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Backdating: Insight Into a Scandal
Chief executive officers are driven by success, and the more they can get for their companies, the better their personal fortunes. At least that’s the theory behind corporations loading up their CEOs with stock or, as the experts put it, “aligning CEO and shareholder interests. But a new study from researchers at the University of Georgia, the University of Notre Dame, and Lehigh University shows that sometimes the opposite is true.
Ex-CEO of investment giant Pimco given longest sentence to date in college admissions scandal. Former Pimco CEO Douglas Hodge, center.
NEW YORK Fortune — In every big corporate scandal, a company must make a decision about where to draw the line: Who to throw under the bus, and who to place in the driver’s seat. McGuire “. But the corporate blame game is almost never a black-and-white matter. Deciding who stays and who goes requires a tricky combination of weighing: 1 the facts; 2 the likely impact of firings on the company’s operations and on Wall Street; and 3 the reaction of the feds, who may treat the company with greater or lesser kindness in their own investigations, based on their assessment of how fully the company has cleaned house.
Here’s a closer look at how UnitedHealth Charts , Fortune weighed in on these tricky issues – and why. Like McGuire, Hemsley received millions of backdated stock options – in fact, he got one grant dated before he even started work at the company. And like McGuire, he received a huge windfall with the dubious decision to “suspend” two million executive options, replace them at a lower and apparently backdated price, then “reactivate” them 10 months later. Hemsley also faced a similar conflict of interest as McGuire, in retaining UnitedHealth director William Spears, chairman of the board’s compensation committee, to manage a chunk of his personal fortune.
UnitedHealth’s outside investigator, former SEC enforcement chief William McLucas, notes in his report that internal controls involving broad options grants to thousands of employees were “inadequate” and “senior management failed to ensure that the options granting practices were appropriate. UnitedHealth’s HR department, as a matter of policy, for years awarded grants to new and promoted employees that were backdated to the lowest stock price of the quarter.
McLucas found that “these practices were followed openly in the company, at least within the HR organization.
Option Backdating: The Next Big Corporate Scandal?
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public scandal. We focus on the SEC’s investigations of option backdating in the wake of numerous media articles on the practice of backdating.
Washington, D. Anderson, of Atherton, Calif. Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement, stated, “The Apple case demonstrates the Commission’s ongoing commitment to take action against stock options backdating and other executive compensation abuses. When corporate officers enrich themselves at the expense of a company’s shareholders, the Commission will hold the responsible individuals accountable, particularly where, as here, the responsible individuals are among those obligated to ensure that the company complies with all applicable securities laws and that its financial statements are accurate.
Marc J. Fagel, Associate Regional Director of the SEC’s San Francisco Regional Office, stated, “Apple’s shareholders relied on Heinen and Anderson, as respected legal and accounting professionals, to ensure the accurate reporting of the company’s executive compensation. Instead, they failed in their duties as gatekeepers and caused Apple to conceal millions of dollars in stock option expenses. According to the Commission’s complaint, filed in the Northern District of California, Apple granted 4.
Because the options were in-the-money when granted i. The Commission alleges that, in order to avoid reporting this expense, Heinen caused Apple to backdate options to January 17, , when Apple’s share price was substantially lower. Heinen is also alleged to have directed her staff to prepare documents falsely indicating that Apple’s Board had approved the Executive Team grant on January Anderson, who should have realized the implications of Heinen’s actions, failed to disclose key information to Apple’s auditors and neglected to ensure that the company’s financial statements were accurate.
Both Heinen and Anderson personally received millions of dollars in unreported compensation as a result of the backdating.
Executive Tripped by 409A and Backdating Scandal
What is backdating? Backdating is the practice of marking a document with a date that precedes the actual date. What is the benefit of backdating ESO grants? ESOs are usually granted at-the-money, i. Because the option value is higher if the exercise price is lower, executives prefer to be granted options when the stock price is at its lowest. Backdating allows executives to choose a past date when the market price was particularly low, thereby inflating the value of the options.
