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Posted by / 16-Jul-2020 06:24

Backdating fraud

For instance, public companies generally grant stock options in accordance with a formal stock option plan approved by shareholders at an annual meeting.

Many companies' stock option plans provide that stock options must be granted at an exercise price no lower than fair market value on the date of the option grant.

If a company backdated its stock options, but failed to recognize a compensation expense, then the company's accounting may not be correct, and its quarterly and annual financial reports to investors may be misleading.

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.

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.

There is a five-year statute of limitations for securities fraud, and under the Sarbanes-Oxley Act of 2002, option grants to senior management must be reported within two days of the grant date.

This all but eliminated the opportunity for senior management to engage any meaningful options backdating.

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The problem with this practice, according to the SEC, was that stock option backdating, while difficult to prove, could be considered a criminal act.

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