What Are Options Backdating?
Options backdating is the process of granting an option that is dated before the actual issuances of the option. In this way, the exercise price of the granted option can be set at a lower price than that of the company's stock at the granting date. This process makes the granted option "in the money" and of value to the holder.
Understanding Options Backdating
This process occurred when companies were only required to report the issuance of stock options to the SEC within two months of the grant date. Companies would simply wait for a period in which the company's stock price fell to a low and then moved higher within two months. The company would then grant the option but date it at or near its lowest point. This is the granted option that would be reported to the SEC.
The act of options backdating became much more difficult after companies were required to report the granting of options to the SEC within two business days. This adjustment to the filing window came with the Sarbanes-Oxley legislation.
Enforcement of Options Backdating Restrictions
After the two-day reporting rule went into effect, the SEC found numerous companies were still backdating options in violation of the legislation. Disordered, untimely paperwork was cited as the cause in some cases of unintentional backdating. Initially, lax enforcement of the reporting rule was also blamed for allowing many companies to sidestep the rule adjustment that stemmed from Sarbanes-Oxley.
The SEC would go on to investigate and sue companies and related parties that were found to backdate options, in some cases, as part of fraudulent and deceptive schemes. For example, the SEC filed a civil lawsuit in 2010 against Trident Microsystems and two former senior executives from the company for stock option backdating violations. The legal complaint alleged that from 1993 to 2006, the former CEO and the former chief accounting officer directed the company to engage in schemes to provide undisclosed compensation to executives and certain employees.
CEO Frank C. Lin was accused of backdating stock option documents to give the appearance that options were granted on earlier dates than issued. This scheme was allegedly used to the benefit of officers and employees of the company as well as its directors. This included options backdating presented in offer letters to new hires. Annual and quarterly reports filed by the company did not include the compensation costs that stemmed from the options backdating incidents.
Trident and its former executives agreed to settle the case without admitting or denying the allegations in the SEC’s complaint.