Back-Dated Stock Options

Of late, there’s been a lot of press concerning backdating of stock options. Companies use stock options as incentive for employees to excel in their performance. The idea of employee stock options being if the employees excel, the company will excel and the company, company’s shareholders and the employees will all benefit.

Generally, the idea for employee stock options is to grant stock options with a strike price at the current company’s stock price on the date of stock option grant. If the stock appreciates in price, then thestock options become valuable, if the stock depreciates in price, then the stock options become of lesser value or of no value at all.

But, if the stock options are backdated, the strike price of the options is set for a low point in the price of the company’s stock, giving employees an extra profit when thestock options are exercised.

Backdating of stock options is not necessarily illegal as long as it is disclosed as such by the company, but if the company backdates stock options and falsely reports that they are not backdating, then the company may have engaged in securities fraud.

We analyzed all the stocks listed on the Nasdaq, NYSE and American stock exchanges to determine if a company’s stock options granting appeared to be suspicious. For this analysis we looked at the price of a company’s stock between the date when a company’s report to the SEC indicated the stock options were granted and the date when the report was filed with the SEC. If during the time between the two dates the company’s stock price was at a low point, then the company was flagged as a potential candidate for backdating ofstock options. Simply because the company was flagged by the procedure does not mean the company engaged in backdating of stock options, it only indicates there was an opportunity for backdating of stock options.

The results of our search are shown below (optionable stocks are shown as links) :

Some of the company’s on this list have already acknowledged backdating of options, and in some cases the company’s stock price has depreciated in price as a result. For example on June 29, 2006, Apple Computer (AAPL) indicated it had launched an investigation into its executive stock option grants. In early July, Apple Computer announced it had found some irregularities in the issuance of certain stock option grants, and in early August Apple Computer announced it had discovered more stock option irregularities. From the inital announcement of the investigation the price of Apple Computer’s stock depreciated 14% but has since rebounded. It should be noted that some of the companies coming under scrutiny by the SEC for possible stock option irregularities were not flagged in our search, Broadcom (BRCM) for example.

PowerOptions provides a search engine for finding potential option income generating positions for various strategies for those option investors seeking to “go short”.

[tags]stock options, option income, option investors[/tags]