Options Backdating Back Story

Michael Giberson

Former Apple CFO Fred D. Anderson reached a deal with the U.S. Securities and Exchange Commission over the backdating of stock options, including an agreement to pay $3.5 million to settle civil charges. As many of the newspapers stories report, backdating options is not necessarily illegal, but must be properly disclosed and accounted for.

At Economic Principals last week, David Warsh noted that the Wall Street Journal received the Pulitzer Prize for public service for its “creative and comprehensive probe” into backdated stock options. Warsh reports the back story of the options backdating affair, including how “the story itself began with an alarm raised by a finance professor.”

In addition to revealing the role that statistical analysis by a couple of academics played in bringing the story to the attention of the Wall Street Journal and federal regulators, Warsh also puts the right spin on the ethics of the practice:

The basic problem with backdating is fabrication…. It has to do, not with fleecing shareholders, but with misleading them. Deceptive practice is the issue, not some purely economic crime.

2 thoughts on “Options Backdating Back Story”

  1. How badly were the shareholders mislead? Corporate boards are pretty much able to issue options at any level the like, any time they like. There is nothing illegal about it. It may be expedient to backdate an option, but by no means is any shareholder hurt anymore than any other type of option issue..as long as the option issue is made with the acknowledgement of the Corporate Board.

    On the other hand….I can point to a (failed) corporate takeover I was involved in 2 years ago here in Chicago. After a change in CEO at a midsized local NYSE Listed company, corporate executives literally began flying sackloads of corporate cash and assets (in the 10’s of Million $$) from Chicago to the Grand Caymans. The Board of Directors objected, to no avail, and an attempt was made to fire the executives involved in the theft, to no avail.

    The SEC was fully aware of the theft; Fitzgerald’s Office was fully aware of the theft; AG Madigan’s Office was fully aware of the theft. Thousands of people were laid off as a result, and the corporation lost 95% of its value.

    Now ask yourself, what on earth do our “regulators” do all day? A bald faced crime is ignored, where millions disappear and thousands are laid off, while our esteemed regulators are out chasing an accounting notation where no one loses a dime.

    It reminds me of parking in Evanston, where a policeman told me parking tickets are mostly issued in the high rent neighborhoods, so as to maximize the probability of the ticket getting paid.

  2. How badly were the shareholders mislead? Corporate boards are pretty much able to issue options at any level the like, any time they like. There is nothing illegal about it. It may be expedient to backdate an option, but by no means is any shareholder hurt anymore than any other type of option issue..as long as the option issue is made with the acknowledgement of the Corporate Board.

    On the other hand….I can point to a (failed) corporate takeover I was involved in 2 years ago here in Chicago. After a change in CEO at a midsized local NYSE Listed company, corporate executives literally began flying sackloads of corporate cash and assets (in the 10’s of Million $$) from Chicago to the Grand Caymans. The Board of Directors objected, to no avail, and an attempt was made to fire the executives involved in the theft, to no avail.

    The SEC was fully aware of the theft; Fitzgerald’s Office was fully aware of the theft; AG Madigan’s Office was fully aware of the theft. Thousands of people were laid off as a result, and the corporation lost 95% of its value.

    Now ask yourself, what on earth do our “regulators” do all day? A bald faced crime is ignored, where millions disappear and thousands are laid off, while our esteemed regulators are out chasing an accounting notation where no one loses a dime.

    It reminds me of parking in Evanston, where a policeman told me parking tickets are mostly issued in the high rent neighborhoods, so as to maximize the probability of the ticket getting paid.

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