Stock option backdating restatements
Backdating is the practice of marking a document, whether a check, contract or other legally-binding document, with a date that is prior to what it should be.
Backdating is usually disallowed and even can be illegal or fraudulent based on the situation.
There are certain situations, however, when backdating is acceptable; however, the parties involved must agree to it.
There was a spate of backdating stock options in the 2000s, mostly at technology firms that rely heavily on stock options for executive compensation, but also at some companies not in the tech sector.
The backdating scheme involved moving an effective date for the exercise of stock options from when the options were 'out of the money' to a date that made the options 'in the money' in order to allow certain executives to exercise their options profitably.
The author of the academic study who is credited with focusing regulators on this issue estimates that at least 10% of “at-the-money” grants of options to CEOs between 19—before Sarbanes-Oxley shortened the reporting period for option grants—were backdated.SEC Chairman Christopher Cox recently stated that the proposed SEC rules on disclosure of executive compensation will “almost certainly address options backdating explicitly.” I. Companies have considerable discretion in determining the timing of stock option awards.Most employee stock options are, or purport to be, granted “at-the-money,” meaning that the exercise price of the option equals the market price of the underlying stock on the date of the grant.The stock plans of many public companies prohibit the granting of below-market options; other companies disclose in their SEC reports that stock options are granted at market and prepare their financial statements on that basis.The term “backdating” refers to a number of option granting practices in which the reported grant date is different from the date on which the option is actually awarded, resulting in an option that is already “in-the-money” at the time of the grant.
In its most basic form, backdating can range from the blatant falsification of a document to take advantage of a lower stock price to allowing executives to select a grant date during a specified period, for example during the 30 days after the grant is approved by the board or committee.