Stock Options Backdating A Disturbing Trend, Page Perry Partner Warns

Stock options are a form of deferred compensation offered to CEOs and other highly compensated corporate executives. A CEO’s job performance is presumably reflected in the company’s stock price, so the grant of stock options provides an incentive for good performance – or so the theory holds. Options backdating occurs when the company’s board of directors – who are in charge of executive compensation and are sometimes cronies of the CEO – want to provide the CEO with an extra benefit, so they “backdate” the options to a date when the price was lower than the current market price, thereby giving the CEO an instant profit.

The problem is that applicable laws and accounting rules require such discount options to be charged against the company’s earnings and reported as such, and this was generally not done. The undisclosed options backdating is essentially a more widespread form of the “cooking the books” fraud that occurred in the Enron, WorldCom, and Global Crossing scandals.

In an Investment News article published on February 15, 2007, Page Perry senior partner Boyd Page was quoted as follows:

“[Options backdating] is a disturbing trend that has affected so many companies and many big firms, and is reprehensible,” said J. Boyd Page, a senior partner at Page Perry in Atlanta. “I hope the actions taken deal with these abuses in a swift and a harsh manner.”

Mr. Page, who has testified before Congress on securities matters and is the co-founder of the Norman, Okla.-based Public Investors Arbitration Bar Association, said that options backdating is contrary to what the financial markets are supposed to be about and that any of the major companies mentioned would be hit hard.

“Firms were better off coming clean,” he added.

Investment News, February 15, 2007, Backdating scandals seen as tapering off; SEC and Justice Dept. still to investigate.