The SEC and other federal authorities are currently investigating more than 50 companies suspected of illegal, undisclosed options backdating practices, and the first criminal charges relating to these practices are expected shortly.The practice of backdating options is not illegal as long as it is disclosed to shareholders.The Santa Monica, Calif., videogame company said on July 28 that the SEC has asked the company for documents related to its stock-option grants as part of an informal inquiry.
The stock option “backdating” scandal has implicated several (mostly technology) companies over the past few months.
At first glance, call options represent the perfect way to tie an executive's level of compensation to the company's performance because as the company's share price increases, so does the payoff the executive will receive.
However, this concept is not perfect and there are ways that executives can take advantage of the way that options are granted in order to earn money.
But abuse of stock options has been allowed to perpetuate for years.
In all my reading of the backdating scandal coverage, I have yet to see a thorough analysis of the real victims of this scandal: shareholders.
Options backdating occurs when companies grant options to their executives that correspond to a day where there was a significantly lower share price.