Because the option value is higher if the exercise price is lower, executives prefer to be granted options when the stock price is at its lowest.
Backdating allows executives to choose a past date when the market price was particularly low, thereby inflating the value of the options.
The number of shares subject to option was 250,000 and the exercise price was (the trough in the stock price graph below.) Given a year-end price of , the intrinsic value of the options at the end of the year was (-) x 250,000 = ,750,000.
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.
Jasper signed all of Maxim’s filings with the SEC at that time.
Liability was found in the Maxim case partly because backdating and a failure to expense the practice were proven, Fickes notes.
This is a way of repricing options to make them valuable or more valuable when the option "strike price" (the fixed price at which the owner of the option can purchase stock) is fixed to the stock price at the date the option was granted.
Cases of backdating employee stock options have drawn public and media attention.
The practice of backdating stock options as a way of retaining valued employees is legal, as long as the true expense of the backdated options is recorded as a company expense for employee compensation.
According to a study by Erik Lie, a finance professor at the University of Iowa, more than 2,000 companies used options backdating in some form to reward their senior executives between 19.
The SEC’s opinions regarding backdating and fraud were primarily due to the various tax rules that apply when issuing “in the money” stock options vs.
High-profile companies including Apple Computers, United Health Group, Broadcom, Staples, Cheesecake Factory, KB Homes, Monster.com, Brocade Communications Systems, Inc., Vitesse Semiconductor Corp.
and dozens of lesser-known technology firms were implicated in the scandal. .) Read on to find out how the scandal emerged, what brought it to and end and what you can learn from it now.