Companies caught backdating

Companies caught backdating

Comverse Technology, Inc., founded in Israel, was a technology company located in Woodbury, New York in the United States, that developed and marketed telecommunications software.The company focused on providing value-added services to telecommunication service providers, in particular to mobile network operators.This means they must wait for the stock to appreciate before making any money.(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.That is, they grant their executives stock options with an exercise price (or price at which the employee can purchase the common stock at a later date) equivalent to the market price at the time of the option grant.Whenever I write about backdating, many people write in to tell me that backdating's not illegal; you just have to account for it correctly.Since so many people think this is an important point, I thought I'd do a post addressing just that contention. What I assume people mean is that granting in-the-money options is not illegal, so long as you account for it properly. But the whole point of backdating is to pretend that you're not granting in-the-money options when in fact you are.And to say it's up to the bean-counters to catch this situation is silly, because the whole reason you're using phony dates is so that the bean-counters won't know what you really did.

If the company sets the prices of the options grant well below the market price, they will instantaneously generate an expense, which counts against income.

When then-general counsel Nancy Heinen emailed Apple (AAPL) CEO Steve Jobs such a spreadsheet on January 30, 2001, she noted that it was a bad idea to choose January 2 as the grant date--even though that was the day the stock had been at its lowest--if they wanted "to avoid any perception that the Board was acting in appropriately [sic] for insiders prior to Macworld announcements." (They ultimately chose one of the next-best dates from after Macworld.) Now isn't it obvious to everyone on that email that shareholders are being misled?

She's saying that shareholders will naively think that the options were really granted on January 2, leaving them suspicious of springloading.

Law360, New York (June 15, 2006, AM EDT) -- It is virtually impossible to pick up a newspaper these days and not see an article about the ever-growing list of companies being caught up in investigations concerning allegations of backdated stock options.

Despite the attention paid to this issue, little has been written explaining why backdating options is problematic and potentially illegal.

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