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13-Aug-2019 23:15

The other major way that backdating can be misleading to investors relates to the method by which the company accounts for the options.

Until very recently, a company that granted stock options to executives at fair market value did not have to recognize the cost of the options as a compensation expense.

This is not always the case, according to a ruling by federal judge William Alsup of the U. District Court for the Northern District of California.

According to Alsup’s reasoning and subsequent ruling, it is improper to infer fraudulent activity based solely on the occurrence of options backdating – further facts must be present and proven before the act can be considered to be fraudulent.

At one extreme, where it is clear that top management was guilty of conscious wrongdoing in backdating, attempted to conceal the backdating by falsifying documents, and where the backdating resulted in a substantial overstatement of the company's profitability, SEC enforcement actions and even criminal charges have resulted.

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.

If a company grants options on June 1 (when the stock price is 0), but backdates the options to May 15 (when the price was ) in order to make the option grants more favorable to the grantees, the fact remains that the grants were actually made on June 1, and if the exercise price of the granted options is , not 0, it is below fair market value.

Thus, backdating can be misleading to shareholders in the sense that it results in option grants that are more favorable than the shareholders approved in adopting the stock option plan.

At one extreme, where it is clear that top management was guilty of conscious wrongdoing in backdating, attempted to conceal the backdating by falsifying documents, and where the backdating resulted in a substantial overstatement of the company's profitability, SEC enforcement actions and even criminal charges have resulted.

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.

If a company grants options on June 1 (when the stock price is 0), but backdates the options to May 15 (when the price was ) in order to make the option grants more favorable to the grantees, the fact remains that the grants were actually made on June 1, and if the exercise price of the granted options is , not 0, it is below fair market value.

Thus, backdating can be misleading to shareholders in the sense that it results in option grants that are more favorable than the shareholders approved in adopting the stock option plan.

Options backdating is the practice of altering the date a stock option was granted, to a usually earlier (but sometimes later) date at which the underlying stock price was lower.