All stemming from the practice known as “options backdating.” Options backdating occurs when a company issues stock options on one date, but reports in its financials an earlier issue date to create a “strike” or exercise price equal to the earlier date’s lower price.
Another consequence is that the company underrepresents the real nature of an executive’s compensation, perpetuating the myth that options are performance-based incentive compensation.
Even Apple CEO Steve Jobs came under investigation; he was never charged with wrongdoing, although two other Apple executives paid millions to settle lawsuits by the Securities and Exchange Commission, without admitting fault.
In some cases, the government has struggled to prove criminal acts.
Fifty-two companies currently under criminal investigation. Moreover, the company avoids having to expense the options as current compensation, thus increasing earnings in the near term.
As a consequence, the option is immediately profitable, or “in the money,” to the option holder.
Another headline-grabbing case collapsed last month, when a different judge dismissed charges against two executives of Southern California chip-maker Broadcom, while overturning a guilty plea by a third executive and excoriating prosecutors for misconduct.
These led to numerous civil and criminal enforcement actions that helped change those practices, they say, despite some high-profile stumbles by prosecutors in recent months.
At its height, the backdating scandal touched dozens of local companies that came under federal investigation or launched their own accounting reviews, which led in some cases to firings, earnings restatements and shareholder lawsuits.
If not, authorities say the practice can effectively hide expenses, inflate profits and mislead investors.
Some executives and attorneys argue that most backdating violations were simply technical errors that meant little to investors.
Five of those received prison sentences, as opposed to probation or fines.