issue options with an exercise price equal to the market price at the date of grant.This practice requires at least a nominal investment on the part of the option holder if he or she wishes to exercise.You’d think that shareholders wouldn’t tolerate the use of accounting sleight of hand to compensate executives while bypassing the traditional “selling, general, and administrative” line in the income statement.But abuse of stock options has been allowed to perpetuate for years.

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We also find that the market reaction is more negative for companies with higher stock price volatility, less effective corporate governance, and lower quality of financial statements.The practice of allowing a mutual fund shareholder to use previous purchases of the fund's shares so as to qualify for reduced commission charges on subsequent purchases.Backdating is used when a fund offers declining proportional sales charges on larger purchases.However, it can be permissible under certain circumstances.For instance, one may backdate an insurance claim if there was an unavoidable delay between the date the insured event occurred and the day the claim was made.Shares are issued to option holders at artificially low prices and the company gets an artificially low amount of capital in return for its shares.Backdating is perpetrated by “cherry-picking,” after the fact, the lowest points the company stock traded throughout the previous year when calculating the exercise price of option grants.For example, if one signs a contract on February 1, one may backdate it to January 31.Backdating is usually illegal; for example, one may use backdating to evade taxes.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...


  1. Stock options From backdating to. is not illegal per se but granting options. An alternative method used to inflate the value of stock options is backdating.

  2. OPTIONS BACKDATING. The practice of backdating stock options was first identified by Erik Lie in 2005.10 Lie’s seminal. backdating often illegal.

  3. Stock Options The Backdating Issue Abstract Excerpt Employee stock options are contracts giving employees the right to buy the company’s common

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