What is Options Backdating?

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Options backdating is the process of granting an employee stock option (ESO) that is dated before its actual issuance. In this way, the exercise (strike) price of the granted option can be set at a lower price than that of the company's stock price at the granting date. This process makes the granted option "in the money" (ITM) and therefore of greater value to the holder.The practice of backdating options has been considered unethical and is now the subject of regulatory scrutiny, making it far less widespread in recent years.

Definition

Options backdating refers to the process of setting the date of employee stock options (ESO) before they are actually issued. This allows the exercise price of the granted options to be lower than the company's stock price on the grant date, making the options 'in-the-money' (ITM) and thus more valuable to the holder.

Origin

Options backdating became popular in the 1990s and early 2000s as companies sought to attract and retain talent through this method. However, over time, it was deemed unethical and came under strict regulatory scrutiny, especially after the U.S. Securities and Exchange Commission (SEC) investigated several companies in 2006.

Categories and Features

Options backdating primarily involves two types: one where the grant date is backdated to a time when the stock price was lower, and another where the exercise date is moved forward to a time when the stock price is higher. The former increases the intrinsic value of the options, while the latter can affect tax and financial reporting. Although this practice can increase employee benefits in the short term, it may harm the company's reputation and financial transparency in the long run.

Case Studies

A notable case is Apple Inc., which was found to have engaged in options backdating in 2006. Investigations revealed that Apple backdated options for several executives between 2001 and 2006, leading to the need for restating financial statements and paying fines. Another case is Broadcom, a U.S. technology company, which was also investigated in 2006 for similar practices and eventually paid hundreds of millions in fines to settle the charges.

Common Issues

Investors might ask if options backdating is legal. While it may not always violate laws, it is generally considered unethical and can lead to legal and financial issues. Another common misconception is that options backdating is always beneficial for the company, whereas it can actually result in regulatory penalties and reputational damage.

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