Backdating employee stock options

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SEC Chairman Christopher Cox recently stated that the proposed SEC rules on disclosure of executive compensation will “almost certainly address options backdating explicitly.” I. Companies have considerable discretion in determining the timing of stock option awards.

Most employee stock options are, or purport to be, granted “at-the-money,” meaning that the exercise price of the option equals the market price of the underlying stock on the date of the grant.

Backdating allows executives to choose a past date when the market price was particularly low, thereby inflating the value of the options.

An example illustrates the potential benefit of backdating to the recipient.

The practice is illegal if it is not followed by proper disclosure and related expenses are not recorded in financial statements.

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.

In our example, backdating the options is the same as giving John Doe a check for ,000 -- without recording that ,000 on the within two business days.

For instance, if the board meeting is on January 3, 2012, and Company XYZ stock closes at per share that day, then the exercise price of John's 2012 stock are backdated, then his exercise price is only per share.

He pays the per share exercise price and can turn around and sell those shares on the exchange for each, netting a profit of per share, or ,000.

Basically, a stock option is a contract right to purchase an amount of stock at a set price for a period of time.

For instance, if a stock was worth a share, a stock option may grant an option holder the right to purchase

In our example, backdating the options is the same as giving John Doe a check for $35,000 -- without recording that $35,000 on the within two business days.

For instance, if the board meeting is on January 3, 2012, and Company XYZ stock closes at $45 per share that day, then the exercise price of John's 2012 stock are backdated, then his exercise price is only $15 per share.

He pays the $15 per share exercise price and can turn around and sell those shares on the exchange for $50 each, netting a profit of $35 per share, or $35,000.

Basically, a stock option is a contract right to purchase an amount of stock at a set price for a period of time.

For instance, if a stock was worth $10 a share, a stock option may grant an option holder the right to purchase $1,000 shares at $10 a share for a period of 5 years.

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In our example, backdating the options is the same as giving John Doe a check for $35,000 -- without recording that $35,000 on the within two business days.For instance, if the board meeting is on January 3, 2012, and Company XYZ stock closes at $45 per share that day, then the exercise price of John's 2012 stock are backdated, then his exercise price is only $15 per share.He pays the $15 per share exercise price and can turn around and sell those shares on the exchange for $50 each, netting a profit of $35 per share, or $35,000.Basically, a stock option is a contract right to purchase an amount of stock at a set price for a period of time.For instance, if a stock was worth $10 a share, a stock option may grant an option holder the right to purchase $1,000 shares at $10 a share for a period of 5 years.

,000 shares at a share for a period of 5 years.

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