Backdating pay windows not validating
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.
Numerous financial analysts replicated and expanded upon the prior academic research, developing lists of companies whose stock price performance immediately after options grants to senior management (the purported dates of which can be ascertained by inspecting a company's Form 4 filings, generally available online at the SEC's website) was suspicious.For instance, public companies generally grant stock options in accordance with a formal stock option plan approved by shareholders at an annual meeting.Many companies' stock option plans provide that stock options must be granted at an exercise price no lower than fair market value on the date of the option grant.To avoid having to pay higher taxes, many companies adopted a policy of issuing “at the money” stock options in lieu of additional income, with the idea that the executive or employee would benefit through the option by working to increase the value of the company without exceeding the one million dollar deductibility cap for executive income.When company executives discovered that they had the ability to backdate stock option grants, thus making them both tax deductible and “in the money” on the date of actual issuance, the common practice of stock option backdating for financial gain began on a widespread level.
Toward the other extreme, where the backdating was a result of overly informal internal procedures or even just delays in finalizing the paperwork documenting options grants, not intentional wrongdoing, there is likely to be no formal sanction—although the company may have to restate its financial statements to bring its accounting into compliance with applicable accounting rules.