Backdating wall street
That is, insiders from firms with alleged grant backdating practices were more likely to have a suspect exercise than other insiders.
We also find that the firm-specific odds of option grant backdating are positively associated with the frequency of suspect exercises among firms not mentioned in the list.
Unlike exercises in which the acquired shares are sold immediately through a broker, these exercise-and-hold transactions are often accomplished in-house.
Thus, we expect that opportunistic backdating, to the extent it exists, is more likely to occur in exercise-and-hold transactions.
Finally, we find that suspect exercise-and-hold transactions are more likely in firms with a higher likelihood of stock option grant backdating.
For the sample of exercise-and-hold transactions by insiders of firms under scrutiny for option grant backdating as listed in the “Options Scorecard”, we find that 21.53% of exercises by CEOs and 18.41% of exercises by non-CEOs occurred on the day the stock was at its lowest price during the month.
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Some companies are accused of backdating grant dates to days when the share price was lower, giving the recipient the opportunity for extra profit.We focus on a group of exercises where there likely exists both the incentive and the ability to backdate an option exercise: exercises paid in cash where the insider holds the acquired shares.Once the decision to exercise is made, insiders who plan to hold the acquired shares have an unambiguous personal tax-based incentive to exercise on the day with the lowest possible stock price.On Thursday, the ex-general counsel at Monster Worldwide pleaded guilty to conspiracy and securities fraud in relation to the backdating of stock options, a day after the former chief executive of video game publisher Take-Two Interactive Software pleaded guilty to options-related charges.
Federal charges have also been brought against former executives at Brocade Communications Systems and Comverse Technology , stemming from the stock options backdating scandal.Consistent with the prediction that backdating an exercise-and-hold transaction is driven by personal tax considerations, we find that the likelihood of a suspect exercise is increasing in the potential taxes saved by the option holder from exercising on the day of the month with the lowest closing price before SOX, but not after SOX.