Sec stock option backdating cases

Furthermore, the pre-and post-grant price pattern has intensified over time (see graph below).

Most shareholder approved option plans prohibit in-the-money option grants (and thus, backdating to create in-the-money grants) by requiring that option exercise prices must be no less than the fair market value of the stock on the date when the grant decision is made. For example, because backdating is used to choose a grant date with a lower price than on the actual decision date, the options are effectively in-the-money on the decision date, and the reported earnings should be reduced for the fiscal year of the grant.

(Under APB 25, the accounting rule that was in effect until 2005, firms did not have to expense options at all unless they were in-the-money.

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.

There is also some relatively early anecdotal evidence of backdating.

A particularly interesting example is that of Micrel Inc.

This made me think about the possibility that some of the grants had been backdated.

I further found that the overall stock market performed worse than what is normal immediately before the grants and better than what is normal immediately after the grants.

For several years, Micrel allowed its employees to choose the lowest price for the stock within 30 days of receiving the options.

After these stock option terms came to the attention of the IRS in 2002, it worked out a secret deal with Micrel that would allow Micrel to escape million in taxes and required the IRS to keep quiet about the option terms.

However, under the new FAS 123R, the expense is based on the fair market value on the grant date, such that even at-the-money options have to be expensed.) Because backdating is typically not reflected properly in earnings, some companies that have recently admitted to backdating of options have restated earnings for past years. The exercise price affects the basis that is used for estimating both the company's compensation expense for tax purposes and any capital gain for the option recipient.

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