Last week the Do J brought criminal charges against two Brocade Communications Systems executives, while the SEC filed a civil suit against the same two and the CFO.As expected, the charges focused on backdating stock options by doctoring employment documents, neglecting to record the stock-option expense on the company’s books, and misleading investors.In some cases, the date of exercise, rather than the date of grant, was changed to an earlier date to convert ordinary income into capital gains.In general, companies engaging in a classic backdating transaction chose a date when the stock price was at a low point and chose that favorable date as the grant date.
Additionally, companies can use backdating to produce greater executive incomes without having to report higher expenses to their shareholders, which can lower company earnings and/or cause the company to fall short of earnings predictions and public expectations.
(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.
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.
Stock option backdating has erupted into a major corporate scandal, involving potentially hundreds of publicly-held companies, and may even ensnare Apple's icon, Steve Jobs.
While the focus of the Securities and Exchange Commission ("SEC") centers on improper accounting practices and disclosures, thereby violating securities laws, a major yet little explored consequence to the scandal involves potentially onerous taxes on those who received these options.