A new study suggests the options backdating scandal that took place in the mid-2000s was just the tip of the iceberg.

Research conducted at the University of Houston's C.T.BauerCollege of Business used statistical analysis to investigate patterns of stock option granting at 4,000 public companies. The goal of the effort was to identify grants that were given when a firm's stock was at or near a low price point.

Results
The results highlight 141 firms that gave senior executives stock grants at extraordinarily favorable prices. The researchers argue that giving grants on such favorable days demonstrates a high likelihood of options backdating. The Houston study is particularly enlightening in that 92 of the firms were never formally investigated when the options backdating scandal was discovered. (Wall Street continues to attract fresh hordes of ghoulish people committing the same old crimes. Read about them in Tales From Wall Street's Crypt.)

Backdating Review
Options backdating, as you may recall, involves changing the date on which a firm claims to have issued a stock option grant. Granting options at a lower rate than the current trading price guarantees instant profits to executives.

Options backdating was not illegal at the time the options in question were granted as long as proper reporting procedures were followed. That noted, the Wall Street Journal cited Omnicom Group, Dress Barn, and United Rentals as firms identified in the study that likely participated in the practice. Some of these firms weren't even coy about their efforts, brazenly granting options at the lowest trading point in near memory. (Learn more in The Dangers Of Backdating.)

SEC Backlog
The University reports that "Accountancy & Taxation Associate Professor Scott Whisenant and Visiting Scholar Rick Edelson, authors of the study, reported their findings to the Securities and Exchange Commission several months ago, providing a preliminary list of suspected companies." Should the Securities and Exchange Commission (SEC) take a break from investigating the plethora of other scandals Wall Street has cooked up to delve back into this one, the CEOs of these firms are likely to find themselves the subject of some uncomfortable attention. (Learn how to spot a company's fiscal discrepancies, read Playing The Sleuth In A Scandal Stock.)

Implications
The implications of the study are particularly interesting in that it covered only 4,000 firms. Researchers have suggested that expanding the universe to include a larger number of companies would likely double or triple the number of firms likely to have participated in options backdating.

Statute of limitation issues may enable regulators and scofflaws alike to brush this one under rug, but shareholders would do well to pay attention. With corporate profits in the red at more than a few firms and stock prices sitting somewhere near the basement, rich compensation to CEOs who run money-losing businesses is certainly cause for concern, especially when the money they are taking home has come out of your pocket. (For further reading, check out The Biggest Stock Scams Of All Time.)

For a closer look at the methodology behind the study, you can view the researchers' process and statistical results here.

Related Articles
  1. Options & Futures

    What Does Quadruple Witching Mean?

    In a financial context, quadruple witching refers to the day on which contracts for stock index futures, index options, and single stock futures expire.
  2. Options & Futures

    4 Equity Derivatives And How They Work

    Equity derivatives offer retail investors opportunities to benefit from an underlying security without owning the security itself.
  3. Options & Futures

    Five Advantages of Futures Over Options

    Futures have a number of advantages over options such as fixed upfront trading costs, lack of time decay and liquidity.
  4. Term

    What is Pegging?

    Pegging refers to the practice of fixing one country's currency to that of another country. It also describes a practice in which investors avoid purchasing security shares underlying a put option.
  5. Economics

    Why Enron Collapsed

    Enron’s collapse is a classic example of greed gone wrong.
  6. Home & Auto

    Understanding Pre-Qualification Vs. Pre-Approval

    Contrary to popular belief, being pre-qualified for a mortgage doesn’t mean you’re pre-approved for a home loan.
  7. Investing Basics

    An Introduction To Structured Products

    Structured products take a traditional security and replace its usual payment features with a non-traditional payoff.
  8. Options & Futures

    Contango Versus Normal Backwardation

    It’s important for both hedgers and speculators to know whether the commodity futures markets are in contango or normal backwardation.
  9. Investing Basics

    What Does Contango Mean?

    Contango​ is when the futures price of a commodity is higher than the expected future spot price.
  10. Options & Futures

    The Short Guide To Insure Stock Market Losses

    The best ways to hedge against losses are to diversify your portfolio and to use a variety of options.
RELATED FAQS
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. What is after-hours trading? Am I able to trade at this time?

    After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Full Answer >>
  3. How do hedge funds use equity options?

    With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
  4. Can mutual funds invest in options and futures? (RYMBX, GATEX)

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  5. How does a forward contract differ from a call option? (AAPL)

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  6. What are some high-profile examples of wash trading schemes?

    In 2012, the Royal Bank of Canada (RBC) was accused of a complex wash trading scheme to profit from a Canadian tax provision, ... Read Full Answer >>
Hot Definitions
  1. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  2. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  3. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  4. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  5. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center