Option backdating and
New research (July 2006) by Eric Lie and Randall Heron found that 29.2% of companies issuing options to executives and/or directors between 19 have grant date patterns that suggest backdating or other manipulative practices (such as "spring-loading," the announcement of a grant before good news is released), and 23% of options issued to executives appear to have been backdated or spring-loaded.The pattern was somewhat more common in technology companies, smaller companies, companies granting options to more executives and directors, and companies with higher stock price volatility.Typically, the grant date of the stock options is the same as the date of the board meeting.This is important because the grant date is what determines the exercise price on the options.Only 7.7% of companies filing within the new two-day reporting window for options grants show a pattern of backdating, compared to 19.9% of companies that did not meet the requirements.The results focused on the 51% of the grants during the period that were unscheduled and at-the-money.
When she was hired, Company XYZ's board of directors offered Jane an attractive salary as well as an annual grant of 1,000 Company XYZ stock options.
Today, regulations in the Sarbanes-Oxley Act require companies to report option grants to the SEC within two business days.
Dozens of companies are under investigation by the Securities and Exchange Commission for backdating stock options. Alternatively, a company could hit a low without actually backdating its options by granting awards just before a major (positive) earnings announcement, a practice known as "spring-loading." A more extreme and more clearly illegal practice was to say that an award was exercised on a date other than its actual exercise date.
Under normal circumstances, she pays the per share exercise price and can turn around and sell those shares on the exchange for each, netting a profit of per share, or ,000 total.
But if Jane's options are backdated per the example above, then her exercise price would be only per share.