Apple corporation stock option backdating scandal
The legal complaint alleged that from 1993 to 2006, the former CEO and the former chief accounting officer directed the company to engage in schemes to provide undisclosed compensation to executives and certain employees. Lin was accused of backdating stock option documents in order to give the appearance that options were granted on earlier dates than issued.
This scheme was allegedly used to the benefit of officers and employees of the company as well as its directors.
The problem with this practice, according to the SEC, was that stock option backdating, while difficult to prove, could be considered a criminal act.
One of the larger backdating scandals occurred at Brocade Communications, a data storage company.
The SEC’s opinions regarding backdating and fraud were primarily due to the various tax rules that apply when issuing “in the money” stock options versus the much different – and more financially beneficial – tax rules that apply when issuing “at the money” or "out of the money" stock options.
Additionally, companies can use backdating to produce greater executive incomes without having to report higher expenses to their shareholders, which can lower company earnings and/or cause the company to fall short of earnings predictions and public expectations.
Options backdating may still occur under the new reporting regulations, but Sarbanes-Oxley compliant backdating is far less likely to be used for dishonest reasons due to the short time frame that is allowed for reporting.
As a result, numerous companies are conducting internal investigations to determine if, when, and how backdating occurred, and are filing amended earnings statements and tax forms to show the issuance of “in the money” options in place of the “at the money” options that were previously reported.
When company executives discovered that they had the ability to backdate stock option grants, thus making them both tax deductible and “in the money” on the date of actual issuance, the common practice of stock option backdating for financial gain began on a widespread level.
Companies would simply wait for a period in which the company's stock price fell to a low and then moved higher within a two-month period.
The company would then grant the option but date it at or near its lowest point.
It was forced to restate earnings by recognizing a stock-based expense increase of 3 million between 19, after allegedly manipulating its stock options grants for the benefit of its senior executives.
It allegedly failed to inform investors, or account for the options expense(s) properly.