Superstar UnitedHealth CEO Bill McGuire was ousted in an options-backdating scandal. So why was his #2 promoted? Fortune’s Peter Elkind.
Tobak’s take on Steve Jobs’ role in the stock options backdating scandal at Apple. The allegations of illicit sex, drugs, and rock and roll reminded me of the 60s Funny, I can’t remember. While the story was enthralling, I didn’t understand what any of it had to do with a federal investigation into stock option 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?
After all, stock option backdating is all the rage these days. You’d think they’d be up to their eyeballs in rope. I count no fewer than 38 top executives at 19 high-tech companies that have bit the dust over this stuff. And we’re just getting started. That’s serious fallout considering that options backdating is legit as long as the company reports it and accounts for it accurately. 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. If you cover it up and fail to report that expense, the way Apple’s folks allegedly did, well, that amounts to accounting fraud.
In addition to his prison term, U. District Judge Nathaniel M. From the day he surrendered to authorities last March, Hodge, a resident of Laguna Beach, was among the highest-profile names in a scandal headlined with them. He rose to the head of Pimco, the bond management company based in Newport Beach, before retiring from the post of chief executive in Full Coverage: The latest updates on the college admissions scheme.
An example is the options backdating scandal of the mids, when researchers such as Erik Lie of the University of Iowa found that.
This was one of many options backdating scandals to occur within the last decade. To prevent similar fraudulent activity in the future, Apple should take measures to increase consequences for bad behavior or incentivize whistle-blowers. Options backdating consists of granting an option that is dated prior to the date the option is actually granted. It allows the grantee to receive options that are already in the money, which allows him or her to glean a much higher profit. Apple admitted to granting backdated options on 15 dates between and 2.
It is rare for someone to commit unethical behavior without the expectation of gaining some sort of benefit. In a deposition for the case SEC v. Heinen, Jobs also claimed that recognition by his peers was what drove him to ask for the options. Jobs and the other executives felt that they deserved a reward for their contributions to the company. They may have been justified in their expectation of large compensation: these top Apple executives could have easily joined a competing company and received large sign-on bonuses and salaries.
The board of directors benefited from the backdated options by being able to reward Jobs and other top executives who were valuable to the company. The board did not want to lose any of the executives and therefore wanted to give them an incentive to stay with Apple. The backdated option grants in question occurred towards the end of the tech bubble when many executives were switching companies.
Many of the options that Jobs and other executives had been granted were worthless due to the collapse of the tech bubble.
The U. Court of Federal Claims concluded that a genuine issue of material fact exists, namely, whether the stock option was discounted at the time it was granted. The court found this is a necessary factual predicate to tax liability under Internal Revenue Code IRC Section A, and remanded the case to trial to determine whether the option was indeed discounted. Plaintiffs Dr. Sehat Sutardja and his wife, Weili Dai, argued that even if the option had been granted at a discount, Section A would not apply, as there was no actual compensation creating a taxable event until Sutardja exercised the vested portions and sold the shares.
The corporate stock option backdating scandal has dominated business page headlines since the summer of The SEC has launched investigations of more.
Forbes’ latest cover story details Apple’s options-backdating scandal, and a copy of Steve Jobs’ sworn testimony provides a rare glimpse into a surprisingly vulnerable, humble CEO. Forbes obtained the page deposition, taken on March 18, at Apple headquarters, using the Freedom of Information Act. In his three-hour interview with the Securities and Exchange Commission, Jobs claimed he was ignorant of the backdating and accounting consequences, adding that he was pressured to ask for a generous stock-options package because his board was not supportive of him.
I just felt like there is nobody looking out for me here, you know So I wanted them to do something, and so we talked about it I thought I was doing a pretty good job. My body thanks you. Jobs in January announced his six-month medical leave due to “complex” health issues. Apple on Wednesday said it expects Jobs to return end of June. View Comments. Sponsored Stories Powered By Outbrain.
Spotlight on Stock Options Backdating
Jacob “Kobi” Alexander has been on the run since , when the U. He is now living in Namibia and the U. Department of Justice said. The government had been trying to seize the holdings of two of Alexander’s investment accounts since he fled the country four years ago, but Alexander and his wife had been fighting the seizure.
