grants to one that is earlier than the actual grant date in order to place a lower exercise price on the options and thus enhance the potential profits from the exercise of those stock options.
In addition to being illegal, backdating isn't always a sure thing.The general reason companies backdate options is to create a lower exercise price, which in turn increases the probability that exercising the options will make more money for the optionee.Granting stock options to employees is a generally accepted and perfectly legal form of compensating employees. Critics of backdating argue that the practice is difficult to detect and thus encourages boards and executives to use it to synthesize more creative compensation packages.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.
Dozens of companies are under investigation by the Securities and Exchange Commission for backdating stock options. Alternatively, a company could hit a low without actually backdating its options by granting awards just before a major (positive) earnings announcement, a practice known as "spring-loading." A more extreme and more clearly illegal practice was to say that an award was exercised on a date other than its actual exercise date. Attorney's Office in Northern California has launched a series of investigations and in July issued criminal and securities fraud charges against two top executives at Brocade Communications. National concern about the practice has been spurred by a series of articles in the Wall Street Journal. Companies found to have practiced this could be forced to restate their earnings.