What is Stock Option Backdating?

Backdating Stock Options is a way of rewarding employees with options that are In the Money (ITM) and hence of immediate value. The option is awarded with a time stamp that predates the actual time of the option issue. The difference in the value of an option on the actual date it is issued vs. its value on the backdate, is the profit the holder is entitled to.

Why Backdate Stock Options?

The Securities and Exchange Commission (SEC) previously only required companies to declare the number of options issued within two months of issuing the options. Companies began the practice of issuing backdated options within a 2 months duration, with the lowest performing date of the option being chosen as the date of issue. The SEC would be reported of this stock option issue dated at the lowest price in the preceding two months. The SEC changed the rules regarding the reporting of stock option issuing with the Sarbanes-Oxley legislation. Companies now need to inform the SEC within 2 business days of issuing stock options. This rule effectively put paid to the practice of Backdating Stock Options.

Enforcement of Restrictions on Backdating Stock Options 

The immediate response to the ruling was weak. Companies chose to sidestep this dictat with various methods like citing complicated paperwork and other issues. Enforcement of the new rules was also lacking with no penalties being incurred by companies in violation of this legislation. The SEC then resorted to legal measures, suing companies found in violation of the Stock Options Backdating rules. A civil lawsuit against Trident Microsystems in 2010 was one such case. The case was settled out of court with the chief accused in the case neither confirming, nor denying SEC charges.