The reason for doing this was simple: stock options priced at or above where the stock is trading (aka, "out of the money" options) get favorable tax treatment compared to stock awards priced below the market price (aka, "in the money" options).

is backdating stock options illegal-12

The tech industry's stock option backdating scandal appears to be gathering steam.

Last week, federal investigators announced criminal charges against former executives of Brocade Communications Systems, and they're hinting that more cases may be on the way.

In testimony before a Senate Committee on Banking, Housing, and Urban Affairs on Wednesday, regulators, an academic, and private sector representatives roundly condemned backdating, the practice of adjusting stock option grant dates to an earlier time than they were actually granted in order to provide a windfall to the new option holder.

But spring-loading, which was also discussed during the hearing, received more mixed comments, underscoring general disagreement among regulators and in the marketplace over whether the practice is, in fact, illegal — or even unethical.

Guilty or not, companies accused of backdating clearly would have known what would be a favorable option grant date.

But a company suspected of spring-loading cannot be said to have that advantage, and executives can argue, truthfully, that there is no way to know for certain how the market will react to impending news.

The total compensation to executives granted back-dated options was either unchanged or, perhaps, lower than it would have been, since people tend to irrationally over-value a bird in hand (in the money options) to a dozen in the bush (out of the money options).

But it all became worse than a pseudo-scandal, in fact.

Documenting a transaction which has already happened One possible scenario is that the relevant transaction has already happened, but just hasn’t been documented yet.

For example, there may have been a transfer of trade from one group company to another on a particular date.

In this situation, it may be possible to create a document after the event which recites what actually happened, and which records the key terms of the transaction.