Backdating stock options: a crisis in confidence

Stock option backdating is the grant of an option on one date with an exercise price based on the market price of the stock at an earlier date, with the market price of the stock being lower at the earlier date. Under SFAS No. 123 or SFAS No. 123 R where a company was required to record compensation...

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Bibliographic Details
Published in:The Corporate Governance Advisor 2006-09, Vol.14 (5), p.1
Main Authors: Stein, Jeffrey M, Brown, Sara Walden
Format: Article
Language:English
Subjects:
Compensation
Disclosure
Executives
Fair market value
Financial accounting standards
Financial statements
Grants
Litigation
Market prices
Public companies
SEC regulations
Securities fraud
Securities law
Stock options
Stock prices
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Summary:Stock option backdating is the grant of an option on one date with an exercise price based on the market price of the stock at an earlier date, with the market price of the stock being lower at the earlier date. Under SFAS No. 123 or SFAS No. 123 R where a company was required to record compensation cost using the fair value method, the impact of a backdated option would depend on the nature and magnitude of changes in conditions that affect option valuation between the incorrect date used and the actual grant date. At the same time that the number of lawsuits relating to backdating is increasing, companies are learning that their Directors' and Officers' Liability Insurance carriers may be seeking to deny coverage under their policies for actions relating to options backdating. The tidal wave of investigations and prosecutions relating to options backdating and other abuses relating to stock options were largely unforeseen, and it is difficult to predict the lifecycle of this disruption.
ISSN:1067-6163