The practice of falsifying the date stock options were granted in order to make them more valuable to company executives was widespread in the technology industry over the past decade.
Employee stock options typi- cally have a strike price that is equal to the fair market value of the stock on the day the option was granted. “Backdating” refers to a.
A new threat to the perceived propriety of American business has emerged in the wake of past financial scandals. Paul Worth, partner and head of fraud and asset recovery at Eversheds, explains why a number of major US companies are now under investigation by American authorities over their approach to granting stock options. The options backdating problem stems from a number of practices adopted when granting employee stock options.
Stock options are generally granted to executives as an incentive. They tie executive pay to shareholder returns by allowing executives to earn compensation equal to the difference between the stock price at the date of the grant, the strike price, and the stock price at the date the option is exercised. The executive therefore has an incentive to increase the company’s stock price so that the option can be exercised for a profit.
UnitedHealth and the scandal blame game
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The options backdating problem stems from a number of practices adopted when granting employee stock options. Stock options are generally.
Before Lehman Brothers imploded, before Bernard L. Karatz, the former chief executive of KB Home , to five years of probation. His case is likely to be the last criminal trial relating to backdating, a scandal that ensnared dozens of executives over allegations that the dates of stock-option awards had been manipulated to enrich recipients.
When the first cases emerged in , they looked like low-hanging fruit for federal prosecutors. The Securities and Exchange Commission and the Justice Department investigated more than companies. Internal investigations by companies led to scores of financial restatements and dozens of executive dismissals. But on the criminal front, the government had mixed results, winning several trials but also losing a number of prominent cases.
In all, 12 executives across the country were received criminal sentences, five of them prison terms. The others were sentenced to probation. Clark, a criminal defense lawyer at Dewey LeBoeuf who has done work on backdating cases.
Stock option backdating scandal could grow: report
Fortune Magazine — It’s tempting to roll your eyes at the latest options backdating news – more evidence that in certain ways American executives are still the world’s most creative. But in fact it’s worth a closer look, because this type of conniving, which involves backdating exercise dates rather than grant dates, is different and in some ways worse.
Bizarrely, while this book-cooking appears to be a tax scam, it may actually leave the U.
The practice of falsifying the date stock options were granted in order to make them more valuable to company executives was widespread in.
In finance , options backdating is the practice of altering the date a stock option was granted, to a usually earlier but sometimes later date at which the underlying stock price was lower. This is a way of repricing options to make them more valuable when the option ” strike price ” the fixed price at which the owner of the option can purchase stock is fixed to the stock price at the date the option was granted.
Cases of backdating employee stock options have drawn public and media attention. Stock options are often granted to the upper management of a corporation. While options backdating is not always illegal,  it has been called “cheating the corporation in order to give the CEO more money than was authorized. To be legal, backdating must be clearly communicated to the company shareholders, properly reflected in earnings, and properly reflected in tax calculations.
The U. Corporations, however, have defended the practice of stock option backdating with their legal right to issue options that are already in the money as they see fit, as well as the frequent occurrence in which a lengthy approval process is required. In essence, the revision enabled companies to increase executive compensation without informing their if the compensation was in the form of stock options contracts that would only become valuable if the underlying stock price were to increase at a later time.
The problem with this practice, according to the SEC, was that stock option backdating, while difficult to prove, could be considered a criminal act. One of the larger backdating scandals occurred at Brocade Communications , a data storage company. It allegedly failed to inform investors, or account for the options expense s properly. Since the advent of stock option backdating, corporate policies have moved first toward a posture of encouraging backdating as a standard business practice, but then toward a posture of avoidance as public scandals emerged and investigations into fraudulent or dishonest business practices increased despite a commonly held belief that backdating was an acceptable and legal practice.
In the modern business world, the Sarbanes-Oxley Act has all but eliminated fraudulent options backdating by requiring companies to report all options issuances within 2 days of the date of issue.