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Even if grant dates are fixed and happen at the same time every year, there's still room for shenanigans. There's an exception in the tax code, however, for "performance-based compensation," which includes stock options.Academics have found some evidence that CEOs time the release of negative information to happen just before a scheduled grant date, and release positive information after a scheduled grant date. So companies can save on taxes by handing out lucrative stock options instead of lucrative salaries.The tech industry's stock option backdating scandal appears to be gathering steam.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.There is not even an allegation of self-enrichment, or self-dealing." Q: That's backdating. The shares increase in value and--presto--the options are worth more.It works like this: If a CEO expects to make a new product announcement, he could allocate himself options when the stock is valued at . Attorney Kevin Ryan said the task force will be investigating spring-loading as well.
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.
Q: How did the Sarbanes-Oxley (SOX) law change things? In addition, executives themselves benefit by exercising the stock option and waiting a year to sell the stock.
After Sarbanes-Oxley took effect in August 2002, companies were supposed to report stock option grants within two days. Nejat Seyhun, finance professors at the University of Michigan's business schoool, analyzes grants made before and after the law's effective date. That qualifies as a capital gain and is currently subject to only a federal income tax of only 15 percent.
Gregory Reyes, Brocade's chief executive until 2005, and Stephanie Jensen, the company's vice president of human resources from 1999 to 2004, are facing civil and criminal charges.
In addition, Antonio Canova, Brocade's former chief financial officer, is facing civil charges. The FBI has not alleged that Reyes backdated stock options for his own financial benefit.