Post by unlawflcombatnt on Apr 19, 2007 2:50:25 GMT -6
Below are excerpts from the AFL-CIO site titled Stock Options Backdating and Spring Loading—CEO Pay Run Amok, describing the illegal practice of backdating stock options that has become epidemic in Corporate America.
"CEOs get options from their boards of directors to buy shares of their company’s stock. These options give CEOs the right to buy shares at a set price, often called the “strike” or “exercise” price, normally the stock’s closing price on the grant date. CEOs can exercise their options after the options “vest,” typically after one year or longer. Supporters of stock options said they would give CEOs an incentive to work harder to get their company’s stock price as high as possible.
But some CEOs wanted a better deal: They backdated their options by picking a date when the stock was trading at an even lower price than the date of their options grant, resulting in an instant profit.
For example, former UnitedHealth Group CEO William McGuire received 14.6 million stock options on the same day that UnitedHealth Group’s shares fell to their lowest price for the year. In addition, grants in several other years occurred near the bottom of sharp stock dips. [2] McGuire, of course, denied he ever backdated his options. But the odds of all that occurring by chance were one in 200 million or greater—much worse than his odds of winning the Powerball.[3] The result? Over his 15 years as CEO, stock option backdating helped McGuire accumulate more than $2 billion in stock options.[4]
The problem for McGuire and other backdating CEOs is they may have violated accounting rules, state corporate law, federal securities laws and tax laws. In some cases, like that of former Comverse CEO Kobi Alexander, who fled to Namibia, the U.S. Department of Justice concluded that CEOs committed criminal fraud.[5]
Stock options backdating already has forced some 70 CEOs and other corporate officials to resign or be fired,[6] and the U.S. Securities and Exchange Commission (SEC) is investigating possible options backdating at some 160 companies.[7] Leading academics say at least 700 companies received or provided manipulated stock option grants.[8] The gap between academic findings and corporate disclosures suggest that many companies are still hiding stock options misconduct from the investing public.
Harvard professor Lucian Bebchuk has identified a strong link between stock option grant manipulation and corporate governance. Options manipulation is more likely to occur in circumstances in which the CEO has greater influence on the company’s pay-setting and governance processes,[9] which suggests a lack of board oversight. Bebchuk also has found a strong correlation between options backdating and boards of directors who themselves received backdated stock options.[10]
Backdating stock options wasn’t the only way CEOs could beat the odds. They and their boards of directors used another tactic to win more: They spring loaded their options, granting them just before they announced news guaranteed to drive up the share price. Conrad Hewitt, chief accountant of the SEC, has suggested that spring loading stock options does not raise serious accounting issues.[11] This appears to be contradicted by Chancellor William B. Chandler III of Delaware's Court of Chancery when he ruled, in a suit by shareholders against Tyson Foods and Maxim Integrated Products, that spring loading by CEOs and directors is illegal.[12]
Backdating and spring loading stock options also harm shareholders. The money paid to CEOs who improperly backdate or spring load their stock options belongs to shareholders, and when companies have to restate their earnings and pay additional taxes, shareholders lose even more. A University of Michigan study has estimated the fallout from the recent options investigations may cost shareholders hundreds of millions of dollars.[13]
Since the Sarbanes-Oxley Act became law in 2002, companies must report stock options grants to their executives within two business days. Thanks to this investor protection law, it is much harder for executives to backdate stock options. But some companies, including KB Home, have reported option grant problems even after 2002.[14] And under Sarbanes-Oxley, CEOs can still inappropriately time their stock option exercises based on inside information or by spring loading their stock option grants."
The original article can be found at the AFL-CIO site under the title
www.aflcio.org/corporatewatch/paywatch/stockoptions.cfm
"CEOs get options from their boards of directors to buy shares of their company’s stock. These options give CEOs the right to buy shares at a set price, often called the “strike” or “exercise” price, normally the stock’s closing price on the grant date. CEOs can exercise their options after the options “vest,” typically after one year or longer. Supporters of stock options said they would give CEOs an incentive to work harder to get their company’s stock price as high as possible.
But some CEOs wanted a better deal: They backdated their options by picking a date when the stock was trading at an even lower price than the date of their options grant, resulting in an instant profit.
For example, former UnitedHealth Group CEO William McGuire received 14.6 million stock options on the same day that UnitedHealth Group’s shares fell to their lowest price for the year. In addition, grants in several other years occurred near the bottom of sharp stock dips. [2] McGuire, of course, denied he ever backdated his options. But the odds of all that occurring by chance were one in 200 million or greater—much worse than his odds of winning the Powerball.[3] The result? Over his 15 years as CEO, stock option backdating helped McGuire accumulate more than $2 billion in stock options.[4]
The problem for McGuire and other backdating CEOs is they may have violated accounting rules, state corporate law, federal securities laws and tax laws. In some cases, like that of former Comverse CEO Kobi Alexander, who fled to Namibia, the U.S. Department of Justice concluded that CEOs committed criminal fraud.[5]
Stock options backdating already has forced some 70 CEOs and other corporate officials to resign or be fired,[6] and the U.S. Securities and Exchange Commission (SEC) is investigating possible options backdating at some 160 companies.[7] Leading academics say at least 700 companies received or provided manipulated stock option grants.[8] The gap between academic findings and corporate disclosures suggest that many companies are still hiding stock options misconduct from the investing public.
Harvard professor Lucian Bebchuk has identified a strong link between stock option grant manipulation and corporate governance. Options manipulation is more likely to occur in circumstances in which the CEO has greater influence on the company’s pay-setting and governance processes,[9] which suggests a lack of board oversight. Bebchuk also has found a strong correlation between options backdating and boards of directors who themselves received backdated stock options.[10]
Backdating stock options wasn’t the only way CEOs could beat the odds. They and their boards of directors used another tactic to win more: They spring loaded their options, granting them just before they announced news guaranteed to drive up the share price. Conrad Hewitt, chief accountant of the SEC, has suggested that spring loading stock options does not raise serious accounting issues.[11] This appears to be contradicted by Chancellor William B. Chandler III of Delaware's Court of Chancery when he ruled, in a suit by shareholders against Tyson Foods and Maxim Integrated Products, that spring loading by CEOs and directors is illegal.[12]
Backdating and spring loading stock options also harm shareholders. The money paid to CEOs who improperly backdate or spring load their stock options belongs to shareholders, and when companies have to restate their earnings and pay additional taxes, shareholders lose even more. A University of Michigan study has estimated the fallout from the recent options investigations may cost shareholders hundreds of millions of dollars.[13]
Since the Sarbanes-Oxley Act became law in 2002, companies must report stock options grants to their executives within two business days. Thanks to this investor protection law, it is much harder for executives to backdate stock options. But some companies, including KB Home, have reported option grant problems even after 2002.[14] And under Sarbanes-Oxley, CEOs can still inappropriately time their stock option exercises based on inside information or by spring loading their stock option grants."
The original article can be found at the AFL-CIO site under the title
www.aflcio.org/corporatewatch/paywatch/stockoptions.cfm