The SEC and other federal authorities are currently investigating more than 50 companies suspected of illegal, undisclosed options backdating practices, and the first criminal charges relating to these practices are expected shortly.The practice of backdating options is not illegal as long as it is disclosed to shareholders.Backdating is perpetrated by “cherry-picking,” after the fact, the lowest points the company stock traded throughout the previous year when calculating the exercise price of option grants.The exercise price of an option is crucial because it is the price the executive or employee option holder must pay to the company when exercising options in return for newly issued shares.17, 2001, through the end of the month, 511 top executives at 186 of these companies got stock option grants. They were worth about 5 million when granted, based on a standard method of valuing stock options.“At Stryker Corp., a Michigan maker of orthopedic products, onetime stock option committee member John Lillard said he didn’t regret the decision to award options nine days after the attack. 20, 2001, at the bottom of a sharp ‘V’ pattern in the share price.“Mr.The number who received grants was 2.6 times as many as in the same stretch of September in 2000, and more than twice as many as in the like period in any other year between 1999-2003.“Ninety-one companies that didn’t regularly grant stock options in September did so in the first two weeks of trading after the terror attack. ‘If you believe the company is going to do well, and here is an external event that is affecting the market, and you’ve made a decision to reward executives, you go ahead with it,’ Mr. ‘Life goes on.’ …“At Stryker…post-9/11 stock option grants to several executives appear to have been initiated by the chairman and CEO at the time, John W. Brown would ‘periodically tell us if he thought the stock was attractive,’ and then the board would decide whether to award options, said Mr. Besides, he added, no one could have known whether the stock would rebound immediately or continue to slide.“Mr.
Lie estimates that 29% of the nearly 8,000 firms studied had backdated or otherwise manipulated grants to top executives at some point between 1996-2005.“The paper, authored by Dr.
But are options really as great for all parties as many have assumed?
The stock option “backdating” scandal has implicated several (mostly technology) companies over the past few months.
But first, on the same page of the July 15 Wall Street Journal is another article quoting an early whistle-blower in the backdating scandal.
He suspects that it will turn out much worse than what has been exposed in the media thus far (emphasis added): “Erik Lie, a University of Iowa business professor whose work helped fuel regulatory inquiries into backdating, is expected to release fresh research this weekend showing anomalies that suggest a huge cohort of companies may have played games with their options grants.