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Last October I interviewed Scott Mc Nealy, CEO of Sun Microsystems (SUNW), for a different story, and I brought up the subject of options backdating.
I thought his comment was telling: “When I sign a document and it has a date thing there? I didn’t even go to law school, and I figured out that that’s probably the most appropriate thing.” By the way, even in the unlikely event that someone backdates options and accounts for them properly–i.e., treats them as in-the-money options–he would still almost always be violating the terms of the stock option plan which has been approved by shareholders.
Backdating destroys the equivalent of capital gains treatment and basically doubles your tax.
So for those companies stupid enough to backdate not only inevitably do they seem to get caught, witness Research in Motion, but more importantly, Canadian resident employees subject to the Canadian , end up with far more adverse tax treatment due to backdating than would be the case if they had the options priced at a conventional basis at market when the share were issued. If you are an employee of a public company and that company gives you options for 10,000 shares and the market price today is .00 per share, you can exercise these options at .00.
In addition to manipulating the documentation of stock option grants (the sine qua non of backdating), these general counsels often directly profited from the fraud through their own receipt of back-dated options.
It was enacted during the 1980s farm crisis because neither Chapter 13 nor Chapter 11 worked well to enable farmers to reorganize and keep farming.
What happens under our tax regime is when you go to cash in those options at .00, the .00 profit is now taxed as ordinary income and you don’t get the capital gains treatment or its equivalent.
Therefore you go from paying 23 per cent tax on your gain to paying 46 per cent on your gain.” Something else to consider about backdating stock options.
This was spitting on the sidewalk back then.” And I can understand that argument.In the United States, 55 individuals and 17 companies currently face SEC scrutiny over options backdating. In the first stock-option backdating case to reach trial, Brocade Communications CEO Gregory Reyes was sentenced to 21 months in jail, two years’ probation and fined US-million for 10 counts of securities fraud in 2007. There’s a reason for that – and it has nothing to do with securities laws.Rather, the practice of backdating stock option is a non-event in Canada due to the “Backdating has occurred – Research in Motion is an example – but it doesn’t tend to be a big issue in this country.Whenever I write about backdating, many people write in to tell me that backdating’s not illegal; you just have to account for it correctly.Since so many people think this is an important point, I thought I’d do a post addressing just that contention. What I assume people mean is that granting in-the-money options is not illegal, so long as you account for it properly. But the whole point of backdating is to pretend that you’re not granting in-the-money options when in fact you are.