The case is notable for two reasons: it has been one of the few times that an options-backdating case actually went to trial, and it shows that CFOs and chief executives have no way to hide from improper expensing, even years later. Jasper appealed the case on trial errors he claims violated his rights, but did not dispute his knowledge of or involvement in the backdating scheme.
Court of Appeals for the Ninth Circuit agreed with a district court on Tuesday that the former CFO of semiconductor concern Maxim Integrated Products, Carl Jasper, would be on the hook for backdating stock options without expensing them.
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.
Law360, New York (June 15, 2006, AM EDT) -- It is virtually impossible to pick up a newspaper these days and not see an article about the ever-growing list of companies being caught up in investigations concerning allegations of backdated stock options.
Despite the attention paid to this issue, little has been written explaining why backdating options is problematic and potentially illegal.
In theory, it’s fine to offer an employee a backdated stock option — such as one for when a firm’s stock is currently at — as long as it’s accounted for correctly.
Ninth Circuit Judge Carlos Bea noted in his opinion on the appeals case yesterday that for “in the money” options, in which an option’s strike price is typically lower than a firm’s share price, accounting principles require the company to record an expense for the profit to the options recipient, since the company could have sold its stock at the market price rather than grant an option.
“It falls on them because the statements were materially false at a time they were representing those statements were accurate,” says Mark Fickes, partner at Braun Hagey & Borden and former lead trial counsel for the SEC in the Maxim/Jasper trial.
In essence, the revision enabled companies to increase executive compensation without informing their shareholders if the compensation was in the form of stock options contracts that would only become valuable if the underlying stock price were to increase at a later time.
In the mid-2000s, an investigation by the Securities and Exchange Commission resulted in the resignations of more than 50 senior executives and CEOs at firms across the industry spectrum from restaurants and recruiters to home builders and healthcare.
This article will attempt to provide reasons why this issue is important, why civil and criminal authorities are investigating, and why it is critical that public companies who issued options over the past...
ESOs are usually granted at-the-money, i.e., the exercise price of the options is set to equal the market price of the underlying stock on the grant date.