and dozens of lesser-known technology firms were implicated in the scandal. .) Read on to find out how the scandal emerged, what brought it to and end and what you can learn from it now.Options Backdating The essence of the options backdating scandal can be summarized simply as executives falsifying documents in order to earn more money by deceiving regulators, shareholders and the Internal Revenue Service (IRS).Therefore you go from paying 23 per cent tax on your gain to paying 46 per cent on your gain.” Something else to consider about backdating stock options.According to Alan Ellman of Labaton Sucharow LLP, “unlike the typical securities fraud scenario, options backdating places the general counsels at the center of the fraudulent conduct.” Ellman adds: The general counsel is essential to the creation of the stock options award plan; explains the rules of the plan to management; prepares stock option grant documents, such as unanimous written consents, which directors use to formally approve option grants; files forms with the U. Securities and Exchange Commission acknowledging the grants; and signs proxy statements which generally state that options are granted at the fair market value of the stock on the date of grant.When those firms have no ethical boundaries, their wares become suspect.From a shareholder's perspective, nobody likes to be lied to when providing the financing and paying the salaries.
Why It Matters Betting on stock prices when you already know the answer is dishonest.
The roots of the scandal date back to 1972, when an accounting rule was put in place permitting companies to avoid recording executive compensation as an expense on their income statements so long as the income was in the form of stock options that were granted at a rate equal to the market price on the day of the grant, often referred to as an at-the-money grant.
This enabled companies to issue enormous compensation packages to senior executives without notifying shareholders.
In the mid-2000s, an investigation by the Securities and Exchange Commission resulted in the resignations of more than 50 senior executives and CEOs at firms across the industry spectrum from restaurants and recruiters to home builders and healthcare.
High-profile companies including Apple Computers, United Health Group, Broadcom, Staples, Cheesecake Factory, KB Homes, Monster.com, Brocade Communications Systems, Inc., Vitesse Semiconductor Corp.