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But if you're lucky enough to have a coupon that lets you buy a Ferrari for a mere ,000, your piece of paper would have a far more handsome market value of ,000. If an executive is able to change the grant date of an option retroactively--for instance, to when the stock was trading at a lower price--the options become more lucrative. Stock options by themselves are not problematic or controversial. One method academics have used to measure the pervasiveness of backdating is to review stock option grants to executives to see if an unusual number are clustered around dates when the stock is trading at a low value.They're a way to recruit and retain good employees, and they tend to align employees' interests with those of shareholders. What's at issue here is whether some top executives--typically CEOs--committed fraud when obtaining them. Then, when the stock increases, the executives benefit. Erik Lie, a finance professor at the University of Iowa's College of Business, has evaluated thousands of option grants and found that it was statistically improbable for them not to have been backdated at many companies.For the first news event (typically the announcement of an internal investigation by the firm), we find a statistically significant excess return of about -4.50% in the -20 to -2 window and -2.40% in the -1 to 1 window.The magnitude of the implied wealth changes seems too large to be attributed to any reasonable estimate of direct out-of-pocket costs of the backdating scandal or to the resulting legal penalties disclosed to date (direct cost hypothesis).A paper (click for PDF) that Lie and Randall Heron, an associate professor at Indiana University's business school, published on July 14 estimates that 18.9 percent of unscheduled grants to top executives from 1996 through 2005 were backdated or manipulated.

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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.We use cookies to make interactions with our website easy and meaningful, to better understand the use of our services, and to tailor advertising.For further information, including about cookie settings, please read our Cookie Policy .Any of those three categories could yield civil (and perhaps criminal) legal action. Second, do the backdated options constitute "nonqualified deferred compensation," in which case the companies may be liable for excise taxes? If they had stock options that were backdated and not disclosed, that essentially provides executives (or other employees, but typically executives) with extra compensation.Q: What kind of legal charges could companies face? But in general, backdating a stock option (without communicating this to shareholders) could run afoul of tax laws, securities regulations and laws prohibiting fraud. That's an expense that must be disclosed to shareholders.

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