Options backdating cases


13-Oct-2019 12:00

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A 2004 NY Times article describes this case in greater detail (the article is available here), and so does a 2006 article in Tax Notes Magazine (available here).

In a 2004 CNBC interview, Remy Welling said that "this particular -- well, it's called a 30-day look-back plan, is even widespread in Silicon Valley and maybe throughout the country."The terms "spring loading" and "bullet dodging" refer to the practices of timing option grants to take place before expected good news or after expected bad news, respectively. This is what Professor Yermack hypothesized in his article discussed above, though he never used these terms.

There is also some relatively early anecdotal evidence of backdating.

A particularly interesting example is that of Micrel Inc.

In particular, he found that stock prices tend to increase shortly after the grants.

He attributed most of this pattern to grant timing, whereby executives would be granted options before predicted price increases.

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Instead, she decided to risk criminal prosecution by blowing the whistle.

Unless corporate insiders can predict short-term movements in the stock market, my results provided further evidence in support of the backdating explanation.

In a second study forthcoming in the Journal of Financial Economics (available at Randy Heron of Indiana University and I examined the stock price pattern around ESO grants before and after a new SEC requirement in August of 2002 that option grants must be reported within two business days.

In comparison, had the options been granted at the year-end price when the decision to grant to options actually might have been made, the year-end intrinsic value would have been zero.

Backdating does not violate shareholder-approved option plans.

This pioneering study was published in the Journal of Finance in 1997, and is definitely worth reading.



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